Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law Volume Volume 3: Transnational Contract Law 9781509949496, 9781509949526, 9781509949519

Volume 3 of this new edition deals with the transnationalisation of contract law. It compares common law and civil law c

208 97 4MB

English Pages [349] Year 2022

Table of contents :
Preface
Contents
Table of Cases
Table of Legislation and Related Documents
Part I: General
1.1. Introduction
1.2. Formation of Contracts in Civil and Common Law
1.3. The Normative Interpretation Technique in Practice: The Civil Law Notion of Good Faith, the Common Law Alternatives, Liberal Interpretation and the Role of Other Sources of Private Law
1.4. Performance of the Contract, Defences, Default, Excuses, Termination
1.5. Privity of Contract
1.6. The UNIDROIT and European Principles of Contract Law. The Vienna Convention and UCC Compared. The Draft Common Frame of Reference in the EU and the Draft EU Regulation on a Common European Sales Law
Part II: Contracts for the International Sale of Goods
2.1. The Main Aspects of the International Sale of Goods
2.2. Ancillary Arrangements in International Sales. The Role of Intermediaries and Documents
2.3. The Uniform International Sales Laws. The Vienna Convention or CISG
Part III: Contractual Agency
3.1. The General Notion of Agency
3.2. International Aspects of Agency
Index

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DALHUISEN ON TRANSNATIONAL AND COMPARATIVE COMMERCIAL, FINANCIAL AND TRADE LAW VOLUME 3 Volume 3 of this new edition deals with the transnationalisation of contract law. It compares common law and civil law concepts, noting the origin of the one in commercial law and of the other in consumer law, and identifies the different attitudes to protection, risk management, and risk distribution. The volume explores the future direction in international commerce and finance, as well as the potential, effects, and challenges of e-commerce, the blockchain, and the emergence of the smart contract. The complete set in this magisterial work is made up of 6 volumes. Used independently, each volume allows the reader to delve into a particular topic. Alternatively, all volumes can be read together for a comprehensive overview of transnational comparative commercial, financial and trade law.

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Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law Volume 3 Transnational Contract Law Eighth Edition

Jan H Dalhuisen Emeritus Professor of Law King’s College London Chair in Transnational Financial Law Catholic University Lisbon Visiting Professor UC Berkeley Corresponding Member Royal Netherlands Academy of Arts and Sciences Member New York Bar Former ICSID Arbitrator and FCIArb

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2022 Copyright © Jan H Dalhuisen, 2022 Jan H Dalhuisen has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2022. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. ISBN: HB: 978-1-50994-949-6 ePDF: 978-1-50994-951-9 ePub: 978-1-50994-950-2 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

To my Teachers and my Students

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PREFACE This is the third Volume in this series’ Eighth Edition, devoted to contract law. It is concerned with the contract model especially in professional commercial and financial dealings, with the differences between common and civil law perceptions, its operation in the international manufacturing and distribution chains foremost as road map and risk management tool, its close connection with property notions especially in finance, and its functioning as standard agreement, in e-commerce, and as smart contract. Transnationalisation of the law in the international commercial and financial flows is the focus of this series in respect of the unity of the dealings in these flows and avoiding, notably, their fracturing under an amalgam of domestic laws that were never written for them whilst it is ever more difficult to establish the proper contract. It is considered part of the modern lex mercatoria and the methodology is explained in the first Volume, borrowed from public international law with its sources and their hierarchy and reliance on fundamental and general principle, custom and practices, party autonomy, and, where available, treaty law. Undoubtedly there is much that can be improved or may need reconsideration, but the idea is always to move forward. We know that the structures in place do not work well, and much reform and innovation is necessary. For some of these Volumes, I have already received important support from the next generation of scholars and practitioners. Those who take an interest are invited to contribute by writing to me and will be duly acknowledged as co-author or co-operator depending on the kind of involvement. Jan H Dalhuisen, Melides, Portugal, January 2022 [email protected]

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CONTENTS Prefacevii Table of Cases xv Table of Legislation and Related Documents xxi Part I General 1.1. Introduction 1.1.1. Modern Contract Law: Nature of the Parties or Type of Contract? Relationship Thinking and the Professional Contract 1.1.2. The Effect of Globalisation. Transnationalisation of Contract Law Concerning Professional Dealings 1.1.3. Content and Coverage of this Volume. Formal Transnationalisation Efforts 1.1.4. Modern Contract Law. Will Theories and the Relevance of Intent. Non-intentional Aspects of Contract Law. The Abstraction Principle and the Meaning of Party Autonomy 1.1.5. The Formation and Operation of the Professional Contract. Standard Contracts 1.1.6. A New Transnational Model of Contract Law among Professionals? Modern Contract Theory 1.1.7. Modern Contract Theory, the Normative Interpretation Technique in Civil Law and its Contribution to the Transnationalisation of Contract Law 1.1.8. The Contribution of Law and Economics 1.1.9. The Challenge of E-commerce 1.1.10. The Smart Contract 1.2. Formation of Contracts in Civil and Common Law 1.2.1. The Development of Contract Law and the Role of Parties’ Intent in Civil Law. The Notion of Consensus as the Basis for Contract Validity 1.2.2. The Notions of Consideration, Exchange or Bargain in the Common Law of Contract. Meaning of Intent, Offer and Acceptance 1.2.3. The Development of the Consideration Notion in Common Law. The Modern Alternative of Detrimental Reliance 1.2.4. Contracts: Construction and Remedies in Civil and Common Law. The Parol Evidence Rule 1.2.5. The Practical Significance of the Consideration Requirement in Common Law 1.2.6. The Common Law Notion of Consideration and the Civil Law Notion of Causa Compared

1 1 8 15 17 23 26 31 35 38 40 44 44 48 52 57 60 62

x Contents 1.2.7. Other Aspects of Contractual Validity: Capacity and Authority 1.2.8. Other Aspects of Contractual Validity: Formalities 1.2.9. Other Aspects of Contractual Validity: Definiteness 1.3. The Normative Interpretation Technique in Practice: The Civil Law Notion of Good Faith, the Common Law Alternatives, Liberal Interpretation and the Role of Other Sources of Private Law 1.3.1. The Modern Normative Approach and the Concept of Dynamic Contract Law 1.3.2. Roman Law, Ius Commune, Nineteenth-Century Thinking, and the Modern Revival of Multiple Sources of Contract Law in Civil Law Behind the Good Faith Notion 1.3.3. Interpretation and the Notion of Good Faith in Civil Law 1.3.4. Good Faith as a Multifaceted Notion 1.3.5. Institutional Aspects of the Operation of the Notion of Good Faith in Civil Law 1.3.6. Good Faith, Legal Positivism and System Thinking in the Codification Manner. The Bridge to the Common Law and the Connect with the Transnationalisation Process of Private Law in the Professional Sphere 1.3.7. Good Faith in Common Law. Alternatives. Equity Distinguished 1.3.8. EU Notion of Good Faith 1.3.9. Good Faith and Sources of Contract Law in the CISG, UNIDROIT and European Contract Principles. The DCFR 1.3.10. When is Good Faith a Mandatory Concept? 1.3.11. Practical Effects of Good Faith or Normative Thinking: The Nature of Pre-contractual Information and Disclosure Duties, Meaning of Consensus, Mistake, Misrepresentation and Gross Disparity 1.3.12. Practical Effects of Good Faith or Normative Thinking: Pre-contractual Negotiation Duties, Contractual Co-operation Duties, and Abuse of Contractual Rights 1.3.13. Practical Effects of Good Faith or Normative Thinking: The Status of Commercial Letters of Intent. ‘Best and Reasonable Endeavour’ Clauses 1.3.14. The Practical Effects of Good Faith or Normative Thinking: Force Majeure and Change of Circumstances in Professional Dealings 1.4. Performance of the Contract, Defences, Default, Excuses, Termination 1.4.1. Performance in Kind/Specific Performance 1.4.2. Lack of Consensus in Civil Law and Defences to Performance in Common Law: Invalidity and Rescission 1.4.3. Excuses of Performance and the Meaning of Conditions and Warranties, Covenants and Representations 1.4.4. Default or Breach and Damages 1.4.5. The Excuses of Force Majeure and Change of Circumstances 1.4.6. Change of Circumstances, Frustration and Economic Impossibility. Development in Civil and Common Law 1.4.7. Unforeseen Circumstances and the Balance of the Contract: Hardship and Renegotiation Duties 1.4.8. Modern Legislative Approaches to a Change in Circumstances 1.4.9. Contractual Hardship Clauses

64 65 66 67 67 71 75 78 83 86 88 93 94 96 99 101 104 105 107 107 111 116 119 122 125 126 131 133

Contents xi 1.4.10. How to Secure Contractual Rights and Obligations in Common and Civil Law? 134 1.5. Privity of Contract 138 1.5.1. Privity of Contract or Third-Party Rights and Duties under a Contract 138 1.5.2. Development of Contractual Third-Party Rights and Duties in Civil Law 147 1.5.3. The Situation in Common Law and the Developments in the US and England 149 1.6. The UNIDROIT and European Principles of Contract Law. The Vienna Convention and UCC Compared. The Draft Common Frame of Reference in the EU and the Draft EU Regulation on a Common European Sales Law 151 1.6.1. Unification of Contract Law. Academic Texts and the EU Activity in this Area 151 1.6.2. The Unitary Codification Approach 156 1.6.3. The UNIDROIT Principles for International Commercial Contracts 159 1.6.4. The Principles of European Contract Law (PECL) 164 1.6.5. The Draft Common Frame of Reference (DCFR) 166 1.6.6. Interpretation and Supplementation in the Principles and the DCFR. Sources of Commercial and Financial Law, Hierarchy, and Lex Mercatoria Compared170 1.6.7. Approach to Contract Formation: Consensus, Reliance and Exchange Notions, Capacity, Formalities and Specificity 172 1.6.8. Defences. The Question of Continued Validity of the Contract 175 1.6.9. Performance, Breach and Excuses 177 1.6.10. Privity of Contract 178 1.6.11. The Nature and Impact of the PECL and DCFR 179 1.6.12. The 2011 Project of the Expert Group on European Contract Law 180 1.6.13. The 2011 EU Draft Regulation on a Common European Sales Law (CESL) 183 Part II Contracts for the International Sale of Goods 2.1. The Main Aspects of the International Sale of Goods 2.1.1. Introduction 2.1.2. The Minimum Requirements of the Sales Agreement: Special Features and Risks of International Sales 2.1.3. Legal Risk in International Sales 2.1.4. Special Arrangements to Cover the Risks of International Sales 2.1.5. International Sales as Contracts between Professionals. Effect on the Applicable Law 2.1.6. Currency and Payments in International Sales: Free Convertibility and Transferability of Money 2.1.7. The Transfer of Title in International Sales. Finality Issues 2.1.8. Conform Delivery and the Passing of Risk in International Sales 2.1.9. The Passing of Risk in the Sale of Goods in Civil and Common Law 2.1.10. Proprietary Sales Price Protection in Civil and Common Law 2.1.11. The Retention Right of the Seller 2.1.12. Alternatives to the Reclaiming Rights in International Sales. The Letter of Credit

187 187 191 194 197 199 202 203 205 208 213 217 219

xii Contents 2.2. Ancillary Arrangements in International Sales. The Role of Intermediaries and Documents 219 2.2.1. The Safe Harbour Function: Agents and Documents of Title 219 2.2.2. The Use of Agents: Their Position 221 2.2.3. The Use of Negotiable Documents of Title in International Sales: Bills of Lading and Warehouse Receipts 222 2.2.4. Documents of Title in Payment Schemes in International Sales. Collection and Letters of Credit 223 2.2.5. The Use of Negotiable Instruments in International Sales: Bills of Exchange224 2.3. The Uniform International Sales Laws. The Vienna Convention or CISG 226 2.3.1. Origin and Scope 226 2.3.2. The Coverage of the Vienna Convention 228 2.3.3. The System of the Vienna Convention: Directory or Mandatory Rules? 231 2.3.4. Applicability of the Vienna Convention 232 2.3.5. The Sales Law of the Vienna Convention. Formation Issues: Offer and Acceptance and the Issue of Intent 234 2.3.6. The Sales Law of the Vienna Convention. Substance, Default, and Remedies, the Issue of Fault or Blame 235 2.3.7. Supplementation and Interpretation of the Vienna Convention 240 2.3.8. The Interpretation of International Sales Contracts under the Vienna Convention: Meaning of Conduct and Custom in Terms of Contract Interpretation246 2.3.9. Supplementation of the Vienna Convention: Private International Law and the EU Regulation on the Law Applicable to Contractual Obligations249 2.3.10. The Main Rules of the 2008 EU Regulation on the Law Applicable to Contractual Obligations. International Sales 251 2.3.11. The Vienna Convention and the Different Trade Terms in International Sales 255 2.3.12. Incoterms: Their Status and Relation to the UCC and Vienna Convention258 2.3.13. The Vienna Convention and the ICC Model International Sale Contract. The 2004 European Civil Law Project: Sales 260 2.3.14. The Law Merchant Concerning International Sales 261 2.3.15. The EU Efforts in the Area of the Law Concerning the Sale of Goods 262 Part III Contractual Agency 3.1. The General Notion of Agency 265 3.1.1. The Use of Agents: Their Position 265 3.1.2. The Role of the Agent: Explicit or Apparent Authority 268 3.1.3. The Notion of Independence, Apparent Authority and Agencies of Necessity271 3.1.4. The Consequences of Agency: Conflicts of Interests, Rights and Duties of the Agent 273 3.1.5. Undisclosed and Indirect Agencies. Trusts as Alternative in Common Law 275

Contents xiii 3.1.6. The Civil Law Indirect Agency. The Relationship between Principal and Third Party. Customers’ Assets 3.1.7. The Economic Importance of Modern Agency 3.2. International Aspects of Agency 3.2.1. Private International Law Aspects of Agency 3.2.2. Treaty Law Concerning the Law Applicable to Agency 3.2.3. The Lex Mercatoria and Agency 3.2.4. The EU Commercial Agents Directive

277 281 281 281 283 285 286

Index289

xiv

TABLE OF CASES Australia Alstom Ltd v Yokogawa Australia; (No 7), SASC 49 (2012)�� 36 Hospital Products Ltd v US Surgical Corpn (1984) 156 CLR 41�� 274 Belgium Cour de Cass, 9 December 1999, Pas I, 1669 (1999)�� 278 Canada Bhasin v Hrynew 2014 SCC 71�� 90 Cansons Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129�� 274 European Union De Pinto Case C-361/89 [1991] ECR I-1189�� 13 Germany v European Parliament and Council of the European Union Case C-380/03 [2006] ECR I-11543�� 154 Gijsbrecht v Santurel Case C-205/07 ECJ, 16 December 2008, Jur I-9947�� 156 Gruber Case C-464/01 [2005] ECR I-439�� 13 France Cour de Cassation 24 June 1845 [1845] D.1.309�� 214 15 June 1892 [1892] DI 596�� 82 12 May 1914 [1918–19] s 1.41�� 82 27 May 1927, D.1928.25�� 201 3 May 1935 [1935] D.H.313�� 214 24 January 1939, Gaz Pal 1.5866�� 117 2 December 1947 [1948] Gaz Pal I.36�� 82 20 October 1959 [1959] D 537�� 110 20 March 1972 [1973] JCP2.17542�� 103 10 May 1972 [1972] Bull Civ III 214�� 46

xvi Table of Cases 17 Mar 1975 [1975] D.S.553�� 214 7 July 1975 [1976] D.S.70�� 214 20 November 1979 [1980] 33 Revue Trimestrielle de Droit Commercial 43�� 216 1 Dec 1995 [1996] JCP 22.565��191, 236 29 June 2007 (Putrabali), Les Cahiers d’Arbitrage no 2007/2, Gaz Pal 17 July 2007, 44�� 12 Court of Appeal, 10 June 1992, Riom PTD Civ 343 (1993)�� 103 Tribunal de la Seine, 18 December 1967, GP.2.108 (1968)�� 203 Germany BAG, 7 June 1963 [1963] NJW 1843�� 103 BGH, 1 July 1970, 54 BGHZ, 214�� 215 OLG Cologne, 2 February 1971 (1971) 47 NJW 2128�� 203 RGH 25 November 1911, RGHZ 77�� 148 11 June 1920, 99 RGZ, 208 (1920)�� 278 International Cases Award in the Matter of an Arbitration between Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi (1952) 1 ICLQ 247 and (1951) 18 ILR 144�� 11 Netherlands HR

6 January 1922 [1922] NJ 265�� 63 13 November 1937 [1937] NJ 433�� 63 15 November 1957 [1958] NJ 67�� 103 13 May 1966 [1967] NJ 3�� 253 12 January 1979 [1979] NJ 362�� 148 18 June 1982 [1983] NJ 723 Plas/Valburg�� 103 3 Feb 1984 [1984] NJ 752�� 280 15 February 1991 [1991] NJ 493�� 103 27 November 1992 [1993] NJ 287�� 271 13 June 2003 RvdW nr 108, 2 July 2003�� 280 19 January 2007 PontMeyer, NJ 575 (2007)�� 3 29 2007 Derksen/Homburg NJ 576 (2007)�� 3 9 April 2009 UPC/Land, JOR 179 (2010)�� 3 6 April 2012, LJN BV 6727�� 142

United Kingdom Adams v Lindsell (1818) 106 ER 250��46, 50 Affrêteurs Réunis Société v Walford [1919] AC 801�� 150

Table of Cases xvii Appleton v Sweetapple 3 Doug 137 (1792)�� 53 Arnhold Karberg & Co v Blythe, Green, Jourdain & Co [1915] 2 KB 379�� 256 Arnold v Britton [2015] UKSC 36�� 91 Ash v Ash (1696) Holt 701�� 53 Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988��34, 58 Ayliffe v Tracey (1722) 2 P Wms 65�� 50 Bankline v Arthur Capel [1918] AC 435��58, 91 BCCI v Ali [2001] 2 WLR 735��34, 58 Berkeley Community Villages Ltd and Another v Pullen and Others [2007] EWHC 1330 (CH)�� 89 Borden (UK) Ltd v Scottish Timber [1979] 3 WLR 672�� 215 Bristol Groundschool Ltd v Intelligent Data Capture Ltd and Or [2014] EWHC 2145 (Ch)�� 89 British Movietonews v London and District Cinema [1951] 2 All ER 617��58–59 Bulmer v Bollinger [1974] Ch 401�� 49 Chandler v Webster [1904] 1 KB 493�� 130 Channel Tunnel Group v Balfour Beatty Construction Ltd [1995] AC 334�� 11 Charnock v Liverpool Corpn [1968] 1 WLR 1498�� 150 Container Transport Inc v Oceanus Mutual Underwriting [1984] 1 Lloyd’s Rep 47�� 89 Cooperative Insurance Society v Argyll Stores WLR 898 (1997)�� 108 Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297�� 103 Dalrymple v Dalrymple (1811) 2 Hag Con 54��50, 55 Davis Contractors v Farnham [1956] 2 All ER 145��19, 58, 124 Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250�� 149 Dunlop Pneumatic Tyre Co v Selfridge & Co [1915] AC 847�� 149 Emirates Trading Agency v Prime Mineral Exports Private Ltd [2014] EWHC 2104�� 105 Emmott v Michael Wilson & Partners Ltd [2008] Bus. LR 1361�� 91 Esso Petroleum v Mardon [1976] 2 All ER 5�� 101 Euroption Strategic Fund Ltd v Skandinaviska Ensdkilda Banken AG [2012] EWHC 584 (Comm)�� 105 Fibrosa v Fairburn [1943] AC 32�� 130 First Energy UK Ltd v Hungarian International Bank [1993] 2 Lloyd’s Rep 194�� 271 Foakes v Beer (1884) 9 App Cas 605 (HL)�� 53 Goldsmith v Rodgers [1962] 2 Lloyd’s Rep 249�� 212 Greenclose Ltd v National Westminster Bank Plc [2014] EWHC 1156�� 89 Hazell v Hammersmith and Fulham London Borough Council and ors [1991] 1 All ER 545�� 65 Hirji Mulji v Cheong SS Co [1926] AC 497�� 91 Hollingworth v Tattersall 1778�� 53 Hood v Anchor Line (Henderson Brothers) Ltd [1918] AC 837�� 59 Independent Automatic Sales v Knowles and Foster [1962] 1 WLR 974�� 215 Independent Broadcasting Authority v EMI Electronics [1980] 14 Building Law Reports 1�� 150 Interfoto Picture Library Ltd v Stiletto Visual Programmes [1989] 1 QB 433��1, 49, 59, 90 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896��34, 58 J Spurling Ltd v Bradshaw [1956] 1 WLR 461�� 59 Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417�� 105 Karen Oltmann [1976] 2 Lloyd’s Rep 708 (QB)�� 59 Keech v Sandford (1726) 25 ER 223�� 274

xviii Table of Cases Krell v Henry [1903] 2 KB 740�� 129 McCutcheon v David MacBrayne Ltd [1964] 1 WLR 128�� 59 Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72�� 91 Metropolitan Water Board v Dick [1918] AC 119��58, 91 Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200�� 89 Miliangos v George Frank (Textiles) Ltd [1975] 3 All ER 801�� 203 Moor v Hart (1683) 1 Vern 201�� 50 Moorcock, The (1889) 14 PD 64�� 91 MSC Mediterranean Shipping Co v Cottonex Anstalt [2015] EWHC�� 89 National Carriers Ltd v Panalpina Northern Ltd [1981] AC 675�� 126 Northern Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] 3 All ER 1170�� 115 Paradine v Jane (1647) 82 ER 897�� 123 Parker v Smith Eastern Railway Co [1877] 2 CDP 416�� 59 Philips Electronique Grand Public SA v British Sky Broadcasting Ltd��22, 91 Pillans v Van Mierop (1765) 97 ER 1035 (KB)�� 53 Pitt v PHH Asset Management Ltd [1994] 1 WLR 327�� 102 Raffles v Wichelhaus (1864) 2 HC 906�� 115 Rann v Hughes (1778) 101 ER 1014 (KB)�� 53 Ryan v Mutual Tontine Westminster Chambers Association [1983] 1 Ch 116�� 110 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446�� 149 Shanklin Pier v Detel Products Ltd [1951] 2 KB 854�� 150 Sharpe, Re [1980] 1 All ER 198�� 215 Shell UK Ltd v Lostock Garages Ltd [1976] 1 WLR 1187�� 91 Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 WLR 370�� 275 Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500�� 149 Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116�� 105 Stag Line v Foscolo Mango & Co Ltd [1932] AC 328�� 259 Sterns Ltd v Vickers Ltd [1923] 1 KB 78�� 212 Suisse Atlantique v NV Rotterdamse Kolen Centrale [1967] 1 AC 361�� 118 Taylor v Caldwell (1863) 3 B&S 826, (1863) 32 LJQB 164��58, 124 Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545�� 282 Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163�� 59 Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209�� 34 TSG Building Services Plc v South Anglia Housing [2013] EWHC 1151 (TCC)�� 89 Vaessen v Romalpa [1976] 1 WLR 677�� 215 Walford v Miles [1992] 2 WLR 174��89, 91, 102 Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111�� 89 United States Branham v Fullmer 181 NW 2d 36(1970)�� 279 Brehany v Nordsstrom Inc 812 P 2d 49 (Utah1991)�� 92 Centric v Morrison-Knudsen Co 731 P 2d 411(1986)�� 115 Eustis Mining Co v Beer, Sondheimer & Co 239 F 976 (1917)�� 50 Fradey v Hyland 37 Fed 49 (1888)�� 279

Table of Cases xix Hawkins v McGee 146 A 641 (NH 11929)�� 121 Hoffman v Red Owl Stores Inc (1965) 26 Wis 2d 683, 133 NW 2d 267�� 54 Kennedy v Lee (1817) 3 Mer 441�� 50 Kidd v Thomas A Edison 239 F 405 (1917)�� 272 Lawrence v Fox 20 NY 268 (1859)�� 151 Lincoln Land Company, LLC v LP Broadband, Inc 163 Idaho 105 (2017)�� 145 Meinhard v Salmon 249 NY 458(1928)�� 274 Murphy v American Home Products Corp 448 NE 2d 86 (NY 1983)�� 92 Pacific Gas & Electric v GW Thomas Drayage & Rigging Co 442 P2d 641 (Cal 1968)�� 68 Seaver v Ransom 120 NE 639 (NY 1918)�� 151 SEC v Cheney Corp 318 US 80, 85 (1942)�� 274 Teacher’s Ins & Annuity Assn v Butler 626 F Supp 1229 (SDNY 1986)�� 92 Von Wedel v McGrath 180 F 2d 716 (1950)�� 282

xx

TABLE OF LEGISLATION AND RELATED DOCUMENTS Belgium Civil Code ................................................................................................................................................ 64 Art 1690 ........................................................................................................................................... 199

European Union Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters 1968 ...............................................................................................94, 249, 253 Art 17 ................................................................................................................................................. 94 Commercial Agents Directive ......................................................................................................286–87 Common European Sales Law (CESL) ......................................... 7, 12–13, 16, 34, 86, 120, 125, 151, 155, 159, 167–68, 171–72, 174–76, 178, 180, 183–86, 188–90, 192–93, 229, 232, 240, 246, 261–62 Preamble .......................................................................................................................................... 185 Art 1 ................................................................................................................................................. 171 Art 1(2) ............................................................................................................................................ 172 Art 1(3) ............................................................................................................................................ 185 Art 4 ...........................................................................................................................................170–71 Art 7 ................................................................................................................................................. 171 Art 35 ............................................................................................................................................... 174 Art 48(2) .......................................................................................................................................... 177 Art 67 ............................................................................................................................................... 171 Art 87 ............................................................................................................................................... 177 Art 88 ............................................................................................................................................... 178 Art 120 ............................................................................................................................................. 178 Arts 172ff ......................................................................................................................................... 176 Consumer Sales Directive 1999/44/EC ............................................................................................. 212 DCFR (Draft Common Frame of Reference) ...................................... 3–4, 10, 16–17, 24, 33, 38, 46, 75–77, 80, 86–88, 94–95, 98, 100, 103, 106, 116, 119–20, 122, 125, 134, 151–55, 157–59, 165–72, 174–81, 183, 186, 188–89, 192–93, 228–29, 232, 244, 246, 248, 260–62, 286–87 Art I-1:102 ............................................................................................... 87–88, 95, 97, 158–59, 240 Art I-1:102(1) .................................................................................................................................. 168 (4) .............................................................................................................................................. 159 Art I-1:102(2) .................................................................................................................................. 167

xxii Table of Legislation and Related Documents Art I-1:102(3)�� 159 Art I-1:102(3)(b)�� 158 Art I-1:102(3)(c)�� 172 Art I-1:102(4)��88, 168 Art I-1:102(b)��11, 87 Art I-1:103�� 3, 56, 80, 168–69, 173–74 Art I-1:103(1)�� 70 Art I-1:103(2)�� 83, 168–69, 174 Art I-1:104��98, 168, 171 Art I-8:101�� 158 Art II-1:101�� 21 Art II-1:102��88, 95, 168 Art II-1:103�� 96 Art II-1:104��95, 98, 159, 167, 171, 248 Art II-1:106(1)�� 59 Art II-1:107�� 158 Art II-1:107(1)�� 175 Art II-2:101�� 167 Art II-3:101�� 158 Art II-3:101(2)�� 3–4, 99, 103, 168 Art II-3:104(2)�� 106 Art II-3:105�� 40 Art II-3:301�� 4, 22, 106, 158, 168 Art II-3:301(2)��98, 103, 159 Art II-3:302��158, 178 Art II-3:502�� 177 Art II-4:101�� 169, 174–75 Art II-4:101(a)�� 158 Arts II-4:101ff�� 173 Art II-4:102��34, 56, 158, 173–74 Art II-4:103��158, 175 Art II-4:103(1)(a)�� 175 Art II-4:104�� 158 Art II-4:201�� 175 Art II-4:201(1)(b)�� 158 Art II-4:201ff�� 34 Art II-4:202�� 158 Art II-4:202(3)��169, 174 Art II-4:202(3)(c)��158, 173 Art II-4:204��158, 169, 173–75 Art II-4:204–6�� 46 Art II-4:205�� 34, 158, 174–75 Art II-4:205(1)�� 174 Art II-4:205(3)�� 167 Art II-4:206�� 46 Art II-4:211�� 175 Art II-6:106�� 280

Table of Legislation and Related Documents xxiii Art II-7:101�� 158 Art II-7:101(2)�� 176 Art II-7:102��173, 176 Art II-7:201�� 158, 176–77 Art II-7:201(1)(a)(iii)�� 176 Art II-7:201(2)(b)�� 77, 100, 169, 177 Art II-7:202��158, 176 Art II-7:202(1)�� 176 Art II-7:203�� 177 Art II-7:204�� 173 Art II-7:205��158, 176 Art II-7:206�� 158, 176–77 Art II-7:207�� 158, 176–77 Art II-7:211�� 177 Art II-7:212�� 177 Art II-7:212(2)��176–77 Art II-7:214�� 177 Art II-7:215�� 177 Art II-7:301��64, 159, 167, 172, 176 Art II-7:301(a)��87, 167 Art II-8:101�� 95, 100, 173, 176 Art II-8:102��95, 169, 173 Art II-8:102(1)(e)�� 3, 98 Art II-8:102(1)(f)�� 159 Art II-8:102(1)(g)�� 168 Art II-8:102(g)�� 158 Art II-9:101�� 158–59, 167 Art II-9:101(2)(a)�� 3, 98 Art II-9:101(2)(c)�� 168 Art II-9:102�� 158 Art II-9:102(1)�� 158 Arts II-9:301ff�� 178 Arts II-9:401ff�� 169 Art II-9:404/5�� 4 Art II-9:405�� 159 Art II-401ff��169, 173 Art II–9:301�� 149 Art II–9:303�� 149 Art III-1:103��3, 22, 68, 158 Art III-1:103(1) and (2)�� 158 Art III-1:103(2)��98, 168 Art III-1:104�� 158 Art III-1:110��4, 106, 133, 158–59, 169 Art III-1:110(3)(c)�� 4, 77, 100, 169 Art III-3:104�� 158 Art III-3:104(2)��77, 100 Art III-3:303�� 178

xxiv Table of Legislation and Related Documents Art III-3:401�� 178 Arts III-9:401ff�� 158 Art IVD-1:102(e)�� 280 Book IV�� 3 Ann A�� 3 Directive 68/151/EEC (First Company Law Harmonisation Directive)�� 64 Directive 76/207/EEC on the implementation of the principle of equal treatment for men and women as regards access to employment, vocational training and promotion, and working conditions�� 14 Directive 84/450/EEC on misleading and comparative advertising�� 14 Directive 85/374/EEC on the approximation of the laws of the Member States concerning liability for defective products�� 14 Directive 85/577/EEC�� 14 Directive 87/102/ EEC concerning consumer credit�� 14 Directive 90/314/EEC on package travel, package holidays and package tours�� 14 Directive 93/13/EEC on unfair consumer contract terms�� 14 Preamble�� 93 Art 3(1)�� 93 Directive 97/5/EC on cross-border credit transfers�� 14 Directive 97/7/EC on the protection of consumers in respect of distance contracts�� 14 Directive 97/9/EC on the protection of purchasers in respect of certain aspects of contracts relating to the purchase on a time share basis�� 14 Directive 98/26/EC on settlement finality�� 250 Directive 98/27/EC on injunctions for the protection of consumers’ interests�� 14 Directive 1999/93/EC on a Community Framework for Electronic Signatures�� 39 Directive 2000/13/EC�� 39 Directive 2000/31/EC on certain legal aspects of electronic commerce in the internal market�� 14 Directive 2000/35/ EC combating late payment in commercial transactions�� 250 Directive 2000/78/EC establishing a general framework for equal treatment in employment and occupation�� 14 Directive 2002/65/EC concerning the distance marketing of consumer financial services�� 14 Directive 2002/87/EC on e-commerce�� 43 Art 3�� 40 Art 3(4)�� 14, 39–40 Directive 2004/39/EC on Markets in Financial Instruments (MiFID I)��2, 274, 281 Directive 2005/29/EC concerning unfair business-to-consumer commercial practices in the internal market�� 14 Directive 2008/48/EC on credit agreements for consumers�� 14 Directive 2011/83/EU on consumer rights�� 14, 43, 93, 185, 263 Directive 2014/65/EU on Markets in Financial Instruments (MiFID II)�� 2 Directive on Consumer Sales and Guarantees�� 77 Directive on self-employed commercial agents Art 3(1)�� 94 Art 4(1)�� 94 EEC Treaty�� 249 Expert Group Draft�� 16, 34, 170–71, 174–78, 180–83, 189 Art 1�� 170, 172, 181 Art 1(2)�� 181

Table of Legislation and Related Documents xxv Art 4��171, 181 Art 7�� 181 Art 8��22, 181 Art 23�� 181 Art 29�� 181 Arts 30ff�� 181 Art 34��46, 174 Art 57�� 181 Art 64�� 181 Art 65��171, 181 Art 89�� 181 Art 91�� 180 Art 94(1)(b)�� 181 Financial Collateral Directive 2002/47/EC�� 250 Financial Services Directive 1993, Art 11(3)�� 2 First Company Law Harmonisation Directive�� 64 Insurance Directives��249, 251 Investment Services Directive��274, 281 Non-Life Directive�� 250 PECL (Principles of European Contract Law)�� 188, 232, 261 Art 1.101�� 164 Art 1.102��158–59 Art 1.102(2)��158, 165 Art 1.103�� 158–59, 165 Art 1:103�� 172 Art 1.104�� 158 Art 1.105��159, 165 Art 1.105(2)��171, 248 Art 1.106�� 158, 246, 249 Art 1:106�� 95 Art 1.106(2)�� 159 Art 1.201��96, 158, 165 Art 1:201(2)�� 22 Art 1.202�� 158 Art 1.302��165–66 Art 1:302�� 97 Art 1.305�� 166 Art 2.101�� 158 Art 2.101(1)(b)�� 158 Art 2.101(2)��59, 158, 175 Art 2.102��158, 174 Art 2.103��158, 175 Art 2.105�� 158 Art 2.201�� 158 Art 2.201(1)(b)�� 175 Art 2.202�� 158 Art 2.202(3)�� 174 Art 2.202(3)(c)��158, 173 Art 2.204�� 158

xxvi Table of Legislation and Related Documents Art 2.204(1)�� 158 Art 2.204–6�� 46 Art 2.205�� 158 Art 2.205(1)�� 174 Art 2.301��158, 166 Art 2.301(2)�� 166 Art 2-101�� 174 Arts 3.301ff��268, 280 Art 4.101��166, 176 Art 4.102�� 176 Art 4.103��166, 176 Art 4.103(1)(a)(ii)��158, 177 Art 4.103(1)(a)(iii)�� 176 Art 4.103(2)�� 166 Art 4.103(2)(b)�� 177 Art 4.104��158, 176 Art 4.105�� 177 Art 4.107��158, 176 Art 4.108�� 158, 176–77 Art 4.109�� 176 Art 4.109(2)�� 177 Art 4.110��158, 166 Art 4.114�� 177 Art 4.115�� 177 Art 4.116�� 177 Art 4.117�� 177 Art 4.118�� 166 Art 4.118(2)�� 177 Art 5.101�� 100, 158, 173, 176 Art 5.101(g)�� 158 Art 5:102�� 95 Art 5.102(f)�� 159 Art 6.1.1.1�� 106 Art 6.101�� 158 Art 6.101(1)�� 158 Art 6.102��158, 171 Art 6.110�� 149, 158, 178 Art 6.111�� 135, 158, 166 Art 8.108�� 158 Art 9.102��158, 178 Art 9.103�� 178 Art 9.201�� 178 Art 15.101��158–59 Principles of European Law concerning Sales, ch 5��206–7 Regulation (EU) 2015/1051�� 40 Regulation establishing common rules for a denied-boarding compensation system in scheduled air transport�� 14

Table of Legislation and Related Documents xxvii Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I)��94, 253 Art 5(1)�� 252 Art 15�� 252 Art 19�� 252 Regulation on online dispute resolution for consumer disputes�� 40 Regulation on the Law Applicable to Contractual Obligations (Rome I)��40, 185, 249–54, 262, 283 Preamble�� 252 Art 1�� 250 Art 1(2)�� 250 Art 1(2)(g)�� 283 Art 1(3)�� 250 Art 3�� 251 Art 3(3)��251–53 Art 4�� 233, 251–52 Art 4(1)�� 251 Art 4(2)��40, 251 Art 4(5)�� 251 Art 5��251–52 Art 6�� 252 Art 6(2)��40, 185, 252 Art 6(3)�� 252 Art 7�� 287 Art 8�� 252 Art 8(1)��40, 252 Art 9�� 161, 196, 251, 287 Art 9(1)�� 252 Art 9(2)�� 253 Art 9(3)��252–53 Art 12(1)(c)�� 250 Art 14��250, 254 Art 15�� 250 Art 19�� 251 Art 21��252–53 Rome Convention��250, 252 Art 4(2) and (5)�� 251 Art 20�� 249 Art 21�� 249 Art 24�� 249 Art 25�� 249 Art 30�� 249 Second Life Directive�� 250 Tobacco Advertising Directive�� 154 Treaty on European Union (TEU)�� 14 Treaty on the Functioning of the European Union (TFEU)�� 14 Art 114��14–15, 154, 156, 168, 171, 183–84 Unfair Commercial Practices Directive�� 14

xxviii Table of Legislation and Related Documents France Arbitration Act�� 12 Bankruptcy Act�� 217 Art 33�� 215 Art 47�� 215 Art 59�� 214–15, 217 Art 65�� 214 Art 115��215, 217 Art 117�� 216 Art 121��215, 217 Civil Code�� 2 Art 1104��3, 75, 82 Art 1108�� 46, 62–63 Art 1109�� 210 Art 1112��82, 103 Art 1113�� 3, 66 Art 1114�� 3, 66 Art 1118�� 62 Art 1121�� 148 Art 1128(3)�� 66 Art 1131��62–63 Art 1133��62–63 Art 1134�� 82 Art 1135��75, 82 Art 1138�� 209 Art 1142��108, 110 Art 1143�� 110 Art 1144�� 110 Art 1147�� 124 Art 1148�� 124 Art 1165�� 148 Art 1174�� 191 Art 1178��213, 218 Art 1184�� 117, 120, 214 Art 1184(2)��108, 110 Art 1188�� 45 Art 1195��124, 132 Art 1196��208, 216 Art 1217�� 109 Art 1221�� 109 Art 1226��213, 218 Art 1247(3)�� 236 Art 1341��65, 247 Art 1351�� 208 Art 1354�� 12 Art 1374�� 83 Art 1583�� 208, 214, 216

Table of Legislation and Related Documents xxix Art 1584�� 214 Art 1591��191, 236 Art 1610�� 108 Art 1612��217–18 Art 1613��217–18 Art 1644��210–11 Art 1690�� 199 Art 2102(4)��214, 218 Civil Code 1804�� 148 Art 5�� 84 Art 7�� 84 Code de commerce Art L 611-1�� 215 Art L 621-117�� 215 Art L 621-122�� 215 Code de Consommation�� 3, 77 Code Monetaire et Financier�� 77 Coûtumes de Beauvais�� 45 Decree n 2011-48, Art 1504�� 201 Ordonnance de Moulins, Art 54�� 65 Germany Allgemeines Landrecht (Prussia), I, 5 s 378 (1794)�� 128 Bankruptcy Act 1877 s 26�� 215 s 43�� 215 Bills of Exchange Act 1933�� 224 Civil Code (BGB)�� 62, 64, 76, 103, 120, 152, 157, 180, 203, 206, 208 s 119�� 75 s 121�� 211 s 123(1)�� 116 s 130�� 174 s 138(2)�� 62 s 157��75, 83 s 164�� 277 s 181�� 278 s 195�� 211 s 226�� 75 s 241��99, 148 s 241(1)�� 110 s 241(2)��76, 81, 104 s 242��75, 83 s 275�� 117 s 280�� 76, 81, 117, 120 s 280(1)�� 99 s 311(2)��81, 99

xxx Table of Legislation and Related Documents s 311(2) and (3)�� 76 s 311(3)��81, 145, 148 s 311a�� 115 s 311b�� 66 s 313�� 76, 81, 107, 129, 131 s 322�� 217 s 323��117, 211 s 323(2)�� 117 s 323(6)�� 117 ss 323ff�� 211 s 326(1)�� 117 s 328��147–48 s 333�� 148 s 434�� 211 s 437��210–11 ss 437ff�� 211 s 438(3)�� 211 s 446��209, 211 s 449�� 216 s 455�� 215 s 460�� 206 s 516�� 46 s 566�� 142 s 766�� 66 s 817�� 112 s 819�� 75 Code of Civil Procedure, ss 883ff�� 110 Commercial Code (HGB) s 392(1)�� 277 s 392(2)��277–78 Insolvency Act 1999�� 215 International Decretales of Pope Gregory IX��44–45 European Convention on Human Rights 1950, Art 6�� 245 General Agreement on Tariffs and Trade�� 193 Geneva Conventions 1930�� 224 Hague Convention on the Law Applicable to Agency 1978�� 249, 283, 285, 287 Art 1�� 284 Art 2(f)�� 285 Art 5�� 285 Art 6��284–85 Art 8�� 284 Art 8(c)�� 285 Art 11�� 284 Art 13�� 284

Table of Legislation and Related Documents xxxi Art 14�� 285 Art 17�� 285 Art 18�� 285 Art 26�� 283 Hague Convention on the Law Applicable to Trusts and their Recognition 1985�� 249 Hague Private International Law Convention on International Sales 1955, Art 1(1)�� 200 Hague Private International Law Conventions�� 249 Hague Sales Conventions 1964��12, 56, 87, 121, 174, 190, 226, 228–29, 231, 235, 241, 246, 258 Art 1(a)�� 201 Art 2�� 241 Art 3�� 231 Art 4�� 248 Art 9�� 248 Art 9(2)�� 248 Art 9(3)�� 259 Art 16�� 241 Art 17�� 241 Art 38(4)�� 241 Art 89�� 241 Hague-Visby Rules�� 259 Incoterms��258–62 Statute of the International Court of Justice, Art 38(1)��10, 153, 240 UNCITRAL Assignment of Receivables in International Trade Convention�� 246 UNCITRAL Model Laws��39, 201 UNIDROIT Convention on Agency in the International Sale of Goods 1983�� 15, 268, 280, 286 UNIDROIT Convention on International Factoring 1988�� 246 UNIDROIT Convention on International Interests in Mobile Equipment�� 246 UNIDROIT Ottawa Leasing Convention��145, 246 UNIDROIT Principles for International Commercial Contracts��3, 16–17, 46, 56, 59, 68, 83, 94–95, 98, 106, 116, 119, 122, 125, 132, 157, 159, 162–66, 168–69, 171, 173, 176, 181, 188, 232, 235–36, 244, 248–49, 261–62 Preamble�� 160 Art 1.1��159–60 Art 1.2��158, 175 Art 1.3�� 158 Art 1.4��158–61 Art 1.5��159–62 Art 1.6��95, 158–59, 246, 248 Art 1.6(2)�� 159 Art 1.7��95, 97, 158 Art 1.7(2)��22, 96, 161 Art 1.8�� 97, 159–60 Art 1.8(2)�� 97 Art 2.1�� 158, 173–74 Art 2.1.4(2)(b)�� 173

xxxii Table of Legislation and Related Documents Art 2.2��158, 175 Art 2.3(1)�� 175 Art 2.4�� 158 Art 2.4(2)(b)��97, 158, 174 Art 2.5�� 46 Art 2.6��46, 158 Art 2.6(1)�� 173 Art 2.6(2)��158, 174 Art 2.14�� 158, 163, 175 Art 2.15�� 158 Art 2.16�� 97 Art 2.17��97, 158 Art 2.19��97, 158 Art 2.20�� 97 Art 2.20.2�� 162 Art 3.1��158, 176 Art 3.2��173–75 Art 3.3�� 176 Art 3.4��173, 176 Art 3.5�� 158, 176–77 Art 3.5(2)�� 166 Art 3.5(2)(a)�� 177 Art 3.5(2)(b)�� 177 Art 3.6��158, 176 Art 3.8��97, 158, 176 Art 3.9�� 97, 158, 176–77 Art 3.10�� 97, 176–77 Art 3.12�� 177 Art 3.13�� 177 Art 3.16�� 176 Art 3.17�� 173 Art 3.18�� 177 Art 3.19�� 97, 158, 161–62 Art 3.20�� 177 Art 4.1��158, 173 Art 4.1(1)�� 163 Art 4.1(2)�� 163 Art 4.2��158, 173 Art 4.2(1)�� 163 Art 4.2(2)��97, 163 Art 4.3(b) and (f)�� 159 Art 4.3(c)�� 173 Art 4.6�� 97 Art 4.8��97, 158 Art 5.1.2�� 173 Art 5.2�� 96–97, 158, 171 Art 5.2(b)�� 159 Art 5.3��97, 158

Table of Legislation and Related Documents xxxiii Art 5.4.2�� 97 Art 5.5�� 97 Art 5.6�� 97 Art 5.7�� 97 Art 5.8�� 97 Art 6.2��158, 163 Art 6.2.1�� 158 Art 6.2.2�� 101 Art 6.2.3�� 97 Art 7.1.2�� 97 Art 7.1.3�� 178 Art 7.1.6��97, 158, 163 Art 7.1.7��97, 158 Art 7.2.2��158, 178 Art 7.2.4�� 178 Art 7.2.5�� 178 Art 7.4.13��97, 158, 163 Uniform Customs and Practice for Documentary Credits�� 219 Vienna Convention on the International Sale of Goods (CISG)�� viii, 5–6, 8, 10, 15–16, 21–22, 38, 56, 66–67, 94–95, 101, 119–21, 125–27, 151, 157–60, 163, 170–73, 175, 177–78, 180–81, 184, 187–90, 194–96, 200, 206, 226–51, 255, 258–61, 263 Art 1�� 185, 193, 200, 233 Art 1(1)��159, 227, 232–33 Art 1(1)(b)��233, 244 Art 1(2)��68, 181, 233 Art 1(3)��227, 233 Art 2��227–28 Art 2(1)�� 59 Art 2(2)�� 233 Art 2(a)��7, 252 Art 3�� 228 Art 4��10, 13, 55, 67, 95, 116, 158, 166, 168, 171, 176, 188–89, 217, 228, 234, 240–42, 246, 248–49 Art 4(2)�� 190, 200, 213 Art 4(a)�� 248 Art 5�� 228 Art 6�� 95, 159, 184, 229, 231–33, 243–44, 247, 255 Art 7��13, 95, 158, 170, 231, 240, 246, 259, 262 Art 7(1)�� 94, 158, 232, 235, 242–44, 247 Art 7(2)�� 56, 127, 159, 208, 227, 235, 239–44, 247, 249, 255, 259, 261 Art 8��34, 56, 59, 158, 234, 240, 242, 246–48 Art 8(3)�� 34 Art 9��13, 34, 88, 95, 159, 171, 227, 229, 240, 242, 247–48, 255, 259, 262 Art 9(1)�� 248 Art 9(2)�� 248

xxxiv Table of Legislation and Related Documents Art 10�� 227 Art 11��158, 175 Art 12��95, 158, 175, 231, 242 Art 14�� 55, 67, 158, 174, 191, 235–36 Art 14(1)��175, 235 Arts 14ff��173, 187 Art 15�� 175 Art 16��158, 234 Art 16(2)�� 46, 55–56, 174 Art 16(2)(b)�� 158, 173, 241 Art 18��55, 158, 174 Art 18(1)��56, 158, 173 Art 18(2)�� 46, 158, 174, 234 Art 19(2)�� 241 Art 19(3)��67, 158, 175, 187, 235 Art 21(2)�� 241 Art 23�� 158 Art 24�� 158 Art 25�� 12, 118, 122, 125, 177, 191, 194, 213, 229, 236, 238 Art 26�� 122, 236, 241 Art 28��111, 158–59, 178, 236 Art 29(1)��174, 235 Art 29(2)�� 241 Art 30�� 260 Art 31��94, 228–29, 235, 260 Art 31(c)��193, 227 Art 32�� 201 Art 33��229, 235 Art 34�� 260 Art 35�� 229 Art 35(1)�� 260 Art 35(2)��208, 239 Art 35(2)(a)�� 205 Art 35(2)(b)�� 205 Art 35(2)(d)��205, 260 Art 38(1)�� 227 Art 39(1)�� 241 Art 45�� 229 Art 45(2)�� 119 Arts 45ff�� 119 Art 46�� 236 Art 47��236, 241 Art 48�� 227 Art 48(2)�� 241 Art 49��119, 122, 213, 236–37 Art 49(1)(b)�� 236 Art 50�� 12, 122, 178, 194, 227, 229, 237 Art 55�� 67, 175, 191, 227, 235–36

Table of Legislation and Related Documents xxxv Art 57�� 193, 229, 236 Art 58��193, 236 Art 60�� 228 Arts 60ff�� 119 Art 61��227, 229 Art 61(2)�� 119 Art 62�� 236 Arts 62ff�� 217 Art 63�� 227 Art 64�� 119, 122, 180, 213, 227, 236–37 Art 64(1)(b)�� 236 Art 64(2)�� 227 Art 65�� 241 Arts 66ff�� 118, 198, 228, 255 Art 67��239, 260 Art 67(1)�� 260 Art 68��239, 241 Art 69��209, 239 Art 69(1)��229, 236 Art 71�� 227 Art 71(3)�� 241 Art 72(2)��227, 241 Art 74�� 229 Arts 74–77�� 237 Art 77�� 242 Art 79�� 12, 105–6, 117, 119, 122, 124–25, 127, 135, 158, 178, 194, 229, 237–38 Art 79(4)�� 241 Art 79(5)��124, 238 Art 82�� 238 Art 85��229, 242 Art 86��229, 242 Art 88�� 241 Art 90�� 180 Art 95��232–33 Art 96�� 231 Art 122�� 180 Vienna Convention on the Law of Treaties 1969�� 240 Art 31�� 244 Art 53��10, 153 Italy Civil Code Art 1337��75–76 Art 1366�� 75 Art 1375�� 75 Art 1448�� 62

xxxvi Table of Legislation and Related Documents Netherlands Bankruptcy Act�� 215 Civil Code 1838�� 109 Civil Code 1992�� 62 Art 3.12�� 83 Art 3.38�� 216 Art 3.38(2)�� 213 Art 3.40��62–63 Art 3.44�� 116 Art 3.53�� 214 Art 3.61�� 271 Art 3.61(2)�� 270 Art 3.62�� 268 Art 3.66�� 270 Art 3.69�� 273 Art 3.70�� 273 Art 3.84(4)��213, 216 Art 3.92�� 216 Art 3.94�� 199 Art 3.110��278–79 Art 3.292�� 218 Art 5.2�� 214 Art 6.2��75, 83, 98 Art 6.203�� 214 Art 6.211�� 112 Art 6.213�� 148 Art 6.217(1)�� 46 Art 6.248��75, 148 Art 6.248(2)�� 83 Art 6.251�� 142 Art 6.253�� 148 Art 6.257�� 148 Art 6.258�� 83, 107, 129, 131 Art 6.261�� 148 Art 6.262�� 217 Art 6.265��211, 213 Art 6.269��213, 216 Art 7.10�� 208–9, 211 Art 7.10(3)�� 211 Art 7.17�� 211 Art 7.39�� 214 Arts 7.39ff�� 219 Art 7.42�� 214 Art 7.420��279–80 Art 7.421��279–80 Art 7.423�� 281 Art 7.424�� 279

Table of Legislation and Related Documents xxxvii Switzerland Civil Code, Art 1�� 84 Code of Obligations, Art 401�� 277 United Kingdom Bankruptcy Act 1914�� 215 Bills of Exchange Act 1882, s 8(4)�� 224 Companies Act 1948�� 215 Consumer Credit Act 1974�� 59 Financial Services Act 1986��2, 59, 281 Financial Services and Markets Act 2000��2, 59, 281 Insolvency Act 1985�� 215 Insolvency Act 1986�� 215 Law Reform (Frustrated Contracts) Act 1943��124, 130 Misrepresentation Act 1976�� 113 Sale of Goods Act 1979�� 15 ss 13-15�� 212 s 15�� 205 s 20(1)��208, 212 s 20(2)�� 212 s 23�� 113 s 27�� 111 s 41�� 217 s 51�� 111 s 52�� 111 Statute of Frauds 1677��39, 65, 111 Supply of Goods (Implied Terms) Act 1973�� 118 Unfair Contract Terms Act 1977��59, 90, 118 United States Bankruptcy Code s 362�� 215 s 365(e)��214, 217 s 546(c)�� 218 Restatement (Second) of Agency�� 15, 271–72, 274 s 208�� 279 Restatement (Second) of Contracts��15, 21, 52–53, 115, 274 s 1�� 52 s 3�� 52 s 24�� 52 s 35�� 52 s 71�� 53 s 205��92, 104

xxxviii Table of Legislation and Related Documents s 302�� 151 s 379�� 115 Restatement (Third) of Foreign Relations Law, ss 401ff�� 196 Securities Exchange Act 1934�� 281 Uniform Commercial Code (UCC)�� 4, 15, 17, 33, 61, 80, 83, 92, 99, 104, 121, 124, 151, 154, 158–59, 175, 179, 182, 198, 204, 209, 212, 216–19, 232, 235, 237, 258–60, 274 Art 2�� 15, 55, 65, 67, 158, 193, 204, 230, 275 Art 2A�� 145 Art 9��68, 108, 216 s 1-102�� 158 s 1-103�� 74, 154, 158–59, 243, 248 s 1-103(e)�� 159 s 1-201(20)�� 158 s 1-201(a)(20)��83, 92 s 1-201(b)(20)��80, 92 s 1-205�� 159 s 1-301�� 159 s 1-302��23, 98, 158 s 1-302(a)�� 161 s 1-302(b)��36, 88, 92 s 1-304��91, 104, 158 s 2-103(1)(b)��92, 158 s 2-103(1)(j)�� 92 s 2-134(2)(c)�� 205 s 2-201�� 65, 67, 158, 175 s 2-202�� 59, 158, 175, 247 s 2-202(a)�� 159 s 2-204��21, 51, 55 s 2-204(2)��67, 158 s 2-204(3)�� 158 s 2-205�� 46, 55, 158, 175, 234 s 2-206�� 55 s 2-206(2)�� 158 s 2-208�� 159 s 2-209�� 158 s 2-210�� 141 ss 2-301ff�� 158 s 2-302��21, 92, 158 s 2-303�� 158 s 2-311(3)�� 158 ss 2-314–2-315�� 212 s 2-315�� 205 s 2-403�� 113 s 2-505�� 223 s 2-509(2)�� 209 s 2-509(3)��208, 212

Table of Legislation and Related Documents xxxix s 2-510�� 212 s 2-603�� 92 s 2-615��92, 124, 126 s 2-716(1)��111, 158 s 3-103(a)(4)�� 92 s 3-103(a)(6)�� 92 s 5-102(a)(7)�� 92 s 8-102�� 92 s 9-102(2)�� 216 s 9-102(a)(43)�� 92 s 9-202�� 216 s 9-203(3)(A) and (D)�� 66 s 9-320�� 68

xl

Part I General 1.1. Introduction 1.1.1. Modern Contract Law: Nature of the Parties or Type of Contract? Relationship Thinking and the Professional Contract In this Volume on contract law, the emphasis will be on: (a) the formation of the contract; (b) its binding force; (c) the choices parties have made in terms of their roadmap and risk management, (d) the interpretation and supplementation (or construction) of these choices and the (limited) grounds for correction of the terms; (e) performance and the most current defences; (f) default and the most current excuses like force majeure and potentially change of circumstances or hardship; (g) remedies including specific performance (or real execution) and ordinary or expectation damages, or renegotiation in appropriate cases; and (h) privity of contract, its meaning, and the (limited) exceptions to this principle. These aspects will first and foremost be discussed from the point of view of the nature of the relationship between the parties rather than of the type of contract they conclude. This broadly conforms to the common law approach,1 which, in the application of each of these aspects, takes into account the types of parties that conclude or have concluded the contract. In this approach, it is possible that among professionals a contract is concluded, performed, or excused in a manner quite different from that obtaining in similar contracts in their relationship with consumers,

1 See Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433, 439, in which it was held that the English authorities looked at the nature of the transaction and the character of the parties to it to consider what was necessary to conclude a binding contract, and that particularly onerous or unusual conditions had to be brought to the special attention of consumers. The conventional analysis of offer and acceptance was not followed. Interestingly, in this case Lord Bingham compared the civil law to the common law, and saw the civil law notion of good faith as a principle of fair and open dealing, which considered whether it was fair in all the circumstances to hold a counterparty bound to a specific contractual term. He analysed it as an overriding norm and noted that English law had no such principle (on which there is hardly unanimity in civil law either, see s 1.3 below), but sometimes used equity in striking down unconscionable bargains, or statutory law to crack down on unacceptable standard terms or exemption clauses, or case law to distinguish the nature of the parties, which thus confirmed this dominant theme. Note in this connection also that, as common law is sensitive to the nature of relationships, it never proved necessary to develop a wholly separate administrative law either. Special norms for governmental behaviour are traditionally embedded within the common law of contract, tort, restitution and property itself. This is another consequence of relationship thinking. In that approach, the administrative contract as such is, unlike in civil law countries, unfamiliar although the type of relationship will give rise to similar adjustments in common law and it is not correct to conclude that the concept is unknown in common law countries.

2 Volume 3: General or between consumers among themselves. Closely related is the development in common law of special fiduciary duties between parties in situations of trust, dependency, and confidence, adding potentially precontractual, contractual and post contractual duties, but again relationship specific. It re-emphasises different treatment depending on the nature of the relationship and not primarily the type of contract.2 The essence is that professional parties are supposed to spell out in their agreement what they want and not rely on the general part of contract law but on the contract and its descriptions and protections, the reason why the common law contract is usually longer, also in the determination of the excuses and the remedies. Party autonomy is here stronger in the professional sphere and the general law will not lightly intervene in the relationships created by such parties and adjust their risk management whilst, in the absence thereof, it will let the chips fall where they fall bar extreme situations. As we shall see, the civil law is here more indulgent and takes a consumer law protection attitude also in professional dealings. In this connection it is also relevant and related that in civil law the emphasis is traditionally on types of contracts, not on types of parties.3 This is another important difference and makes more sense in an anthropomorphic or consumer environment where the parties may be less aware of what they are legally doing. That was the background of the civil codes which maintained and do maintain here a unitary system applied to all. As we shall see, only under the modern concept of good faith interpretation of the parties’ contractual rights and duties and under the (related) concept of abuse of rights, may one find greater sensitivity to relationship thinking and more appreciation that the professional contract is different. However, it remains a fact and a natural civil law reflex to apply special protections developed in this way for consumers also to professional dealings of the same contractual type. It is the default rule, which suggests a great weakness in civil law thinking, and shows that the sensitivity to relationship thinking has not yet been fully subsumed in civil law and that the good faith concept here needs further

2 It should be noted, however, that there are lapses also in England, and the protection accorded to investors against their brokers under the Financial Services Act 1986 did not at first properly distinguish between professional and consumer dealings under agency agreements and the extra protection given to small investors was then also given to the larger. It was much criticised and this was reflected in Art 11(3) of the 1993 EU Financial Services Directive, which specifically allowed for differentiation in protection levels among different classes of investors. This approach is now also found in the newer Financial Services and Markets Act 2000 in the UK and in the EU 2004 Market in Financial Instruments Directive (MiFID): see more particularly the discussions in Vol 6, s 3.5 amended and replaced by MiFID II see Vol 5, s 3.7.5. 3 See J Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, 1991) 102 for the development towards different contract types in the natural law school of Grotius: see also De Iure Belli ac Pacis, Lib II, Cap II, xii, 1–7, and subsequently in civil law. The contract types identified in that school were partly based on Roman law distinctions and, in this analysis, partly on Aristotelian notions of fairness supplementing the contractual terms and defining the parties’ rights and duties. On the European Continent, this approach was refined and modified in the early nineteenth century supported by the development of the overarching notion of the parties’ will and their autonomy in contract, although now in a strict legal framework, see FC von Savigny, System des heutigen römischen Rechts, III (Berlin, 1840). It was followed by a more sophisticated distinction of the contractual types in the German Pandectist School of the nineteenth century, which also borrowed from the French Code Civil of 1804 and from the earlier contractual distinctions of Domat and Pothier in this respect, on which the French Civil Code was built and which had in turn often also been based on Roman law distinctions as developed by the earlier medieval writers in the ius commune and by the writers in the natural law school since Grotius. The key to an understanding is that the civil law of contract developed in an anthropomorphic manner before the corporate sphere and legal personality started to operate in full. Hence its consumer law ethos, its protections and its involvement in risk management, applied to all dealings. As we shall see, the common law of contract developed in commerce and is geared to professional dealings, often probably even creditor oriented. Party autonomy is here unlikely to be corrected by consumer law protections and is therefore stronger and covers more ground.

Volume 3: General 3 development and elaboration to propel a true private law concerning professional dealings,4 which, it will be submitted, is at the same time likely to be transnationalised. As will be shown throughout, in a proper analysis, this is not so much a question of overriding higher principle but rather of a liberal interpretation technique which confirms relationship thinking while singling out professional dealings in particular, and accepts other sources of law to be recognised besides established texts and case law, among which fundamental and general principle, and custom and market practices operating in the professional sphere may play an important role. For the time being, civil law remains more focused on the type of contract, such as contracts for the sale of goods, rental agreements, service contracts and the like.5 It also has more general

4 It should be noted, however, that in Germany there has been an attempt at condensing the field somewhat by sometimes introducing special duties only for persons that are in some special relationship. The sensitivity to the nature of the relationship of the parties is here beginning to find some better expression (Sonderverbindungen): see K Larenz, Lehrbuch des Schuldrechts, I Band Allgemeiner Teil, 14th edn (Munich, 1987) 14, but, as we shall see, recent (2002) codification in Germany of extra-contractual duties in the pre-contractual and the post-performance stages as well as of the possibility to adjust contractual terms in extreme circumstances do not fundamentally differentiate between the nature of the parties. This was confirmed by the adoption of the 1999 EU Consumer Sales and Guarantee Directive into the German general contract law in 2002, on the one hand, and of the Vienna Convention on the International Sale of Goods (CISG)’s subjective contract formation thinking on the other. In France, after the amendments to the contract law in 2016, typical consumer protections were moved to the 1993/5 Code de Consomation, but that did not make the revised general contract law more professional law, which remained anthropomorphic and even expressed more clearly intent and will as the foundation of contract in Arts 1113/4, supported by a more general good faith concept covering all stages of the contract (Art 1104 as against the old Art 1134 CC) without defining it or stating what it means and how it was to be applied except to declare it a public policy issue, which suggests it to be absolutely mandatory in all relationships. In the Netherlands, since 2007, in contract, modern case law is moving, see HR 19 January 2007 (PontMeyer), NJ 575 (2007); 29 June 2007 (Derksen/Homburg), NJ 576 (2007); 9 April 2009 (UPC/Land), JOR 179 (2010): see also PS Bakker, ‘Uitleg van Commerciele Contracten’ [Interpretation of Commercial Contracts], WPNR 6890/1 (2011) and also n 50 below and accompanying text. The idea is here indeed that the good faith notion itself may require a more literal interpretation of the commercial contract in which justified reliance plays a major role, especially if the contract is negotiated by outside law firms. This is also confirmed in Norwegian case law since 1994 (Scanvest and Hansa Borg) concerning the commercial contract, although not related to good faith interpretation; it is a matter of predictability and clarity, the contract as instruction manual (unless another common intent of the parties can be proven), see A Bjoranger Torum, Interpretation of Commercial Contracts (Oslo, 2019). 5 This is borne out in the EU by the 2008–09 Draft Common Frame of Reference (DCFR) as the most up-to-date (informal) civil law text (see Vol 1 s 1.4.21 and s 1.6.5 below), which specifies and defines in its Book IV seven types of contracts: sale of goods, rental agreements, services, contractual agency, distributorships, loan agreements, and guarantees. In its interpretation paragraphs, the DCFR refers to the types of contract as a distinguishing factor, see Art II-8:102(1)(e), see also Art II-g:101(2)(a), but not to the nature of the relationship of the parties. Where reference to good faith (and fair dealing) is made, in the DCFR it is not to distinguish fundamentally between different kinds of parties, but it is presented primarily as higher behavioural principle for all, not as a liberal interpretation technique through which at least in professional dealings the other traditional sources of law are revived as is defended in this book in which connection relationship thinking becomes indeed paramount. There is, in the DCFR definition of this notion in Annex A, and in Art I-1:103, however, a reference to the type of parties, which is different from the earlier European Contract Principles (PECL) and UNIDROIT Principles of International Commercial Contracts, on which the DCFR contract text is largely based, but which avoided a definition of good faith. The reference to the type of parties is here limited, however, by asking merely for openness and in that context for consideration of the interests of the other party to the transaction or the relationship in question. More generally, the lack of relationship thinking is fundamentally borne out in the DCFR’s unitary approach, meaning that its rules, which are contract type specific in the civil law tradition, apply to any type of contract party unless specifically stated otherwise. Art III-1:103 adopts this approach by expressly excluding any limitation of the good faith concept or any variation in the application thereof, which is perceived as mandatory and unitary in the performance of the contract, the same therefore in principle between professions or in respect of consumers (although the DCFR may sometimes be less categorical than the European and UNIDROIT Principles in this respect as we shall see).

4 Volume 3: General notions of contract, such as offer and acceptance; the notion of consensus, the role of will or intent, including the defences against the binding force of the contract; and the question of performance, default, remedies and excuses. That is then the general part of contract law. It is still conceivable that in this approach the type of contract, like the contract for the sale of goods, has some different formation aspects or disclosure duties and especially different remedies against default, but again that is less likely to depend on the types of parties, more on the type of contract. Taking the rental agreement in terms of a temporary transfer of user rights in immovable assets as an example, in common law, its basic characteristics are considered to be foremost determined by the type of relationship—be it between (a) professionals among themselves, as in the renting of hotel or office and manufacturing space; (b) smaller companies and consumers, as in the renting of apartments and small offices; (c) land owners and agricultural tenants; (d) local authorities and citizens, as in the renting of housing in the social sector; (e) companies and shareholders, as in the renting of group facilities; and (f) parents and children, as in the renting of housing bought for student accommodation. In proper relationship thinking of this nature, there follow in this way six different contracts, one for each type of relationship (rather than one type for all), which may operate quite differently depending further on how parties have written up their deal, and this attitude seems quite naturally also to be extended into the elaboration of the more general contract law concepts, as in the question when a contract is concluded, what kind of defences may be used, and what kind of excuses are available, again more so, it would seem, than in the civil law of contract, even in its modern, good faith-imbued, variant. In the case of consumer contracts, see note 1 above, the traditional common law analysis of offer and acceptance may then even be ignored altogether. Common law traditionally showed some interest in the type of contract only in commercial law as in the sale of goods, transportation, and insurance. One may detect here continental influence. The reason is that these contract types have their origin in the law merchant, which was developed in England for trade with the Continent and showed some Roman law affinity, but this is not the normal common law attitude, important as these types of contracts are, also in common law. In any event, they remain sector specific operated between a particular type of parties, here merchants in the exercise of their trade, even if now also ‘borrowed’ for consumer dealings, but probably differently operated and interpreted there. It is submitted in this connection that at least professionals should be able to set good faith standards among themselves unless becoming manifestly unreasonable. This is the UCC approach in the US (s 1-302) but is not accepted in the DCFR (or earlier in the UNIDROIT and European Contract Principles or PECL). This confirms the unitary approach under which professional and consumer dealings are treated similarly and not more fundamentally distinguished. Indeed, where sometimes in the text a special reference is made to business or consumer dealings, this is the exception that confirms the basic unitary approach as the standard, see eg, in the area of pre-contractual information duties, Art II-3:101/2, where contract types are also distinguished. Also in the area of unfair contract terms, a distinction is specifically made in this regard, see Art II 9:404/5, but it does not follow from basic concepts. Consumer protection notions otherwise freely spill over into commercial transactions. That is clear, eg, in the negotiation duties under Art II-3:301, but also for post-contractual renegotiation duties, where surprisingly no special rules are given for professional dealings either, see Art III-1:110, although there is a reference to risk acceptance (subs (3)(c), not in Art II-3:301) which might be assumed to be more likely between professionals. Both require good faith negotiations but again that does not introduce in this approach basic relationship thinking. Another problem is, as we shall see in ss 1.1.4, 1.3.14, and 1.4.8 below, that in determining whether the renegotiation is triggered (requiring an exceptional change of circumstances making performance so onerous that it would be manifestly unjust to demand it), the overall position of the debtor, if professional, may have to be considered rather than its position under the particular contract, which may be minor in the totality of its business, but not necessarily in that of its counterparty/claimant. It is another aspect of relationship thinking missing in the DCFR.

Volume 3: General 5 In fact, even in the law of sales in common law, precisely because of the commercial origin of all contract law, one spots a different orientation. A can of milk is here bought in order to produce milk products rather than for consumption purposes. That suggests a different perspective to the contract and property law aspects. In modern terms, it is likely to be part of a supply chain with interconnected sales, supply, and production arrangements.6 It is also noteworthy in this connection that in the 1980 Vienna Convention on the international sale of goods (CISG), see Part II below, the sales agreement is perceived principally to operate in the commercial sphere and it does not cover consumer dealings. They are different even though in the formation section of the Convention, in the notion of breach, and in the excuses and interpretation/supplementation paragraphs, as we shall see, this seems forgotten whilst anthropomorphic nineteenth-century notions of contract formation and operation of the civil law type prevailed, largely focusing on intent and a subjective notion of breach and force majeure excuses in the consumer fashion.7 This may be the true reason for the CISG’s lack of acceptance in the international commercial practice, not helped by the absence of any concept of the combination of goods, services, information, technology and software in large production and distribution chains concerning classes of assets in full transformation and movement. In this connection it may be usefully repeated that in common law the notion of contract largely developed as product of commercial law, which typically affects its nature, although narrowed at first by its incorporation into the common law, but subsequently much helped in equity as we shall see. It has led generally to a less subjective and anthropomorphic attitude to contracting and to determining the contractual content—it is considered a road map and risk management tool (although in common law it may now be different for consumers but that was a more recent development). One may consider that this basically different attitude is also the deeper reason why the UK did not ratify the Vienna Convention as being an imperfect expression of commercial law. Notably the notion of will and intent did not acquire the same importance here as it did in civil law and from there also in the CISG: the common law of contract formation remains based on exchange and bargain (or consideration) or conduct and detrimental reliance, not strictly speaking on consensus and intent. That may make a great difference, especially in professional dealings where it is not primarily what parties intended but what they objectively could rely upon or assumed in terms of risk that becomes the essence of contract formation and operation, in which connection the professional claimant must show also that s/he has put his/her money on the table or started to perform before s/he has a cause of action. Common law is here factual

6 This interconnectedness may also have an effect on the cause of action between (a wider group of) participants, see for the issue of privity in this connection s 1.5.1 below and on the proprietary side it may require advanced forms of (floating) charges and finance sales in classes of assets in movement and transformation rather than in individualised finished products which was the more transitional approach, at least at law in common law countries and in civil law, but not in equity, see Vol 4. 7 Much of the thinking behind the Vienna Convention, at least in the area of formation, dates from 1939 and still appears to have as its main perspective the spot sale of an individual item between natural persons or small companies, see further the discussion in Part II below. The modern emphasis transnationally is at least as much on duration or repeat contracts between large international companies concerning multiple deliveries with a substantial service and technology element in modern production and distribution chains transborder. As for the details of the Convention, it may further be observed that the ancillary arrangements and special risks in transportation, insurance and payment are hardly determining in its set-up, which remains based on delivery ‘ex works’ and presents as such a variation of domestic sales law, another reason probably why in practice the Convention has not proved the success that it is often claimed to be. In fact, there are serious problems with the academic model of the international sale it uses and tries to make operational. The concept of internationality itself is here poorly understood.

6 Volume 3: General in the sense that the law does not appear to operate or present a particular legal model but only attaches legal consequences to some acts.8 The type of relationship of the parties is again likely to play an important role. One consequence is that professional contracts once concluded are less vulnerable to defences and excuses, unless in the first instance there are equitable remedies in terms of misrepresentation, see section 1.4.2 below, or in the latter instance excuses covered in the contract itself like a force majeure or hardship clause, see section 1.4.3 below. The cry ‘I did not mean it, I cannot help it, it is not my fault’ goes less far in the common law. As the professional contract is foremost a road map and risk management tool, intent is not then a formation issue but is only relevant where clear choices have been made which even so will be explained objectively or according to what market practices or the peer group understand. It is an instruction manual where one does not ask either what the drafters meant. It is a performance issue. The civil law comes from the opposite direction: it being nineteenth-century anthropomorphic, it operates in the world of the individual or natural person, not in the corporate environment or that of the legal personality or the modern commercial sphere, which then hardly existed, and is thus based on intent and fault whilst in sales we buy a can of milk to drink. All is gone thereafter, no proprietary rights are left, at most there may be some health concerns, with which the contract may be largely concerned, or product liability. Again, in modern terms this is consumer law which determines the nature of the civil law contract with its intent base and statutory contract descriptions and strong legal defences and excuses derived from the general law, where subjective notions of blame or fault play an important role when it comes to non-performance. It means that the law, not the contract terms, distributes risk unless the parties want it otherwise. That is not the common law approach in contract, at least not in professional dealings. It was already said that this anthropomorphic approach was then extended into the corporate sphere and commercial dealings and no proper distinctions were made. Again, there was and is no relationship thinking but in principle a unitary approach for all types of dealings. Other aspects also need to be considered. The common law of contract is undeniably also embedded in a legal environment that is not at the free disposition of the parties, like issues of capacity, validity, and legality. Extra-contractual duties also exist, like, in cases of dependency, fiduciary duties, and there may also be pre-contractual disclosure and negotiation duties, contractual duties of care and cooperation, and post-contractual renegotiation duties. They were already mentioned but again very likely depending in their urgency on the type of relationship between the parties. Another is the one of legal dynamism. These duties emerge all the time and suggest that the contract is dynamic and the rights and duties thereunder or deriving therefrom are not fixed at the time of the conclusion of the contract as the notion of conduct and reliance also confirms. Duration contracts in particular are not static and likely also to be formally or informally amended. Public order and public policies may further intrude to protect, for example, consumers, the environment or public health, and are likely to constantly develop further. Ultimately justice, social peace and efficiency may also have to be considered and may 8 As we shall see in s 1.2.2 below, in the nineteenth century, the offer and acceptance model was introduced from civil law as a kind of ritual dance that started to emphasise the notion of intent and will, also in the common law of contract, and consequently a more intellectual model of contract formation and a fixed moment of contract formation. However, as we shall also see, it did not get as far as the civil law defences against the binding force of the contract and contractual validity and never convinced entirely. It may well be more successful in modern consumer dealings, but it became the model of the Vienna Convention based there more directly on the civil law provenance, using it then also for professional dealings in line with the unitary civil law approach, which remained nineteenth-century anthropomorphic and does not fundamentally allow for relationship thinking as noted, even though the Vienna Convention was specifically not made for consumer dealing.

Volume 3: General 7 not automatically follow from the observation of the rules. Globalisation and the impact of the operation of the transnational commercial and financial legal order and its own lex mercatoria with its different sources of law and own hierarchy between them then also need consideration. Accepting the importance of the nature of the relationship between the parties for their contractual rights and duties, the emphasis in this book will be mainly on contracts in the professional sphere, therefore on contracts between professionals, especially in international commerce and finance. They are (a) entities of some size, (b) making it their business to engage in commercial or financial dealings among themselves, (c) having expertise in these operations, (d) meaning to add value and (e) doing so for a profit.9 Smaller companies (or SMEs) may form an uneasy intermediary category. They sometimes require a treatment and protection more akin to that of consumers but in other aspects they may be treated or even prefer to be treated as professionals. On the whole they are best off to copy them: what the professional does not want or excludes is seldom good for the SMEs. They operate in the same value adding environment. As just mentioned, considering contract law particularly from the point of view of professional dealings, this may give rise to lesser refinement in terms of defences and excuses, but also in terms of disclosure, negotiation and renegotiation duties and on occasion even to some rougher (and quicker) forms of justice as well, especially when the contract is a roadmap and risk management tool and may then need a more literal interpretation. Again, this is not strange in common law where risk redistribution is not inherent in commercial law; to repeat, in civil law the notion of good faith, if properly understood, may become here similarly restraining in professional dealings and may then mean fewer rights, but it has quite some way to go. In countries like France, which still have commercial courts, this even now may find some expression in different court proceedings, which may be quicker but also less detailed. They involve the peer group as (lay) judges who may favour an approach that goes against greater legal sophistry. In international commerce and finance, we have international arbitration which may show the acceptance of a similar direction. In this book, there will be some special attention for only two contract types: the sale of goods and contractual agency. As far as the sale of goods is concerned, it follows that attention will in this connection be focused primarily on the international sale, which has always been a sale between professionals and is or should be structured accordingly, that is, differently from consumer sales and the CISG will be critiqued in particular from this perspective. These international sales between professionals are to be distinguished also because ancillary arrangements in terms of transportation, insurance and payment are often necessary and suggest a different layer of, and different concern with, risk and its management, also not considered in the CISG. Consumer sales may of course also be international (cross-border) but are not then commonly considered covered by a reference to international sales in this narrower professional sense, so much was at least recognised in the CISG (Article 2(a)). On the other hand, in the EU in the 2011 proposal (Regulation) for a Common European Sales Law (CESL), rather consumers (and SMEs) involved in cross-border sales were the inspiration (see section 1.6.13 below although professionals could also be covered if there was at least one SME among them). But in typical civil law fashion, which concentrates on the type of contract, much was copied from the CISG which had only meant to deal with professional sales, even if one must admit of its incongruous anthropomorphic ethos in its formation paragraphs and excuses. In CESL, the cross-border sales between Member States were essentially considered domestic at the EU level even if purely domestic sales remained covered by the laws of each Member State. Although a result of the EU’s lack of power to legislate otherwise, it will be asked later whether

9 See

for a discussion of the notion of the professional, Vol 1, s 1.1.10.

8 Volume 3: General creating two different (sales) regimes for smaller participants in this manner ever made sense, especially since for these cross-border sales the impact of ancillary arrangements for transportation, insurance and payment, which could have made the difference, was not further considered (the same deficit as in the CISG). It should also be observed that although in cross-border dealings, even within the EU, consumers may have real concerns, they are likely to be quite different from those of professionals. None of this was reflected in the proposal; again, this is a lack of relationship thinking and of any fundamental distinction in this regard. The project was ill conceived and too complicated. It was quietly dropped in 2014. As far as contractual agency is concerned, especially in the financial services area, the distinction between wholesale and retail investors using agents or brokers has also become of overriding importance.10 Again, it shows the importance of relationship thinking. Agency is not the same in every relationship and, especially in financial dealings, may acquire further specialised features and protection aspects to be distinguished according to the nature of the parties. In particular, smaller investors are likely to be better protected against their brokers than the larger ones, which, again, has a transforming effect on the contract of agency for them when operating in this business. International investors may also be different which may have a further effect on the agency as well.

1.1.2. The Effect of Globalisation. Transnationalisation of Contract Law Concerning Professional Dealings The significance of distinguishing not only in commerce, but also in finance, between professional dealings and dealings with consumers or other non-professional parties is in modern times further highlighted by the fact that professional contracts lend themselves increasingly to support by international legal principles and practices leading to the application of transnational law, often also referred to as the modern law merchant or lex mercatoria. In this approach, followed in this book, all professional dealings are in principle assumed to be transnationalised and a distinction is therefore no longer made between international and domestic professional dealings as the latter increasingly derive their form also from international practice unless it is specifically stated that a domestic regime is still wanted, see the discussion in Volume 1, section 1.1.10. This professional law is here perceived to operate in a new transnational commercial and financial legal order with its own autonomous sources of law; see the discussion in Volume 1, in particular, sections 1.4 and 1.5. These are the traditional sources of law still surviving in public international law: fundamental principle, custom and practices, treaty law (where existing), general principle, and party autonomy. They were largely abandoned in codification countries which depend on statutory texts. In that model, other sources of law will only operate to the extent especially allowed by statutory authorisation or licence. That is the codification idea, which is also territorial and anthropomorphic, basically nineteenth-century consumer law oriented as we have seen, even in modern texts like that of the Dutch in 1992 and of Brazil of 2002, and the present Belgian efforts at recodification are not different. Neither were the German contract law amendments of 2002 and the French ones of 2016. As we shall see, they may still re-enter in interpretation but it was not the original idea. In the transnationalisation of private law in professional dealings, this statutory methodology is pushed back and a new one borrowed from public international law which re-establishes

10 See

also text at n 2 above.

Volume 3: General 9 the pre-nineteenth-century unity in all law formation and operation at the international level. In terms of sources of law, the emphasis is then indeed on fundamental and general principle, custom and practices, and party autonomy, besides treaty law if there is any, and international minimum standards of public policy, supplemented in pressing cases by considerations of justice, social peace, and efficiency. Local laws, including public policy, only play here a residual role in situations where an international transaction comes demonstrably onshore and only to the extent it does. The formation and operation of this new transnational law, including contract law, in this (informal, immanent or bottom up) manner in its own legal order for commerce and finance is seen in this book as the consequence of placing ourselves in the international flows of goods, services, money, information, and technology, where there is no natural legislator. It means leaving domestic legal frameworks behind and legally capturing these flows as flows, often in their movement between countries and in their transformation in the international production and distribution chains. It may also suggest an altogether different view of risk management and a notion of assets which allows for services, information, technology and software components, or packages, much of which may be virtual, and may then also cover classes of future assets in which notions of ownership and possession lose their physical connotation and pre-set variety whilst a degree of party autonomy is accepted in their creation and operation, which reminds of equity in common law countries, and will be much the subject of Volume 4. Contract and property law become here more closely connected. In essence it allows room for the descriptions of the relevant assets and rights therein in the contract with operation against other professional insiders, not themselves party to such transactions however. They have a search duty before acquiring any interest in these assets or the operations therein but it does not affect the general public which may ignore these interests or charges and acquires commoditised assets freely in the ordinary course of their activities and purchases. The result is in professional dealings a vital modernisation of contract (and movable property) law and a principal means of avoiding conflicts of (domestic) laws which results from any perceived need still to cut the international flows and the transactions in them legally into domestic pieces, mostly even different for the contractual, proprietary and enforcement aspects, never mind the often very basic and anthropomorphic domestic concepts of contract and property that would be so introduced and still held to be relevant regardless of the fact that they were never meant for this kind of business and need to accommodate the constant transformation of the assets in these flows and the consequent movement transborder of the assets and activities in international supply and distribution chains between professionals.11 As much of this is now done in a virtual manner, it also became ever more difficult to locate any of this properly in any country under any particular national law pursuant to the traditional rules of conflicts of laws, which still look for some closest connection with national laws or an amalgam of them in the hope that they together facilitate the international transaction and provide an adequate and efficient legal framework overall for these flows as flows. It may be increasingly unrealistic and in any event highly inefficient, uncertain and costly. Rather the transnationalisation of the law in these areas is considered the natural response to the globalisation of the marketplace on the scale we now see it and to the cross-border nature of

11 Because of the increasingly virtual nature of much of these flows and the transactions in them, it was noted that the notion of contact with a domestic law, which is the essence of all conflicts of laws, see Vol 1, Part II, often still different for contract and property, was already under severe stress.

10 Volume 3: General much international commercial and financial activity, which is now normally conducted through professionals and is losing its typical domestic character, also in law. The technique and method were the subject of the discussion in Volume 1. As we shall see, in practice, the crux is here the floating charge to fund these transborder processes in their transformation and movement whilst giving them as security for working capital, which in the nationalistic view is not realistically possible, see more in particular the discussion in Volume 5. This makes hardly any longer any sense and increases the cost of funding for no obvious reason. The development of conditional or temporary ownership rights in financial sales supporting newer forms of asset backed funding and the acceptance of trust structures are closely connected, as we shall see, and further impacts on the more traditional notion of property law. This might suggest that the problem is mainly in the proprietary aspects of international transactions, also in their transfer cross-border, but it also affects contract law as in transportation, payments, and the risks and the insurance thereof. The legal problems arising in this connection were always somewhat clearer in the international sale of goods and were earlier spotted there, to which in contract the Vienna Convention (CISG) was a partial but probably always inadequate response. It covered only some contractual aspects which could always have been covered in the contract itself, whilst avoiding all proprietary issues (Article 4), notwithstanding the fact that transfer of title is the true purpose of a sale, and maintaining an anthropomorphic consumer law approach in its subjective formation and excuses coverage. Globalisation, if it holds, poses a more pervasive challenge. Again, it also concerns closely connected international services, technology, software and information flows, which may well be the more important and valuable aspects of a sale, and then also the financing operations concerning them, including payments and funding. It therefore legally also concerns the proprietary aspects of these flows and operations therein, in which the notion of property itself may acquire a different connotation and may become activity or product specific. It is hardly physical any longer and becomes more prone to a greater degree of party autonomy as already noted and as will be further explored in Volume 4. One reason for this change in direction is that international business is now much larger in which financial transactions have become more dominant and often surpass the importance of the older mercantile activity or aspects primarily connected with the international sale and transportation of goods. For the independent transnational legal order that is here created, the cultural, sociological, and economic forces or efficiency considerations that back it up, and the new law merchant or lex mercatoria that emerges in it, its nature and the operation and hierarchy of norms from different legal sources that support it, reference may again be made to the discussion in Volume 1, sections 1.4 and 1.5. Thus in the view presented in this book, the modern law merchant or lex mercatoria, in the transnational commercial and financial legal order in which it operates, depends for its formation and operation on different sources of law, much as public international law does under Article 38(1) of the Statute of the International Court of Justice, supplemented for peremptory law or ius cogens by Article 53 of the Vienna Convention on the Law of Treaties. These sources are not territorial and may supersede even treaty law. In Europe, this means a return to pre-codification perceptions when law was considered the embodiment of a rationality in human affairs that did not stop at borders. Rather it was perceived to be universal in principle and not primarily national; nothing of it was considered domestic per se. To repeat, like in the law between states, from which in this book we derivate inspiration in international professional dealings, it concerns here especially fundamental legal principle,12 12 In codification countries, the impact of fundamental principle as overriding in private law remains particularly contested, see Vol 1, s 1.4.6 and the Introduction to the DCFR of 2009. In this respect, in recent times, the impact and so-called horizontal effect of human rights on private law formation has, however, also been

Volume 3: General 11 custom and practices,13 general principle,14 and party autonomy.15 The latter is here no longer a licensed concept and may be more autonomous as it probably always was on the European Continent before the nineteenth century and perhaps still is in common law, at least in commerce and finance. Its status and power will be a recurrent issue in this book. There may also be treaty

noted and is now often referred to as the constitutionalisation of private law, see for this aspect in Germany, CW Canaris, Grundrechte und Privatrecht, eine Zwischenbilanz (Berlin, 1998) and in England, D Friedmann and D Barak-Erez (eds), Human Rights in Private Law (Oxford, 2001) and Hugh Collins, ‘Utility and Rights in Common Law Reasoning: Rebalancing Private Law through Constitutionalization’, LSE Law Dept Law and Society Working Paper Series, 2nd issue Sept 2007. The freedoms to contract and to own property are here considered especially important in terms of the power of states to intervene. Then there are procedural protections, not merely against states, and relevant especially in their courts. It must be considered in this connection to what extent the horizontal effect (sometimes) of human rights, and therefore their effect between private parties is in truth simply a revival of natural law notions or fundamental or general legal principle, although in the view of many still limited to what governments allow in human rights. In this vein, the DCFR in Art I.-1:102(b) also makes reference to this horizontal effect in the interpretation of contracts, but only allows it to operate in so far as these human rights emanate from Member States, which thus retain the last word. There are still no fundamental principles beyond them. That is a severe limitation, earlier found to follow from the statist tradition in civil law, which does not otherwise admit of such principle, although some analogy may still present itself where power is exerted between private parties. There is here also an overlap with the normative interpretation technique, see s 1.1.7 below, while public order arguments might also be used. 13 In its essence, custom is an expression of what is understood as normal or best practice in the group or community that it concerns and of what is perceived in that group to be the most desirable in terms of common sense and experience, also when situations change. It concerns its routines. As such, resort to custom is ingrained in all law and its application and gives rise to justified reliance notions that will then be legally supported, unless the parties have agreed otherwise (assuming the custom was not mandatory as it may be for example in property law). Normality is the true legal default rule and custom is one of its major expressions. Being immanent law, it is in business not likely to be political, censorious or society-changing; its only objective, at least in commerce and finance, is to facilitate and support the needs of that community as well as possible, given its own perceptions of reality. Being routine, custom is dynamic in concept and can never be fully captured in an intellectual fashion; neither, therefore, can the lex mercatoria or any other living law, see further JH Dalhuisen, ‘Custom and its Revival in Transnational Private Law’ (2008) 18 Duke Journal of Comparative & International Law 339, and the discussion in Vol 1, s 1.4.8. 14 Earlier, in international law concerning disputes in the extraction industry, general principle tended to be referred to as the law of civilised nations; see Lord Asquith of Bishopstone, who appears to have been the first (in 1951) to refer in this connection to ‘the application of principles rooted in the good sense and common practice of the generality of civilised nations—a sort of “modern law of nature”’: see Award in the Matter of an Arbitration between Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi, reported in (1952) 1 ICLQ 247 and (1951) 18 ILR 144. That formula was taken up in oil concessions later, see further Vol 1, s 1.4.7, therefore as a matter of a contractual choice of law. In private law, the construction contract for the Channel Tunnel provided that it was to be governed by ‘the principles common to both English law and French law, and in the absence of such common principles by such general principles of international trade law as have been applied by national and international tribunals’: Channel Tunnel Group v Balfour Beatty Construction Ltd [1995] AC 334, 347. In the international commercial and financial legal order as a newly emerging order, one may expect here an attitude to problem solving that is less encumbered by the past, even where concepts are borrowed from domestic law in a comparative law search for better solutions. The issue thus becomes the normativity of comparative law research in a forward-moving manner: see further the discussion in Vol 1, s 1.4.7. 15 It concerns here party autonomy as an autonomous source of law. It not only operates in contract, with which it is often identified, but is also a key notion in modern movable property law as we shall see in Vol 4 below. How far party autonomy is also effective in property law was, however, always less clear as third parties become involved and must then in principle respect these rights. When this was so and the distinctions in this respect were not truly understood until well into the eighteenth century and then became connected on the European Continent with the notion of the numerus clausus of proprietary rights, see Vol 4, s 1.2.2 below. In this book, party autonomy in proprietary matters is accepted in international commerce and finance subject to the protection of consumers, similar therefore to the operation of equitable proprietary interests in common law, see for a summary Vol 1, s 1.1.6 and the discussion in Vol 4 below.

12 Volume 3: General law, which must then find its place among these other sources of law and it may not be assumed that as legislation it automatically overrules them, also because of its territorial and therefore limited character; see further the discussions in Volume 1, section 1.4, which are here only briefly summarised. As far as this treaty law goes, it remains in any event rare in international commerce and finance (although less so in maritime law), but in the international sale of goods, some uniform international sales law for professional dealings was created through the 1980 CISG after an earlier attempt in the Hague Conventions of 1964, see further the discussion in Part II below. This treaty law, which has already been mentioned, provides only a partial coverage of the subject while important trading nations like the UK have not ratified it and the larger commercial practice remains sceptical and mostly excludes its application, mainly because of the subjective nature of the key notions of contract formation, fundamental breach (Article 25) and force majeure (Article 79) and the unilateral right of the buyer to reduce the price (under Article 50)—notions, however, that returned in the Common European Sales Law project (CESL)—see further the discussion in section 2.3 below. In contract, party autonomy evolved in the idea that the single word binds and forms the contract, to be recognised (not created) by the positive law unless public order (or a lack of a valid cause) forbade it. In France, Loysel, Institutions coutumieres (1607) observed in this connection: ‘On lie les boeufs par les cornes et les hommes par les mots’. That was the traditional French view. The text of Art 1354 French Code Civile (CC old) reflected this: ‘Les Conventions légalement formées tiennent lieu de loi a ceux qui les ont faites’ and suggested the autonomy of the law that parties create. In more modern times, this basic principle has continued to find important support, see notably Paul Scholten, Convenances vainquent loi, Report, Royal Netherlands Academy of Arts and Sciences, 3 Assembled Works (1930) 187, 196, and also in England there is sometimes support for the self-binding force of the promise, see C Fried, Contract as Promise: A Theory of Contractual Obligation (Cambridge, MA, 1981), but party autonomy is now mostly explained as government licence or as operating by permission of the sovereign, being the only source of all law. It is then no longer autonomous but nationalised. That became increasingly the civil law codification idea, although it may have been different in the earlier laws of France, see n 33 below, and it may also be different in transnational law, as will be posited later. See for a broader discussion of party autonomy, Vol 1, s 1.4.10. As an autonomous source of contract law, party autonomy revived at least to some extent in France for international contracts. This became particularly relevant for the validity of gold clauses, which were upheld in international contracts (but not in domestic French contracts) in the 1930s: see GR Delaume, Transnational Contracts (New York, 1989), 119. The long-standing relative popularity of the lex mercatoria in France may be seen in the light of the development in that country of this notion of the ‘international contract’ operating under its own internationalised regime, although only in so far as permitted by French law in respect of conduct and effect in France, see further the discussion in Vol 1, s 1.4.10. The concept of party autonomy as an autonomous source of law, at least at the transnational level, was dramatically underlined in recent French case law in that international arbitration clauses were considered autonomous and not anchored in any domestic law, this being considered the reason why an award being set aside in the country of the seat of the arbitration or origin of the award need not have an effect on recognition of the same award in France. This is ultimately a matter of French recognition law, see Cour de Cass Civ 1, 29 June 2007 in PT Putrabali Adyamulia v Rena Holding, Cass Civ 1, 29 June 2007, Les Cahiers d’Arbitrage no 2007/2, Gaz Pal 17 July 2007, 44. Here the existence of an autonomous international arbitral order was accepted and the award was considered to be a judicial decision in that order, see also E Gaillard, ‘Aspects philosophiques du droit de l’arbitrage international’ (2008) 329 Receuil des Cours 49. See also Vol 1, n 20, and further also P Pinsolle, ‘The Status of Vacated Awards in France: the Cour de Cassation Decision in Putrabali’ (2008) 24 Arb Int’l 277. In view of the new French Arbitration Act, Decree No 2011-48 of 13 January 2011, one may still ask, however, how far the French legislator has drawn the consequence. Under the new arbitration law, international arbitration still seems to be a French concept in France rather than a question of the recognition of an international facility subject merely to French public policy and French public order concerns to the extent the international arbitration comes on shore in France. Indicative is that the severability of the arbitration clause is fully accepted but it is not automatically put under international law, while domestic arbitration concepts are still extended to international arbitration. Its special status may therefore still be in doubt under new French statutory law, which did not, therefore, contribute much at the conceptual level, see also the discussion in Vol 1, s 1.1.8.

Volume 3: General 13 Typically, there is also a lack of understanding as to how the CISG text relates to the other, more immanent, sources of law, which are poorly covered in Articles 4, 7 and 9. In the typical civil law codification tradition, these sources are rather ignored or their existence denied or deprecated, although it must be doubted whether treaty law of this nature has the status and power to determine its own rank amongst the other transnational sources of law. In any event, these sources of law are likely to return in the interpretation and supplementation of the text. Other problems were already identified in the previous section, like its intent and will-based nature in the nineteenth-century civil law anthropomorphic manner, which renders the approach to the defences, to breach, and to the excuses also subjective. It may not be what business wants or can handle. This is to demonstrate that treaty law of a private law nature covering international dealings is no panacea and may well create more problems than it solves. Its success is foremost dependent on business recognising itself in the result in what is mostly no more than some academic compilation, never asked for by it. It has the further disadvantage that it is difficult to update and change as it will involve many nations. This may be the reason why in most areas of private law, formal uniform treaty law has remained incidental.16 An informal but broader creation of transnational law is now becoming apparent in the international professional sphere and is no longer centred on this uniform treaty law but rather on a variety of other (immanent or bottomup) sources of law among which any treaty law must find its place. The resulting modern law merchant or lex mercatoria does not yet present here one coherent pattern of rules but a hierarchy of norms from these different sources, in which indeed, besides fundamental legal principle, the terms of the contract itself, custom or established practices, uniform treaty law, and general principle, even national law may still figure, although the last only residually (and then as part of the transnational law).17 So far and imperceptibly, this transnationalisation has proven particularly important in the Eurobond and international swap markets, the first being the largest capital market, the latter being the largest market of all. Domestic law may remain more relevant for all non-professional dealings, therefore especially for dealings with consumers and employees, even if operating transborder, but also for dealings with smaller licensees, franchisees and distributors, or smaller investors, even though within the EU there has been some harmonisation of the law in some of these areas as well, while the 2011 proposal for an EU Regulation concerning a Common European Sales Law (CESL) introduced what was in essence a consumer sales law for purchases cross-border in the EU. Its need, purpose and approach have been questioned in the previous section, where it was already mentioned that the project was quietly withdrawn in 2014; there is also the question of quality. The effort will be revisited in section 1.6.13 below. Most of these EU efforts on behalf of consumers,18 and to a lesser extent of workers,19 or smaller investors do not have a bearing on cross-border activities and may then arguably better be left to 16 See Vol 1, s 1.4.20. 17 See more particularly the discussion in Vol 1, sections 1.4.13/14 and 3.1.2 and JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law: A Liber Amicorum (Oxford, 2009) 619. 18 The ECJ has defined ‘consumers’ as natural persons acting outside the range of professional activity: see Case C-361/89 De Pinto [1991] ECR I-1189. Problems may arise where individuals also act professionally, raising the question whether such activities may still benefit from consumer protection. Protection is not afforded unless the professional activity was insubstantial: see Case C-464/01 Gruber [2005] ECR I-439. However, the counterparty may here rely on his good faith when an individual contracts for his business. It is also relevant whether the goods are or could be used for professional purposes, require delivery at a business address, or there is VAT registration. This suggests that the buyer may have raised wrong expectations and accordingly bears the risk, but in internet transactions it may be simply the nature of the goods and the likelihood of professional use that will determine the issue.

14 Volume 3: General local law if only as a matter of subsidiarity unless it can indeed be demonstrated that they materially frustrate the internal market. Moreover, consumer law proper is often regulatory and for that reason protection of this nature may remain, it is submitted, also more properly the subject of domestic statutory law, if only because there is often no unanimity on the level of protection that needs to be given while the needs may still be very different even in the EU between the various Member States.20 It should also be realised that the EU motivation and legitimacy for uniformity See for the relevant directives, notably: Council Directive 84/450/EEC of 10 September 1984 [1984] OJ L250 on misleading and comparative advertising; Council Directive 85/374/EEC of 25 July 1985 [1985] OJ L210, on the approximation of the laws of the Member States concerning liability for defective products; Council Directive 85/577/EEC [1985] OJ L372, superseded by Directive 2011/83EU [2011] OJ L304 (see also n 20 below) to protect the consumer in respect of contracts negotiated away from business premises; Council Directive 87/102/EEC [1987] OJ L42, later amended, for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit, now superseded by Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers [2008] OJ L133/66; Council Directive 90/314/ EEC [1990] OJ L158 on package travel, package holidays and package tours; Council Regulation 295/91 [1991] OJ L36/5 establishing common rules for a denied-boarding compensation system in scheduled air transport; Council Directive 93/13/EEC [1993] OJ L95/29 on unfair terms in consumer contracts; Council Directive 97/9/EC [1997] OJ L144/19 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase on a time share basis; Council Directive 97/5EC [1997] OJ L43/25 on cross-border credit transfers; Council Directive 97/7/EC [1997] OJ L144/19 on the protection of consumers in respect of distance contracts superseded by Directive 2011/83EU [2011] OJ L304 (see n 19 below); Council Regulation of 9 October 1997 [1997] OJ L285/1 on air carrier liability in the case of accidents; Directive 98/27/EC [1998] OJ L166/51 on injunctions for the protection of consumers’ interests; Directive 00/31/EC [2000] OJ L178 on Certain Legal Aspects of Electronic Commerce in the Internal Market; Directive 2002/65/EC [2002] OJ L271 concerning the distance marketing of consumer financial services; the E-Commerce Directive 2002/87/EC [2003] OJ L35/1, which contains in its Art 3(4) some special rules for consumer protection and allows host country measures in very narrowly defined circumstances; Unfair Commercial Practices Directive or UCP Directive 2005/29/EC [2005] OJ L149/22 concerning unfair business-toconsumer commercial practices in the internal market (amending Council Directive 84/450/EEC, Directives 97/7/ EC, 98/27/EC and 2002/65/EC). 19 See especially Council Directive 76/207/EEC 1976 [1976] OJ L39, on the implementation of the principle of equal treatment for men and women as regards access to employment, vocational training and promotion, and working conditions; Council Directive 2000/78/EC [2000] OJ L3003/16 establishing a general framework for equal treatment in employment and occupation. 20 The result may be an overall common denominator of protection which may be too low in advanced countries and still too high in the lesser ones. An important effort is the EU was the key maximum Directive 2011/83/EU OJ L304 of 25 October 2011 on consumer rights, which became fully applicable as of 13 June 13 2014, based on the presumed needs of the internal market (Art 114 TFEU), further supported by a desire to avoid differentiation in areas where the EU tries to operate, and finally by some preconceived idea of where the level of consumer protection should be pitched for all. These bases for jurisdiction to legislate at EU level are contentious, see also Vol 1, s 1.4.21. The last two did not exist in the EC Treaty nor do they exist now in the Lisbon Treaty successors (TEU and TFEU), while the first one suggesting that uniform EU private law materially promotes the internal market may lack sufficient empirical support, at least in terms of movement, cost and quality of consumer products proper. Again, the positive effect on the cross-border activity of producers or providers appears the better argument but also provides a weak basis that depends much on the type of activity. Thus EU jurisdiction was convincing in respect of product liability of manufacturers, but may be less so in other areas, especially for service providers to consumers who remain largely domestic. Relevant here also is that consumers do not normally shop for products far away from home, less so even for services. A maximum Directive may still recommend itself in the first instance but hardly in the last one. In the US, in a much more integrated economy, state law has usually been more than competent to deal with this type of protection. One reason is the high cost of uniform legislation and especially of its implementation, but no less the relevance of other factors such as, in the EU for consumers, language, economic development, distances from markets and the like, which are much greater impediments to the operation of the internal market than private law diversity; see further also the discussion in s 1.6 below on the attempts to codify private law at EU level, its methodology and quality. It was noted before that where these EU Directives can only be based on the needs and promotion of the internal market, they must be interpreted restrictively, which means not beyond this limited objective, see also s. 1.6.1 below.

Volume 3: General 15 in this area is quite different from consumer protection proper. Companies in their cross-border operations may benefit from such uniformity of law in the consumer area but, importantly, this is not then a consumer or employee protection perspective but, in the EU, still an issue of promoting the internal market under Article 114 TFEU. Thus product liability issues in respect of goods with a foreign origin, long-distance selling of consumer goods, and the long-distance marketing of consumer financial services may be appropriate EU concerns from the perspective of promoting the internal market and companies may benefit from harmonisation of the applicable private laws at the EU level in these areas,21 but, again, this is then primarily to protect businesses in their EU-wide trade, not consumers.22 The CESL which wanted to do both, inclined here to confusion, which, as we shall see in section 1.6.13 below, also concerned the EU’s jurisdiction to legislate in this manner for this subject and its methodology.23

1.1.3. Content and Coverage of this Volume. Formal Transnationalisation Efforts In Part I of this Volume, contract law will first be dealt with in a comparative law context and subsequently in the context of its transnationalisation for business or professional dealings. As far as domestic contract law is concerned, it has been the subject of much comprehensive statutory intervention, on the European Continent as part of national codifications, but in respect of the sale of movable property (goods) also in common law countries such as England, where there is the Sale of Goods Act 1979 (replacing a similar earlier statute of 1893), which is also in force in Scotland. In the US, there is in this connection Article 2 of the Uniform Commercial Code (UCC), first proposed in 1951, with new texts in 1958 and 1962.24 It was introduced in all US States after 1964, albeit with some minor variations and there are several later amendments. More broadly there is in the US also the important 1981 Restatement Second of Contract but not as a legislative or otherwise binding legal text. In Part II below, the sale of goods will be discussed as traditionally the most common type of commercial contract. As for the other contract type, contractual agency, more especially covered in Part III, in civil law, the domestic laws in this area often remain rudimentary, especially in the case of indirect or undisclosed agency. That is different in common law. In the US, there is in this connection the important Restatement (Second) of Agency, in the process of being replaced by a Third Restatement. Much of the following discussion will be based on an analysis of these domestic texts but attention will also be given to uniform treaty law, for the professional sale of goods in particular to the 1980 UNCITRAL CISG or Vienna Convention already repeatedly mentioned, and for contractual agency to the UNIDROIT Convention on Agency in the International Sale of

21 See for financial services also Vol 6, ss 3.5, 3.6 and 3.7. 22 An area where local laws remain particularly dominant, even between professionals, is real estate dealings, but in movable property, relevant especially when used in asset-backed financing internationally, a strong form of transnationalisation (along equitable lines in a common law sense) may be detected and then allows for some considerable party autonomy subject to the protection of the ordinary course of business, see Vol 1, s 1.1.6 and Vol 4, s 1.10 below. 23 There was also the matter of costs while introducing a new sales regime besides the existing one for purely domestic sales. There is here the further issue of subsidiarity. For the question of EU jurisdiction in these matters see Vol 1, section 1.4.21. 24 See for the origin and scope of the UCC, Vol 1, n 117.

16 Volume 3: General Goods of 1983, although it was never sufficiently ratified to enter into force. For the more general part of contract law, there are the 1994 UNIDROIT Principles for International Commercial Contracts, subsequently extended in 2004, and the Principles of European Contract Law (PECL or ‘European Contract Principles’), first published in 1995 and substantially completed in 1998, although new chapters on special types of contracts were added later. Both sets now also include a part on agency. Importantly and as already mentioned, the 2008–09 Draft Common Frame of Reference (DCFR) provided a further updated text in Europe in these areas and relied heavily on these earlier efforts but also covered tort, unjust enrichment, trusts and personal property, including secured transactions. See further the discussion in Volume 1, sections 1.4.20/21. The DCFR text will be discussed at considerable length and used as an example where civil law now is in this area of contract law. It is in the nature of a full codification, still perceived in the traditional statist and static intellectual civil law style, as a piece of legislation imposed from above for all of the EU (real estate is excluded and thus remains a domestic matter), eliminating all other sources of law. It means to operate for professional and consumer dealings alike. So far, it is not an official document but in 2011 a further text appeared, prepared by an EU appointed Expert Group but dealing mainly with the sale of goods. It substantially borrowed from the existing DCFR text and was followed in October 2011 by the draft EU Regulation on a Common European Sales Law (CESL), already mentioned several times before. It could be seen as a DCFR carve-out and first real attempt at EU private law codification, albeit so far only in the area of consumer and small company sales cross-border in the EU. It was already mentioned that it did not convince and was withdrawn at the end of 2014. See again the discussion in section 1.6.13 below. Although important compilations, used here as contrast in the discussion, these texts had no official status except for the ambition of the withdrawn EU draft Regulation (CESL) and of course the Vienna Convention (CISG). It was submitted already that they show little progression and innovation, and are basically extrapolations of past experiences in the anthropomorphic consumer law manner. Typically, they do not sufficiently distinguish according to type of party allowing for a corporate environment and are hardly aware of modern contract theory (see the next sections). Notably, traditional codification methodology is not questioned as to its continuing efficiency and effectiveness. Other sources of law operating at the transnational level are not considered. The UNIDROIT and European Principles were always consumer law oriented even though the former were meant for international commercial contracts only. They continue a subjective attitude to contract formation and interpretation and present a classic example of a failure of relationship thinking in civil law, showing the dangers of extending consumer law protections to professional dealings while in the civil law manner the emphasis remains on types of contracts rather than parties as we have already seen in section 1.1.1 above. The DCFR, the work of the Expert Group, and the CESL suffered from the same drawbacks. As we shall see in sections 1.6.5ff below, as a model they remained backward looking in the old civil law nineteenth-century anthropomorphic codification mode and have, as such, little to offer for the future of professional dealings in Europe. This impediment may become ever clearer after Brexit when financial business in particular is trying to be retrieved from London. Quality was assumed but there is no clear insight into the formation of private law in the professional sphere in a globalised environment and there is no conceptual rethinking, only an interest in promoting largely pre-existing domestic legal texts as if they were uncontroversial. The need for ever more sophisticated standardisation including the operation of smart contracts is substantially ignored. In sales, the draft common European sales law (CESL) further suffered from all the defects of the 1980 Vienna Convention, already noted above in sections 1.1.1/2, which made this Convention unsuitable for professional dealings and may be considered the reason why its approach has

Volume 3: General 17 been rejected by the business community. The same lack of enthusiasm would undoubtedly have befallen the CESL as an opt-in text if it had ever become law and also concerned the DCFR and its credibility. In the discussion below, it will be argued that these efforts are profoundly misconceived and unfriendly to the modern transnational lex mercatoria, which accepts different sources of law in transborder dealings, tries to address more real needs, and is built on a clear distinction between different types of relationships and on respect for diversity in the law-making process in a modern society. As the UCC also does in the US (section 1-103), it favours bottom-up law formation in the professional sphere and is as such fundamentally different from the top-down civil law codification approach of the DCFR and its progeny and antecedents, which continue to concentrate unquestioningly on statist models and their perceived monopoly in private law formation. These projects are political; quality and responsiveness to actual needs are secondary. At this stage they are truly not necessary as is shown transnationally by the lack of interest in them.

1.1.4. Modern Contract Law. Will Theories and the Relevance of Intent. Non-intentional Aspects of Contract Law. The Abstraction Principle and the Meaning of Party Autonomy As demonstrated above, in contract law the emphasis on the nature of (the relationship between) the parties and the role of the extra-contractual rights and duties that may derive from this relationship, supplementing or even amending the agreed texts, as is clear, for example, in situations of dependency and may then still vary in pre-contractual, contractual, and post-contractual situations, is an important issue also in common law and there much at the heart of fiduciary duties. It suggests in particular different rules for professional and consumer dealings even if the contract type, for example sale of goods, is the same. It may put the concept of party autonomy itself in a different light. Transnationally, it may be more independent or autonomous, may as such even move into property law, but it cannot avoid objectively applicable rules in terms of capacity and binding force or legality and the impact of extra-consensual duties and public policy either or in property the rights of bona fide purchasers. It is embedded in law, also transnationally as we have seen and is only one source of it, and in its operation it may not be able to ignore issues of ultimate justice, social peace and efficiency either and is subject to relevant public policy constraints. As noted in section 1.1.1, the distinction between professional and consumer dealings is much less fundamental in civil law but is now also creeping into it, notably through the good faith notion, although often not yet sufficiently identified and, in any event, it is not complete as the European and UNIDROIT Contract Principles and the DCFR clearly demonstrate. Relationship thinking of this nature if properly understood is not limited to contract law either and may also affect the further development of the law of movable property, which, in a modern professional environment, becomes indeed subject to a larger degree of party autonomy and is therefore no less dynamic, although in a different manner as already mentioned in section 1.1.2 above. Here again, civil law thinking is behind as we shall see in Volume 4 below. On the other hand, in civil law, there may be greater awareness of extra-contractual or non-consensual duties as may be expressed or supported through the concept of good faith and it stands to reason in consumer protection matters. Notions of ultimate justice and social peace may then also figure more strongly when sufficiently pressing, less perhaps those of efficiency which may be more telling in business dealings. Another important consideration is public policy and public order requirements and their effect on the contract and its content. An obvious example is competition policy but there are

18 Volume 3: General many others, for example environmental and health considerations and the need to keep markets clean, avoid abuse and corruption, or promote financial stability, but again the emphasis will be different: for consumers it is their protection, for professionals the protection of the public and possibly the credibility of the markets. These various considerations may move the professional contract further away from the mere intent of or consensus between the parties and any other anthropomorphic or consumer law considerations and protections as we have seen and qualifies the notion of party autonomy at the same time but not necessarily in a similar manner in all legal systems. In civil law, it could ultimately be considered an elaboration of the abstraction principle or independence notion which we also note in property law, bills of exchange and bills of lading, and letters of credit, where the initiative for the transaction is still with the parties but where subsequently the facility created acquires a life and meaning of its own. So it is, it is submitted, in the modern professional contract, which is initiated by the parties but subsequently stands alone. It was in England always the notion behind the parol evidence rule and supports the idea that party autonomy acquires here a different meaning; one may also say that its autonomy is not merely a party product but achieves a measure of objectivity in its operation, different in consumer and professional dealings, again, clearer in common law and then also in the transnational commercial and financial legal order, it was already mentioned in the previous section. Relationship thinking itself furthers here a more objective legal environment for professionals, also in contract. To repeat, this was always clearer in common law, where contract law (like the law of movable property) has its origin in commercial law. It may highlight in particular the following aspects of modern contracting in the professional sphere, assuming therefore proper relationship thinking: (a) how and when contractual rights and obligations emerge and are extinguished or modified between professional participants is foremost a matter of (i) initiative and (ii) conduct and detrimental reliance, not primarily of intent or consensus; (b) there is no fixed moment of contract formation but contractual rights and duties emerge all the time during the contract period and derive from the behaviour of the parties and their extra consensual duties in the various contract phases, especially relevant in duration contracts; (c) there must be an investment or beginning of performance before a party can claim a cause of action under the contract; (d) there is a bias towards a literal interpretation of contractual texts especially where they serve as roadmaps or risk management tools when clear choices have been indicated by the parties in respect of what they want to do and how they allocated the risk; (e) there will be a substantial degree of risk acceptance in respect of unforeseen future developments, and the liability for whatever subsequently happens unless the contract provides otherwise or the burden becomes manifestly unreasonable; it means a substantial limitation of the defences, see section 1.4.2 below, and excuses, see section 1.4.3 below; (f) although intent is not a formation issue proper, it remains important where clear choices have been made and their meaning must be ascertained in interpretation when what is normal in the market segment concerned will be an important guide rather than psychological considerations or even the reasonable person; (g) there are extra-consensual or extra-contractual rights and duties and different contract phases confirming the continuing process of rights and duties formation, such as precontractual disclosure and negotiation duties, contractual care and co-operation duties, and post-contractual renegotiation duties, even if conceivably of less importance in professional dealings; they confirm the dynamic nature of the contract and of the rights and obligations thereunder;

Volume 3: General 19 (h) these rights and duties may be defined and conceivably curtailed in the contract but not all is at the free disposition of the parties, notably not issues of capacity, binding force or validity, and legitimacy of the contract and much of what has to do with public policy or affects third parties; (i) expectation damages in respect of loss of profits are only claimable under contractual duties, not under the extra-contractual ones which are limited to restitutionary or direct damages only; (j) good faith is not primarily a behavioural standard but operates as a liberal interpretation technique, tying together ever-changing fact situations to ever changing norms whilst reintroducing and accepting in the process fundamental and general principle, custom and practices, and party autonomy as independent sources of law, supplementing or in appropriate cases correcting the contract; (k) even when a behavioural standard, parties may define its impact unless the result becomes manifestly unreasonable which may not be soon in professional dealings and may require an evaluation of the effect on the entire business of the relevant contract party rather than the balance or equilibrium of the contract in question; (l) these sources of law may also support the notion of limited recourse and quicker (and rougher) justice through procedural informality, limitations of appeal, whether or not through commercial courts or international commercial arbitration; (m) other objective requirements may be relevant like those deriving from pressing moral, social peace, or efficiency considerations playing a role at least in the interpretation and supplementation of the contract, in appropriate circumstances even correcting it but, except for efficiency probably less so in professional dealings given proper relationship thinking; (n) any supplementation should not lightly disturb the risk distribution of the parties. Reference to reason and implied conditions or the objective of the contract will be curtailed and these legal facilities cannot be used to take the place for what a distressed party should have negotiated or did not get except again if the result becomes manifestly unreasonable which in business is not likely to be soon; if the contract does no longer objectively cover the evolving situation or does no longer make any sense, it may be at an end;25 (o) the impact must also be considered of public policy or public order considerations arising in the transnational commercial and financial legal order as minimum standards or domestically under local laws to the extent an international professional transaction in conduct and effect still comes demonstrably onshore in the relevant country; and finally (p) there is no comprehensive theory of contract or its interpretation. Deductive, inductive, and analogical reasoning might have a place but the reasonable expectation by the standards of the profession it concerns and the demonstrable contractual purpose are more likely to be a guide in determining the contract’s content and effect rather than the parties’ intent and individual objectives. (q) there is no system, only the conduct of the parties and the incidents in the relationship they create as facts, to which the applicable law and its various sources react, in which connection it is assumed, however, that the contract makes some objective sense overall and has as such an obvious purpose. This poses again the question of the true meaning of party autonomy in the professional contract, and its objectivation in view of its operational dependence on (i) adequate signalling in conduct, (ii) detrimental reliance of the other party and proper investment before claims can be made,

25 See

below n 126 for Lord Reid in Davis Contractors v Fareham [1956] 2 All ER 145.

20 Volume 3: General (iii) literal interpretation of the texts when serving as roadmap and risk management tools, (iv) limitation of the defences and excuses, which are not then intent or blame related even where clear choices are made and intentions become clearer,26 (v) the operation of extra-contractual rights and duties, the demands of justice, social peace and efficiency when sufficiently pressing, and the imperatives of public policy. It was already said that the more objective nature and operation of party autonomy and its limitations may be better understood in common law countries, where contract law itself developed first in commerce and depended on exchange and bargain (consideration) rather than on consensus or will of the parties and where there is hardly an underlying theory nor concept of contract, rather an acceptance of and reaction to relevant facts in this connection. It may also be obvious in transnational law where there is no obvious legislator. It was noted that in civil law countries, some of this may now be expressed in good faith language, and may then come to mean fewer additional rights and protections in professional dealings whilst the nature of the relationship of the parties may start to play an increasingly important role when aspiring to determine more objectively the effect of the intentional and relevant extra-intentional considerations in individual cases, but it is only at the beginning of such development. To repeat, intent becomes here mainly relevant in connection with determining the extent of the road map and the allocation or management of risk, meaning formulating contractual terms that allocate at least the foreseeable risks and make choices in this regard. Intent and its meaning is (a) not then a matter of the binding force in contract formation, is (b) limited in contract performance to situations where clear risk management choices have been made (or non-consensual duties are further defined) when even then a literal interpretation will prevail if the texts are clear and, if not, industry perceptions, is (c) of limited value in terms of defences and excuses where, short of a contractual allocation or redistribution, risk acceptance rather than blame or other personal considerations becomes the real issue between professionals, and is (d) in the choices so made supplemented and in appropriate cases amended by extra-contractual rights and duties or considerations of justice, social peace and efficiency, but only if sufficiently pressing given the type of relationship, and further by public policy or public order considerations. Issues of capacity, binding force and legality are also not at the free disposition of the parties and outside the realm of their will and choice. In business, will theories and notions of psychological intent thus become secondary and an anthropomorphic approach to contract is abandoned. Again, the contract as a road map should be read more in the nature of an operational manual where nobody asks either what the writers might have intended or had in mind. The concept of blame or fault becomes remote and the more relevant question is who bears the risk. Where the will and intent or blame and fault are less central, it follows that there may be also be less room for expectation damages in respect of lost profits in the case of breach of the professional contract, certainly when it concerns a breach of extra consensual duties. It follows that the dominance of nineteenth-century will theories, especially in civil law,27 and their inclination to look for intent, blame or fault, may be coming to 26 It was already submitted that precisely this objectivisation of party autonomy may be an important reason why it can then also operate more freely as an autonomous source of law, in equity even in property, although still subject to higher mandatory sources of law like fundamental principle and potentially pressing justice, social peace and efficiency considerations and relevant public policy and public order requirements in appropriate cases. 27 Since von Savigny, System des heutigen römischen Rechts, III (Berlin, 1840) 258, the romantic notion of the creative will of the parties started to take the central position in contract law, especially in its formation and interpretation (see also n 3 above), although R von Jhering, Zweck im Recht, 3rd edn (Leipzig, 1898) continued to emphasise the purposes for which people contract and the reasons why the objective law enforces their commitments.

Volume 3: General 21 an end. At least in professional dealings, the civil law litany: ‘I did not mean it, I cannot help it, it is not my fault’ is then likely to carry less weight. It has already been said that this is all closer to traditional common law thinking28 but a more mature understanding of good faith and its attendant relationship thinking in civil law will also tend towards these conclusions in professional dealings. Again, it suggests a form of abstraction and independence of the contract away from intent and consensus, then relevant mainly in terms of initiative but not in terms of defences and excuses, at least amongst professional contract parties, and in the clear choices they have made, not as a matter of contract formation but as one of performance, when in the case of doubt the perception of the peer group takes over. Indeed, it should be considered that modern contract theory is now more likely to take the corporate environment as the starting point in professional dealings, underscoring the abandonment of a more anthropomorphic approach to contract, see section 1.1.6 below. Obviously, in major corporate contracts it is now often unclear who was involved at the personal level. The one who signs will have the authority but will seldom be aware of the details, only of the economic objective. All is teamwork, but between teams that may hardly co-ordinate among themselves, for example, the technical departments being concerned with quality and the finance departments being concerned with funding and payment. Much may be arranged by outsiders such as law firms, which may be the only ones who understand the arrangement fully, but are not a party. The question as to the intent of the parties thus becomes moot and is losing its traditional relevance, but it is in legal theory a slow process, especially in the will-based civil law notion of contract where corporate dealings remain commonly undistinguished due to a lack of relationship thinking. It has been said in section 1.1.1 above that the Vienna Convention, while also succumbing to the intent- or will-based concept of contracting (the subjectivity of which filters through into the notion of fundamental breach and force majeure with its concept of fault), led to it being

Subsequently the role of the parties in the formation of their contract became in Germany more particularly connected with the doctrine of the juristic act, or Rechtsgeschäft, which covers all voluntary acts of individuals meant to create legal effects for them, thus also offers and acceptances, but no less, eg, the transfer of personal property and the writing of wills. All these juristic acts were deemed based on this notion of the creative will and then made subject to similar techniques of interpretation, at first leading to a subjective interpretation of any declarations (Willenserklärung) made in the context of such acts. Modern civil law has often made much of this subjective concept of Rechtsgeschäft as a more general legal category (itself again a sub-category of all legal acts, which are all acts with legal effect, whether voluntary or involuntary, or in German Rechtshandlung), but this categorisation has proved of modest value and has as such also been criticised: see K Zweigert and H Kötz, An Introduction to Comparative Law, 3rd edn (Oxford, 1998) 146, and will not be further discussed here. As contracting always was the main example of a Rechtsgeschäft, it will be discussed as such and not as part of a greater idea. The DCFR maintains this German approach and covers in Book II ‘contracts and other juridical acts’. The will or intent remains here the central focus for all juridical acts, see Art II-1:101, but especially for professional dealings, it is submitted, it is less useful and is too anthropomorphic to operate well. Again, it is a consumer law concept, which as such may also have obtained more credence even in common law. 28 Intent was never the common law approach to contract formation. Williston denied it explicitly, see n 94 below, but in the US especially Corbin, Llewellyn and more recently Eisenberg (at least for agreements between natural persons) started to consider the contract as promise based, see AL Corbin, ‘Offer and Acceptance, and Some of the Resulting Legal Relations’ (1917) 26 Yale Law Journal 169; K Llewellyn, ‘On our Case-Law of Contract: Offer and Acceptance’ (1938) 48 Yale Law Journal 1, 14–28 and (1939) 48 Yale Law Journal 779, 782–83; MA Eisenberg, ‘Expression Rules in Contract Law and Problems of Offer and Acceptance’ (1994) 82 California Law Review 1127. It is even reflected in the UCC for the sales of goods (s 2-204 (Comment 5), balanced by the notion of unconscionability (s 2-302), followed in the Restatement (Second) of Contracts (1981), although nobody abandoned the consideration or detrimental reliance notions in the area of contract formation. The common law approach to defences was also not changed nor made subservient to the notion of intent, as it is in civil law.

22 Volume 3: General mistrusted in business and to its virtual elimination in practice. The unwillingness of the UK to ratify the Vienna Convention should be understood in this context and concerns in fact the more fundamental issue of risk management, which is handled subjectively and in an anthropomorphic manner in the Convention, whilst it is not averse to redistributing risk beyond what parties may have agreed or left open. It does not accept the basic idea that in professional dealings the risk falls where it falls if parties have not made arrangements in the contract. Common law was always unlikely to redistribute risk unless the situation got totally out of hand when the contract may well come to an end,29 and it may be the common law’s preference. As common law never accepted will notions and parties’ intent as being similarly central in contract formation, interpretation and performance, it may have here the advantage in professional dealings. In those dealings it may even show a creditors’ bias. Although there was some borrowing, probably from German thought—notably in modern offer and acceptance language as we shall see—the exchange and bargain notion (consideration) remained always more important and led to a more objective approach, at least in contract formation and the contract’s binding force. This is now supplemented by conduct and (detrimental) reliance notions. To repeat, intent is important, also in common law, but again mainly in matters of interpretation when risk management choices have been made. These intent notions are therefore likely to surface only when the texts are not clear or where there are textual gaps in these choices, not in formation issues. It was already said also that even then they may be reduced to the more objective industry standard, whether or not in the form of implied terms.30 The related danger, especially in civil law, that in the absence of proper relationship thinking modern consumer law protection, still caught in will and anthropomorphic terminology, pervades all contract law, has already been noted in the previous sections. It is supported by the view that the good faith notion is always a superior uniform norm and as such absolutely mandatory, as expressed in the European and UNIDROIT Principles (respectively Article 1:201(2) and Article 1.7(2)) and now in the DCFR (Article III-1:103, cf also Article II-3:301): see further Article 8 of the 2011 text of the EU Expert Group but this would also appear to be a misconception.31 Here the concept of good faith itself becomes central but what does it mean? As will be shown in section 1.3 below, good faith may stand for many things and is not merely or even mostly redistributive, at least in the professional sphere. It was already said also that upon a proper analysis, in professional dealings, it is not foremost behavioural but rather a liberal interpretation facility and technique (better relating newer fact situations to newer norms, reintroducing in the process other sources of law and above all relationship thinking) even if sometimes also a redistribution tool in terms of risk, when it is likely, however, to appeal to fundamental principle (or manifest unreasonableness), but between professionals only in appropriate, more extreme circumstances and always taking into account the nature of the relationship of the parties and their justified needs. Again, as a redistribution device, it is more especially relevant in consumer cases.

29 See n 25 above. 30 The common law is also wary of implied terms and does not assume them lightly. Lord Bingham thought it a potentially intrusive and an extraordinary power of intervention in the risk management of the parties, on which the law must impose strict constraints, Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472. The difference with mere interpretation is not always clear especially when the search is on for intent. Even so, gap filling is commonly still distinguished, shows the deprecation of the parties’ intent in common law, and goes then more in particular to the issue of implied terms, sometimes also expressed as another facet of the reasonable person approach when even in common law intent may come in but only in this objectivated manner, see further the discussion in s 1.3.7 below. See further also nn 52, 122, 158 and 195 below. 31 See further s 1.3.4 below.

Volume 3: General 23 Good faith is then not merely the opposite of bad faith operating in the same manner in all relationships. Although it may be considered to affect all contractual dealings, and support and even correct the terms (when it may become an issue of fundamental principle, pressing need or public policy) it does not do so in the same way; in fact, it was already said that in professional dealings, good faith interpretation may mean strict or literal interpretation of the contractual text with the accent on the agreed risk distribution and therefore less protection. This may sound paradoxical but in truth it is not so and confirms custom and practice in that world. Professionals should even be allowed to set the precise (good faith) standards unless manifestly unreasonable as indeed expressed in section 1-302 UCC in the US. It shows that for professionals, good faith does not mean introducing objective uniform mandatory standards or a review of contract content per se. In their dealings, adjustment of the contractual terms will only follow in extreme cases or where parties have opted for it. The same goes for the excuses of force majeure and change of circumstances. Again, unforeseen risks fall where they fall unless clauses covering them are entered in the contract or extreme effects or public policy require it.

1.1.5. The Formation and Operation of the Professional Contract. Standard Contracts Returning to the important issue of contract formation and its binding force, the key is that at least for professionals conduct and (detrimental) reliance move to the centre, not the idea of intent or consensus, or even the conventional analysis of offer and acceptance, while more objective elements enter. This must be kept firmly in mind more in particular also in the transnationalisation of contract law amongst professionals. Traditional offer and acceptance notions are then a subset of this conduct and (detrimental) reliance notion. As already mentioned, intent has relevance more particularly for the terms concerning the agreed roadmap and risk management choices when clearly made by the parties,32 not therefore, it was submitted, in the area of formation and binding force of the contract itself. In this newer approach, reliance on reasonable expectations, which must further be detrimental (and cannot therefore be merely in the mind or on a piece of paper), are the basic issue in contract formation and the source of its binding force. It means that for a contract to be binding, investment in the contract by the party who invokes it is required. That was probably always the correct idea behind the consideration notion in common law, at least in commercial dealings.33 It follows that breach of reasonable expectations and duties, culpable or not, is the prime ground for actions for damages. It is clear that unless clear choices were made such actions may then be more closely related to tort than to the traditional subjective contract notions and may also affect the likelihood of expectation damages.34 32 Even in the more traditional offer and acceptance approach, it became established, as we shall see in s 1.2.1 below, that a party could rely on what it reasonably thought the intent of the other party had been but this was considered an exception rather than the rule and it was normally not connected with detriment. 33 Detrimental reliance might mean some commencing of performance by the relying party. See for the conclusion that this is the true requirement in common law PS Atiyah, ‘Contract, Promises and the Law of Obligations’ (1978) LQR 193. In the early droit coutumier, in France, when the promise itself became binding, this extra requirement (besides that of a licit cause) was not unknown either, at least in the law of sales, see A Esmein, Etudes sur les contrats dans le très ancien droit français (Paris, 1883) 5, 29. The codification dropped it and may therefore be considered to have a lesser requirement for the binding force of contract than common law and the immanent transnational law may have. It is submitted that it always made less sense in business. 34 Indeed, in modern contract theory, tort liability may have to some considerable extent superseded contractual liability. Defective performance often constitutes a tort with its more limited recourse, excluding recovery of

24 Volume 3: General This is reinforced where we accept that many extra-intentional rights and duties but also a great deal of risk must be accepted by professional parties in the different phases of their contract, see the discussion in the previous section. Again, it shows that intent is often not the main issue in contract, but where it is still put at the centre by the parties, notably when a clear risk management choice has been made, it may follow that expectation damages may then also be a more correct remedy. Importantly, and it may be repeated, once intent is deemphasised in contract formation, it also means that the moment a contract is concluded may not be as clearly cast as it used to be (often in terms of offer and acceptance) and may show a progression. Rights and obligations may appear more gradually, depending on the stage reached in the negotiations and performance. As a result, there is no fixed moment of contract formation either at which all rights and duties crystallise—it is the notion of a more dynamic contract law covering different phases potentially supplemented by extra-intentional duties as already mentioned. It follows that the formation phase of a contract may see an evolution when gradually parties acquire more rights and accept more obligations until there is a full-blown contract. Even then, this process does not stop. This will be discussed further in connection with negotiation duties and the status of letters of intent in sections 1.3.12 and 1.3.13 below. In terms of reliance, other issues arise. In this connection, it may be clear that when one party chooses to organise itself and its business in special ways, for example a bus company in respect of the buying of a ticket on a bus or a supermarket in respect of the purchase of groceries, this organisational method may suggest a framework for contract formation which is activated only when the other party seriously reacts.35 It highlights a particular aspect of contracting in terms of an organisation technique of which in consumer matters the consequence often is an extra duty of care for the professional seeking performance from a consumer. This may be clearer under standard or adhesion contracts. Even among professionals, multiple contracting, for example in franchising or distribution agreements, may suggest special standards of care for the counterparties even though the contracts are not connected in any way. One may see here an aspect of market behaviour that gives rise to duties. In an economic sense, efficiency notions may then also enter the determination of what may be expected from the organisers, although they should not be asked to carry extra burdens lightly. However, where consumers are concerned, extra protection needs may more readily be assumed.36 future gains or expectation damages under the contract and other consequential damages. This may be relevant in particular in respect of a breach of pre-contractual duties which might give rise to tort rather than contractual liability, see ss 1.2.4 and 1.3.7 below. Situations of dependency may create fiduciary duties, breach of which may also limit the claim for damages to what was actually suffered. In civil law they also tend to give rise to tort rather than contractual liability, although where they emerge under good faith it may still be different. Perhaps it could be said that, at least in professional dealings, except in the contractual core, when specific promises are made, there is a return to tort rather than contractual protection with the attendant limitation on expectation damages. That would then be the true significance. 35 It can often best be explained by reliance on the organisation that the seller of these service or goods has put in place and the choice and selection power that is in this manner given or left to the buyer rather than in terms of offer and acceptance or of bargain and consensus. The way the seller has organised itself in these situations does not, eg, allow the ticket seller or cash attendant discretion in refusing the travel service or the groceries if the correct price is offered unless there are special reasons which the ticket seller or cash attendant would then have the burden of explaining. Intent of the ticket seller or cash attendant as agent for the seller is here substantially irrelevant. 36 The DCFR in its 2009 Introduction becomes here increasingly high minded, talking about underlying and overriding fundamental principles (without, crucially, giving them any status as autonomous sources of law), but short of proper relationship thinking in a contractual environment, the DCFR appears to get lost. According to the Introduction (nos 15 and 16) overriding principles are those of human rights, promotion of solidarity and social

Volume 3: General 25 The foregoing confirms that what was once cast in terms of the will of the parties and their intent is better fashioned in terms of reasonable expectations in which detriment of the petitioning party and relationship thinking are central themes rather than consensus notions and the type of contract. It means that in contract formation the whole set-up or organisation of the parties may have to be considered. That filters through to the interpretation of the roadmap and risk management, where intent may remain more important but a literal interpretation of the texts will be favoured among professionals. A reasonable interpretation—or good faith—may even require it. Again, this means that for defences and excuses, lack of intent or blame become secondary. While fully accepting and perhaps even extending the concept of party autonomy, this suggests more objective standards all around—to repeat, it may even be seen as a form of abstraction or independence of the professional contract, which acquires its own life away from the mere intention or initiative of the parties. It was already said that it may enhance at the same time the status of party autonomy as an autonomous source of law. Such objectivation may also be increasingly expected to be encouraged under the good faith perspective in contract interpretation and performance in civil law once properly understood in commerce and finance, especially in terms of relationship thinking; it is much supported by industry custom and practices in professional dealings. This connects with another important aspect of modern contract law, which is the impact of the demonstrable contractual purpose in determining the contract’s content and effect, again as a more objective standard quite regardless of what the original intent of the parties may or may not have been. It is the essence of purposive and teleological interpretation. Here the contract type may then also acquire important meaning. It follows that entering into a relationship of whatever nature implies acceptance of much that one may not have bargained for or may not have been aware of. Especially in duration contracts, a great deal may happen during the contract period which could not have been foreseen and is difficult to allocate in advance. Extra duties of disclosure, care and co-operation may be imposed objectively to create a better balance, although at least for professionals, this should not give an easy way out except in extreme circumstances when the issue is unlikely to be failure of intent but rather failure of respecting these extra duties leading to an abuse of right by the other party or manifest unreasonableness in the consequences, not easily to be assumed

responsibility. Underlying are the principles of freedom, security, justice and efficiency, see also Vol 1, s 1.4.5. Some of this may be relevant in the professional sphere, especially when contracting becomes an organising technique and there are obvious social consequences and limitations when power is exerted in this way. Perhaps issues of efficiency and cost/benefit analysis also arise, but the question in contract is foremost what the consequence is for the relationship of the parties, not for society overall, which is a regulatory issue. In other words, contracts are not there to organise society and should not normally be considered from that perspective, although there are obvious public policy and public order limitations and contracting may sometimes have some broader organisational aspects and social consequences. Regulation may then be in order—competition law may be a vivid example—but should be well distinguished from the operation of ordinary contract law. This may be so also for the non-intentional duties that may arise in the different contractual phases. This may be demonstrated especially when private law becomes mandatory, eg, to protect consumers against aggressive sales practices, or smaller investors against their brokers: the answer is better private law protection and the amending of private law. The essence remains proper relationship thinking in a private sense. Although there may thus be public policy in a broader sense, it is not always to protect the public at large, but rather individuals or certain classes of them against each other resulting in mandatory (private) law. As just mentioned, this may indeed be different with competition law under which contracts may be voided or where markets are to be protected against abusive practices. Remedies are then of a regulatory nature depending on the intervention of regulators for enforcement; there may also be fines, even though, as in competition law, there may still be private actions as well.

26 Volume 3: General in business. Here again, relationship thinking is a key concept and may then go beyond purposive or teleological interpretation. The law in its different sources will not easily redistribute the professional risks.37 This may be taken one step further in the sense that in professional dealings contracts should not be considered in isolation when relief is being sought notably in terms of mistake, force majeure, or change of circumstances. As already mentioned, there is in such cases some need for assessing the adverse effect overall, even requiring hardship before relief can be considered. It is another aspect of risk acceptance and suggests that in professional dealings the situation must become substantially more difficult for the claimant overall before being able to seek relief under one particular contract only. In other words: there may well be a problem under a single contract, but if that is not, in the totality of these contracts, material for the professional contracting party, relief might be withheld, especially if the other party is more dependent on the individual contract and would suffer more if it were not performed as foreseen. The notion of hardship, often referred to as a requirement for contractual adjustment in the case of a change of circumstances, may itself suggest this overall approach also, although seldom so defined. It may concern a more general principle that operates whenever professionals seek relief or want to be excused from performance, see also section 1.3.14. Again, relationship thinking comes in: what is objectively the need of the other party in this relationship? It has already been said that, under a more objective contract law approach, parties may also face pressing external ethical, social and efficiency standards in the implementation of the agreement, but again notably depending on the effect on the type of parties and it remains a matter of private law recourse between them, not public policy intervention which rather suggests regulation or fines.38 It was also noted that some of these considerations may be less relevant among professionals than in their relationships with consumers or other weaker parties. On the other hand, notions of efficiency may be more important for them. Again, it may also open the way to cost/benefit analysis in respect of relief, especially relevant when, for example in hardship situations, there is a demand for the adaptation of the contract, but it may be significant in all more liberal interpretation techniques, especially in professional dealings.

1.1.6. A New Transnational Model of Contract Law among Professionals? Modern Contract Theory The modern professional contract is perceived in this book as a legal framework in which rights and duties continuously arise and are extinguished between the parties. This may be particularly demonstrable in duration contracts. Offer and acceptance, intent and consensus are here not considered to be the true source of contract; conduct and detrimental reliance are, that means justified expectations. Special undertakings mingle with non-intentional duties of disclosure, negotiation, care, co-operation, and renegotiation, although themselves conditioned by relationship thinking. The framework is dynamic, although there is rigour and discipline in matters of text interpretation whilst non-intentional duties are not readily

37 For professionals it is often balanced by their entering into a multitude of similar contracts, some of them cancelling out or balancing these risks in hedging strategies. In the financial sphere, set-off and netting tools express this risk balancing more clearly, see Vol 5, ss 2.6.5–2.6.6, but the principle of risk diversion notably through hedging is a much broader one and greatly important in all professional dealings. 38 See also n 35 above and accompanying text.

Volume 3: General 27 assumed in the professional sphere (except those derived from public policy).39 During the contract period, however defined, rights and obligations thus arise and disappear all the time regardless therefore of the will or intent of each of the parties or their consensus. As such there is no fundamental difference between the pre-contractual, contractual, and post-contractual phases, although in each phase more specific extra-intentional duties may become apparent and relevant such as negotiation and disclosure duties in the pre-contractual phase, co-operation in the contractual phase, and renegotiation in the post-contractual phase, again always subject to relationship thinking and parties may seek to define and adjust them in the contract. This can also be expressed in terms of good faith encompassing all aspects of a contract and its implementation and supplementation. Given proper relationship thinking, it was already shown as relevant that at least in professional dealings reliance on conduct must be accompanied by detriment, the relying party putting its money on the table before s/he can have a cause of action. As noted, the pre-contractual disclosure and negotiation duties are likely to be more limited, while care and co-operation duties in the contractual phase, and renegotiation duties in the post-contractual phase (mainly induced by changes in circumstances) may be more limited also but cannot be ignored altogether, only if the situation becomes extreme. The essence is that party autonomy is embedded in law even if itself also a source of it. It does not mean that it is debased but it must be seen in context and is itself objectivated. In particular, parties retain the initiative and party autonomy in contract is foremost the fuse that creates the relationship even if hemmed in by (a) the need for parties to show an investment in the contract before they can claim thereunder—hence the requirement that there is consideration or that the reliance is detrimental—and by (b) various extra-intentional duties or considerations. As the contract and the choices parties have made in this regard or the absence thereof constitute the true risk management situation, another limit is (c) the distribution of risk achieved in this manner becoming manifestly unreasonable, short of which the risks fall where they fall, which is the normal situation unless the contract determined otherwise. Its meaning is further circumscribed by (d) the objective purpose of the contract or its entirety and may still be further curtailed by (e) pressing considerations of justice, social peace and for professionals especially efficiency. It may similarly be limited by (f) public policy, such as competition law and other public order considerations, for example, in terms of market abuse, money laundering, tax evasion or corruption but also in terms of legal capacity. In the above-described ways, more objective non-intentional considerations have started everywhere to play an important role in modern contract law in terms of the determination of the parties’ rights and obligations. Again, this need not mean more protection; especially in the professional sphere, there may be less. It was explained as a matter of abstraction and independence from any original initiative or intent.40 The need for more protection became obvious in respect of weaker parties such as workers, tenants, and consumers, later also small investors. This current of potential supplementation or even adjustment on the basis of the objectively applicable law may now operate more generally in the entire law of contract, but, upon a proper analysis, differently in relation to consumers and between professionals. Again, in common law it is reminiscent of the operation of fiduciary duties, there largely limited to situations of dependency. In civil law, the notion of good faith started to encapsulate this trend at least for consumers and then also moved into the area of pre- and post-contractual relationships as noted, although crucially

39 See n 34 above. 40 See for this issue of abstraction and independence reinforced by fiduciary duties the text above in s 1.1.4 and also the operation of agency, referred to in ss 3.1.2 and 3.1.3 below.

28 Volume 3: General often still with a shortage of relationship thinking so that professional dealings were treated similarly. It can only be repeated that, in terms of these dealings, there is a difference and consumer protection should not automatically carry over into the professional sphere on the back of the type of contract it may concern. Note in this connection also that when we talk about objectivation, for consumers it came increasingly through public policy. In professional dealings, it came from the perspective of risk management, which required less fluidity in the interpretation of contractual terms once risks were allocated. In either case will or intent were de-emphasised although for different reasons and in different ways. In transnational dealings, fundamental and general principle, custom and practices may confirm the approach for professionals within the context of the modern law merchant or transnational lex mercatoria, supplementing and, if necessary, correcting the notion of party autonomy as a concept legally embedded in this manner. Good faith interpretation may be closely connected with considerations of justice, social peace and efficiency, or even public policy and public order considerations. Following what has already been said in section 1.1.4 above, for professional dealings it is in this way possible to detect a new framework or new model of contract which may be summarised and puts the emphasis more generally on: (a) justified expectations, conduct and reasonable but detrimental reliance or a commencing of performance as manifestation of the formation and binding force of the contract and the source of any cause of action thereunder (requiring a modicum of investment or commitment and demonstrable seriousness on the part of the claimant); (b) duties of disclosure, investigation and loyalty or care and co-operation, and of negotiation and renegotiation but only in appropriate circumstances, different in the various contract phases and for different types of parties; (c) the objective contractual purpose and the roadmap and risk management regime laid down by the parties, suggesting at the same time a literal interpretation of texts unless any other meaning common between the parties and in their peer group can be established and proven; (d) respect for the specific provisions concerning risk management and a limitation of the defences to performance and of the excuses of performance unless the situation becomes manifestly untenable or the contract itself provides otherwise; (e) recognition of pressing considerations of justice, social peace, and especially efficiency when obtaining between professionals; (f) acceptance of relevant public policy and public order requirements; (g) expectation damages being payable only in respect of breach of parties’ choices or commitments, restitutionary or direct damages being more appropriate in the case of a breach of extra-contractual or statutory duties. In all these aspects, proper relationship thinking completes the picture confirming a different regime for professionals. Together this may be considered the essence of modern contract law or the general part of contract and lex mercatoria in international commerce and finance. Again, it will be clear that in this more modern model, nineteenth-century anthropomorphic ideas of will and intent are de-emphasised and that even in civil law there is increasingly an element of abstraction or independence of the contract away from the original intent. Perhaps good faith interpretation will extend this trend, see also the discussion in section 1.3.2, note 160 below. It was already said also that the road map is more an instruction manual where it is also not commonly asked what the authors had in mind.

Volume 3: General 29 In this way, party autonomy is likely to acquire a more objective and impersonal gloss,41 but then also an enhanced status as an autonomous source of law, at least transnationally as part of the modern lex mercatoria. That is the other side of this coin and is increasingly demonstrable in international dealings supported by the different sources of law which obtain in this legal order. Although it is sometimes argued that, as a consequence, contract as we knew it may be dead, exactly because of the more modest role of the parties’ role in view of social pressures, this may be seriously overstated, at least in professional dealings.42 Especially in terms of initiative, definition of objective, and risk allocation, party autonomy remains key, even if intent when choices are made is here interpreted according to the reasonable person standard in the business concerned or rather in what the peer group makes of it. It may include, as already submitted, the right of at least professional parties to set behavioural standards or even eliminate adjustment possibilities except in extreme cases when unforeseen results become manifestly unreasonable for one of the parties to bear. It follows that the contract text remains important, even more so between professionals—it is their roadmap and basic risk management tool, at least in respect of all that can be foreseen but it is no longer an anthropomorphic framework. Again, this autonomy means that in terms of unforeseen risk, unless parties have provided otherwise in force majeure, hardship or similar clauses, the chips are likely to fall where they fall and there will be little protection under the general law unless the situation becomes manifestly unbearable, which may not be the case so soon between professionals whose overall position would then have to be taken into account and not merely the one under the particular contract. In summary, transnationally in professional dealings, party autonomy becomes more objective but may then also be more autonomous, not subject any longer to it being licensed as such by statute or allowed to operate by a state, potentially with debilitating effect, although it remains subject to public policy and public order confines in appropriate cases,43 themselves likely to be 41 It may further be noted that in civil and common law, the term ‘objective’ is in the context of interpretation sometimes used in different ways: the literal interpretation of the declarations claims objectivity. In the approach that acknowledges the non-intentional aspects of contract formation and operation, in civil law often called the normative approach, see the next section, there is another type of objectivity in the sense that psychological meaning of declarations is no longer the aim but other more objective considerations are taken into account. The literal and normative approaches are here both contrasted with the psychological, subjective or ‘will’ approach. Both are in that sense objective but in very different ways. 42 See G Gilmore, The Death of Contract (Columbus, OH, 1974): see also J Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, 1991), and in England, H Collins, The Law of Contract, 4th edn (London, 2003) 1ff. It often pits a liberal nineteenth-century approach against a more social or dirigiste twentieth-century approach then considered supported by considerable legislative (regulatory) and judicial intervention, now often under good faith cover in civil law countries. In this connection, the normative civil law attitude, which is often mirrored in the teleological or liberal interpretation of statutes, is then thought to be the result of a more consensual and less adversarial, more egalitarian and social approach especially in Germany, the Scandinavian countries, the Netherlands, and Austria, particularly after World War II, although it also became the approach in France and Southern Europe even if less fundamentally anchored there in the concept of good faith. It was submitted, however, that de-emphasising the classical notions of intent and will is in professional dealings as much the natural consequence of contract moving out of the sphere of personal private arrangements into the world of large professional dealings (or a multitude of dealings with individuals in similar positions), where through professional support or even standard terms the personal element in the formation and enforcement of contracts becomes less important and the environment in which the contract must operate much more so. Party autonomy is here a different concept but by no means fatally undermined. 43 As already noted above in n 15, it may even allow party autonomy to move into creating proprietary structures in movable (commoditised) property more freely, especially between professionals, but subject always to a protection of the commercial flows allowing all buyers in the ordinary course of business of these assets, therefore more in particular consumers, to buy them free and clear of such interests, see more particularly Vol 4, s 1.10 below. This is perceived here as an extremely important aspect of party autonomy which confirms that both in contract and movable property it is primarily a risk management tool.

30 Volume 3: General increasingly transnationalised in international transactions as transnational minimum standards. This greater objectivity, potentially followed by greater autonomy, should be cherished albeit at the expense of older intent and will theories, which, from this perspective, only served to give states greater justification to interfere with contracts. It was already said that this allows party autonomy to move into property law as well. Whatever the new contract model that so emerges, it can be repeated negatively that modern contract theory is unlikely to support any single contract view or any single-value theory of contract, such as traditional offer and acceptance or consensus notions, promise-based theories, the notion of will or even the notion of party autonomy unadulterated. Instead, it is likely to accept different paradigms, insights and values (that may even conflict) depending on the nature of the relationship of the parties, the type of their business, the circumstances in which they operate, and their social background, and environment. Thus, professionals may rely more on a reinvigorated but also more objective notion of party autonomy, at least in the details of their relationship and in the standards, they wish to set between themselves (subject to a more literal interpretation of the terms), while consumers may rely more on objective law protections against overbearing counterparties (in which the terms of the contract may not be taken literally). Spot or duration contracts may also make a difference, the latter implying a measure of long-term co-operation or partnership. Thus, the nature of the contract also comes in, but not necessarily in terms of the old types as commonly defined in civil law. At least for professional dealings, modern contract theory does not seek to introduce a different concept of behaviour, efficiency or value either and is not censorious. It is, however, aware of social values, also in professional dealings, especially when larger parts of society become affected, for example in competition matters. Such a pre-occupation may even result from the use of standard contracts, characterised above as an organisation technique, see section 1.1.5, or when one particular contract through its size and impact affects a whole community in terms of employment consequences (but also in terms of the benefits it brings). Environmental issues and constraints on the right to contract and on its contents may also arise. These issues may then no longer be merely issues between private parties; they become regulatory and fines or licences may be imposed. The effect and impact of social values (and public policy) have of course become all the clearer in consumer dealings, even though the remedies are often still private: damages or the termination of the contract or both. Modern contract theory is not necessarily based on pure rationality either, but, while rejecting a psychological attitude and accepting more objective standards, it does assume that the contract makes some objective sense whilst modern contract theory may in this connection also take into account what is normal, in particular how professional participants normally may be assumed to react, therefore their customs and routines, the contractual environment, and life’s experiences. While doing so, legal formalism is increasingly abandoned. Even a written text is put in context and all legal reasoning concerning contract (interpretation and supplementation or even derogation) becomes a normative exercise also for professionals,44 even if this may still lead to and

44 Cf also MA Eisenberg, ‘The Emergence of Dynamic Contract Law’ (2000) 88 California Law Review 1743, 1747 and MA Eisenberg, Foundational Principles of Contract Law, 17ff (OUP, 2018), concluding that ‘the best theory of contract law is normative and pluralistic’. See earlier also S Macauley, ‘Non-contractual Relationships in Business: A Preliminary Study’ (1963) 28 American Sociological Review 55 and ‘Contract Law and Contract Techniques; Past, Present and Future’ [1967] Wisconsin Law Review 805; PS Atiyah, The Rise and Fall of Freedom of Contract (Oxford, 1979) and Essays on Contract (Oxford, 1986); RA Hillman, ‘The Crisis in Modern Contract Theory’, (1988–89) 67 Texas Law Review 103 and The Richness of Contract Law: an Analysis and Critique of Contemporary Theories of Contract Law (Kluwer, 1996); J Beatson and D Friedman, ‘Introduction: From “Classical” to “Modern”

Volume 3: General 31 confirm a literal interpretation of contractual texts as we have seen. A normative interpretation may itself require it, less not more rights is than the result of a good faith approach. In professional dealings, it strives always to be more objective. The contract could not be a prime risk management tool otherwise. Predictability would collapse. Finally, while modern contract theory may allow for different risks and expectations to enter into the equation, even if it may favour a strict and literal interpretation if that was in the nature of the relationship of the parties and their contract, therefore especially between professionals when laying down a roadmap and engaging in a risk management arrangement, it is increasingly sensitive to models of statutory or case law outliving their usefulness in this connection or proving beside the point in the evolution of the factual situation under the contract. Life is not considered basically repetitive nor the law a matter of mere technique in its application. Again, there are no absolutely preconceived notions or limiting concepts, which, especially in civil law system thinking, still lead to a form of confinement or even intellectual prejudice derived from old models and worn intellectual concepts (such as will theories) or rigid system thinking,45 even if, as we shall see in section 1.2.3 below, some of this may also be seen in common law. To that extent, contract theory may also remain contentious in common law doctrinal thinking.

1.1.7. Modern Contract Theory, the Normative Interpretation Technique in Civil Law and its Contribution to the Transnationalisation of Contract Law It has already been said that in civil law, the normative interpretation technique is in modern times meant to cover at least some of this newer ground and—short of constant legislative amendments, which is an unrealistic prospect—to provide some movement in the established codification framework or contract model through more advanced interpretation techniques. It was already said also that at least in professional dealings it may in contract then be cast in terms of the good faith notion as a liberal interpretation tool reintroducing other more traditional sources of law that statutory texts tried to eliminate, not as some absolute standard of protection or a behavioural standard therefore as may be more likely in consumer dealings. It signifies and reflects in that context perhaps also evolving (national) cultural contexts and perceptions of society, even a degree of globalisation whilst allowing newer fact situations to be related to newer normativity if a contract and its meaning become contested. It may show a way to the transnationalisation of contract law in the professional sphere. As we have seen, this approach still has some way to go in civil law especially in terms of relationship thinking and the world of professional activity and a dynamic concept of contract law, likely different for business and consumer dealings.46

Contract Law’ in J Beatson and D Friedman (eds), Good Faith and Fault in Contract Law (Oxford, 1994); S Styles, ‘Good Faith: A Principled Matter’ in ADM Forte (ed), Good Faith in Contract and Property Law (Oxford, 1999) 157; R Brownsword, Contract Law: Themes for the Twenty-first Century (London, 2000); Hugh Collins, The Law of Contract, 4th edn (London, 2003); E McKendrick, Contract Law, 6th edn (Basingstoke, 2005). 45 For a summary of this discussion see Vol 1, s 1.4.2. 46 See in the Netherlands for the long discussion on these issues, JM van Dunne, ‘“Normatieve uitleg”, algemeen aanvaard, maar ook in ruime zin, inclusief derogerende werking en aanvulling van leemtes?’ [‘Normative interpretation’, generally accepted but also in the broad sense of correction and filling gaps?] (2018) 77184/5 WPNR. See p 211 for a reference to professional dealings and the controversies about a more literal interpretation approach in professional contracts.

32 Volume 3: General It should be realised that the term ‘normative’, which comes here from German doctrine, does not mean a high moral tone per se47 or a concern mainly with the idea of justice or (re)distribution— although it may be the result. It may go into social peace and efficiency considerations just as much if sufficiently pressing. The study of this extended type of interpretation behind which modern contract theory unfolds then becomes a matter of ontological hermeneutics: see Volume 1, section 1.2.13. It has been submitted all along that at least in professional dealings in truth it concerns the revival of the traditional sources of law which civil law codification had sought to eliminate or subjugate: fundamental principle, custom and practices, general principle and a more autonomous but also more objective notion of party autonomy. This should be clearer, it is submitted, in the operation of the modern lex mercatoria for transnational commercial and financial dealings where it may also imply the acceptance of a substantive extra-intentional normativity in contracts, whilst these dealings remain also subject to public policy, which transnationally may mean international minimum standards as they develop. The normative approach in its fullest sense is thus more than a merely purposive or teleological interpretation which looks for the objective of the agreement in terms of its interpretation (although also important in the present context). It may even mean transformation of the text at the same time and it may then properly be asked whether interpretation is here still the right terminology, as this newer approach in appropriate cases may mean at the same time more substantial judicial control even if, as was submitted, in professional transactions the scope for adjustment may generally be more limited unless public policy so demands. Suggesting merely interpretation is, however, especially in civil law often the only way to achieve a measure of updating and to create a more responsive law in individual cases, not least in contract law, hence also the comprehensive operation of the good faith notion usually at the expense of will theories. In the perception of this book, however, it means foremost the reintroduction of the autonomous force of other sources of law besides the statutory texts, especially fundamental and general principle, custom and practices. It may also put party autonomy at another level as we have seen. At least in international arbitration, one may assume that parties in their arbitration clause have implicitly agreed to this more modern normative, expansive or dynamic view and may favour it, even if they may still opt for a national law (which would then have to find its place among the other applicable legal sources in international transactions), although subject always to a narrower or even more literal interpretation when the professional contract is perceived as a roadmap or risk management tool. It is for the parties or at least one of them to argue so in their submissions—arbitrators have no independent authority - but, if they do, they may speak to a more receptive audience, in this case international arbitrators. This was much the subject of Volume 2. It has been said before that the civil law development in these matters is not at an end, it may only be at the beginning especially in terms of relationship thinking and in the reintroduction of other sources of law in contract besides statute. To repeat, in the civil law of contract, the good faith notion, if properly understood, may be seen as the modern catalyst of this normative approach in professional dealings and may even support transnationalisation in business dealings. It is more factual, should be less intellectual or systematic and more practical, and may create 47 As for the term ‘normative’ when used in this connection, it is not used as referring to any ideal type or to ethical aspirations per se, as it usually is in the positivist tradition, but rather as referring to legally or objectively binding considerations or correctives, which may have an extra-legal origin in moral, social, cultural or economic considerations, entering the law when sufficiently pressing. Normative interpretation could then also simply relate to rationality or common sense as a supporting source of contract law, but always with proper respect for relationship thinking.

Volume 3: General 33 very necessary flexibility and a better framework, also for professional dealings. There are indeed signs in some civil law countries that in this manner the risk division by professional parties is increasingly accepted in a more literal way. At least in the Netherlands, in contract, modern case law has been moving forward since 2007.48 It confirms that the good faith notion itself may require a literal interpretation of the commercial contract in which justified reliance plays a major role, especially if the contract is negotiated by outside law firms. It shows increasing awareness of the impact of the nature of the relationship of the parties applied in a casuistic/incremental manner. There may then also arise greater sensitivity to dependency considerations. In this connection, reference has been made to changes in the practices and views of the contracting community even in common law academia.49 That may suggest a new paradigm, which, however, still needs better articulation, particularly in civil law. In countries such as Germany, Austria, Switzerland and the Netherlands, the normative interpretation technique is now indeed closely associated with the good faith notion in the interpretation and supplementation of contracts. Again, good faith may acquire here a specific meaning as an interpretation tool, not any longer merely the opposite of bad faith as a behavioural standard, and all interpretation is then governed by it. In appropriate cases, this may also lead to contractual supplementation on the basis of duties of care and co-operation, duties of disclosure, and of negotiation or renegotiation, even if less likely in the professional sphere. Again, in pressing cases adjustment may even be considered on the basis of what is more just, or promotes social peace better, or is more efficient, the latter especially between business partners. What is fairer and more reasonable may thus also be considered, but it is submitted, in professional dealings only if, in objective terms, hardship would otherwise result or, as the UCC in the US puts it, the result would be manifestly unreasonable. Again, this is relationship thinking. Even then, as noted before, it would require the overall position of the harmed party to be considered rather than only its position under the particular contract. The good faith notion as an expression of social movement might then also emphasise what may be required in a social sense or is morally demanded in an advanced society. That might then also be seen as an expression of public policy, but this still needs expression in terms of rights and duties between particular contracting parties only. It was already said that private law at least amongst professionals is not regulatory nor meant to reform society per se; but if the public interest becomes engaged, it may punish certain behaviour as is clear in competition law. So may other public order considerations, also amongst professionals, which often reflect changing societal values. They have sought notably to protect consumers better, earlier workers. Consumer law and workers’ rights have thus become highly regulatory, although the public interest remains here often expressed in private law terms, even if there is a strong risk redistribution element. To repeat, in professional dealings, civil law is only at its beginning and as we shall see there remains much confusion on the subject of good faith in contract, not least also in the DCFR. In Germany, in particular, an attitude of adjustment has long played a role, however, starting in the case of profound changes of circumstances, as we shall see, although proper distinctions in terms of relationship thinking may still not be properly made.50 It can only be repeated that the notion of good faith can mean many things (see section 1.3.4 below) and does not always give more rights to affected parties, even if it is often still used in an imprecise generic sense, as such

48 See n 4 above, also for Germany and Norway. A deviating consensus between the parties may still be pleaded but must be proven. See further also the discussion in n 160 below. 49 R Brownsword, Law of Contract: Themes for the Twenty-first Century, 2nd ed (Oxford, 2003) 89. 50 See ss 1.3.14 and 1.4.5 below.

34 Volume 3: General favoured by many civil law commentators. It may be one reason why traditional common law still avoids the concept, as we shall also see, but it has other means (see section 1.3.6 below). In the meantime, even in modern good faith-imbued civil law, older offer and acceptance notions remain vivid and no less the notion of the will of the parties. Also, the idea that a contract has a precise starting date and needs to be interpreted accordingly continues to dominate. Here again, good faith thinking has not reached its full potential in civil law and is in any event not similarly handled in all civil law countries or even consistently within each country. In this vein, the DCFR starts in Article II-4:102 with some lofty language on intent, but also on conduct and reliance, and almost puts the latter at the centre but then lapses into traditional offer and acceptance language (Articles II-4:201ff) and still looks in Article II-4:205 for one fixed moment of contract conclusion. So did the 2011 text of the EU Expert Group, which concentrated on the sale of goods, followed by the draft EU Regulation on the subject (CESL) in the same year, now withdrawn. The CISG is not different. Even where in Article 8 it refers to the reasonable man approach in the case of doubt, it fails to give it meaning through a reference to the industry in question. There is no reasonable interpretation in the abstract. It cannot be confined to a fictitious person in the same position either, who would likely encounter the same confusion. Meaning depends on a direct connection with industry perceptions, customs and routines, topics which the CISG and the other compilations avoid (or reduce to contractual notions, cf Article 8(3) and 9 CISG). In fact, the new Article 1188 Cc in France is not much better. Even the reasonable person approach in England suffers from similar confines. As just mentioned, in common law, the normative interpretation technique in the above sense remains less well developed or understood in England, but it would be incorrect to say that it does not exist.51 It has already been said that English contract law has tools other than good faith, which may be clearer and more effective; see again the discussion in section 1.3.6 below. First there is acceptance of the concept of reasonable expectations or reliance, which is especially relevant in the area of contract formation if the reliance was detrimental. There is also considerable room for implied terms, which are on the whole also objectively construed, and may include notions of fairness or natural justice. In such cases, there appears suddenly some use of the notion of intent but, as in matters of offer and acceptance, it is not the same as in civil law, exactly because it is not a matter of psychological will but rather what a contract means to a reasonable addressee in the business concerned.52 In situations of dependency, there are fiduciary duties, an important instance of relationship thinking, although it is also trade dependent. Finally, other external sources of law, such as custom and practice, operate more freely and appear to be less curtailed, at least in commerce and finance, while equity adds further tools but also cuts out excess. Together, these common law concepts and attitudes approximate the notion of good faith or a more normative approach in civil law and may often go well beyond it. They are likely to be more precise whilst reflecting relationship thinking. 51 See Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912, referring to the reasonable person approach, with a preference for contextual interpretation over abstract literalism, but also in BCCI v Ali [2001] 2 WLR 735, 749 restating the principle of literal interpretation on the basis of a narrow view of the parties’ intent, at least as a starting point, whilst subsequently relying on ‘a reasonable person of the same kind … in the same circumstances’ but this may not help much and does not provide any standard without reference to the relevant industry or community. Similarly, Lord Steyn in Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209 alluded to the contractual language, the contractual scheme, the commercial context and the reasonable expectations of the parties (again no emphasis on intent or the will of the parties but no reference to the relevant industry and its perceptions either). 52 Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, see for implied terms further n 30 above and nn 122, 158 and 195 below.

Volume 3: General 35 It is therefore not true, as often surmised by civil law theorists, that English contract law has remained static or is even primitive as it did not develop or adopt the notion of good faith. This is not perceptive. It needs the good faith notion much less because it has long used different notions and techniques that may come very close to achieving the same results and, in relationship thinking and fiduciary duties, may well go beyond it and is then often more sophisticated and also commerce minded. But perhaps it may be equally important to repeat that contract in common law was itself always a more objective concept, less tied to parties’ intent and consensus notions. In professional dealings it is also much less concerned with fault or blame, much more with risk attribution in a more objective sense. Again, this has to do with tradition: the English law of contract emerged from commerce. It is true that the notions of offer and acceptance and much intent language were later imported from the European Continent but only during the nineteenth century whilst the related notion of consensus remained underdeveloped. There are good reasons for this, at least in professional dealings, as we have seen and shall see throughout. This being said, as we shall also see, the notion of good faith itself is now more clearly enunciated in contract law in the US, where normative interpretation is strong but often related to a search for underlying (objective) policies,53 not intent or its rationalisation; see further sections 1.3.6–1.3.7 below. In this environment, the old terminology of contract law is becoming less and less satisfactory, especially in civil law, but common law also needs updating as modern contract theory suggests everywhere that the traditionally established contract models may be largely out of date, especially in professional dealings, now ever more impacted by further standardisation and even the smart contract, see section 1.1.10 below. These modern trends will be discussed in greater detail below and, where possible, traced through comparative and transnational law.

1.1.8. The Contribution of Law and Economics It is of interest to see what modern thinking in the US, especially in ‘law and economics’, has contributed to the discussion on modern contract law. It may be less than one might think or may have hoped for. First there is the question of contract or party autonomy being an independent source of law, not a licensed notion, operating among the other sources of law in the modern lex mercatoria. This poses the question at the same time of other balancing forces, especially public policy but also notions of justice, social peace and efficiency, the latter being of special interest in business transactions. It also raises the question of the model that is best used to explain and simplify what is happening and to contribute to a better understanding and operation of modern contracting in the professional sphere, therefore in business transactions which are now often transnational in content, if not also in structure even when in the event the transaction happens to be local. Indeed, the contract model that is used or maintained here, is itself an issue—in business together with the stronger gravitation towards efficiency—and cannot be presumed to uncritically pre-exist. It was already said that rather than concentrating on a contractual interpretation from within, American realism concentrated on policy and the choices so made rather than on texts.54 53 Cf also Eisenberg (n 44) 1747 and MA Eisenberg, Foundational Principles of Contract Law (OUP 2018), 707 with Mark Gergen. 54 Cf also A Schwartz and R Scott, ‘Contract Theory and the Limits of Contract Law’ (2003) 113 Yale LJ, 541ff, R Scott, ‘The Case for Formalism in Relational Contracts’ (1999) 94 North Western University LR 847 and earlier ‘Conflict and Cooperation in Long-Term Contracts’ (1987) 75 Cal LR 2005.

36 Volume 3: General Above, the view was expressed, that, in such an approach, relationship thinking, the detrimental reliance notion, the accent on investment in the contract as the precondition for claiming thereunder, and the distribution/management of risk may also become of special interest. In business dealings, especially the promotion of efficiency may then be an objective standard and the parties‘ risk distribution, resource allocation and transaction costs, like the costs of lawyers and enforcement,55 become other key elements.56 Again, such contracts are unlikely to be intentbased in the traditional sense, if only because in a corporate environment only outsiders like a law firm might truly know what is in it. To enhance predictability, the notion of intent and the connected notion of blame when it comes to performance or the lack thereof will then also be limited, it was submitted, at least in commerce and finance, to situations where the contract makes clear choices, and defences and excuses will be curtailed in a strict interpretation of texts. This will reflect established business practices in that community. It was said that good faith may even require it where the contract is expressed as a road map and risk management tool. To repeat, one can say that these limitations favour efficiency whilst enhancing predictability. It may also advance the most competent actors and better or more efficient forms of cooperation. It follows that at least amongst professionals, efficiency in terms of economic exchanges leading to a better allocation of resources and to a greater economic benefit created by enhanced co-operation and subsequent distribution of the gains between the parties may trump subtler notions of justice except if manifest unreasonableness results like demonstrated by the use of the good faith concept in the UCC (Section 1-302(b)), a situation unlikely to result soon between informed parties in proper relationship thinking. Efficiency itself could even become an objective justification for contractual liability, probably increasingly expressed in smart contracts as a further form of standardisation between professionals, see section 1.1.10 below. In terms of promotion of social peace, the other red line may be the contract being socially or economically destructive. Monopolisation and other market abuse may be an example but also the use of standard terms as an organisation tool by a contractor may have limits, obvious for consumers, but even between professionals, more in particular if it manifests a dominant position. The extent or reach of extra-contractual disclosure, co-operation and re-negotiation duties may also be considered and measured from an efficiency point of view.57 Public policy may further impact on the contract content, not only contracts in restraint of trade but also those with other illicit objectives, like fraud or other forms of market manipulation or abuse and money laundering. Environmental protection was already mentioned in this connection. Thus, policy and cost issues impose themselves, also in professional dealings, more in particular of interest in a law and economics analysis. It was already said that at all times, professional parties will have to be careful with whom they contract. It was shown that at least in common law, entering into long term relationships may have a lot of downsides that cannot be foreseen but will not lead to an excuse (of force majeure or changed circumstances) unless the contract itself so provides or otherwise only in exceptional circumstances. Such an approach may indeed align with the more modern ‘law and economics’ analysis of contract law and support the view that this approach (which may in terms of sources of law be supported by custom and general principle), can withstand a ‘law and economics’ analysis, where efficiency considerations are paramount. However, the haul of 55 The notion of transactions costs is by no means fully clear, see Douglass W Allen, ‘Transaction Costs’, in Encyclopaedia of Law and Economics (Edward Elgar, 1999) 893. 56 See for an early discussion, J Berman, ‘Excuse for Non-performance in the Light of Contract Practices in International Trade’ (1963) 63 Columbia LR 1413. 57 See for the recognition of implied cooperation duties even in professional contracts, the Supreme Court of South Australia in Alstom Ltd v Yokogawa Australia (No 7), SASC 49 (2012).

Volume 3: General 37 new ideas remains limited,58 and even Posner complained of the lack of progress.59 On the other hand, empirical research has more recently questioned some of the basic ‘law and economics’ tenets in contract law.60 One idea here is that if parties have not expressed their intentions clearly, the default rule for the courts is the one that maximises the value of the transaction, even if it may be hard for judges to assess it and pin it down.61 Another is the notion of ‘efficient reliance’ in such situations.62 This notion is fact specific and it may be demonstrated that courts have paid some attention to it, although, here again, theory and practice often remain wedded to the idea of intent, which is then still preferred as the real basis of the contract. Rightly or wrongly, that often still seems the bigger issue even in modern case law in the US. It may be noted in this connection that there is then no proper relationship thinking either: professional and consumer contracts are hardly distinguished. The common law tradition may explain it better where the commercial contract was the original model all along. Contract performance is another area of ‘law and economics’ interest and becomes then a question of incentives: is it more efficient or less costly not to perform? Would this be a complete defence? This connects with the question of defences and excuses. Are we perhaps drifting towards a form of strict liability in professional dealings?63 In the meantime, the measure of damages and the question whether it is different when intentions are not clearly expressed or when extra contractual duties impose themselves remains unresolved, although, again, it is recognised that a tort-like approach may sometimes be more appropriate, in particular in pre-contractual situations.64 At the theoretical level, the difference is that in the first case damages are based on the full performance of the contract (the monetary equivalent of specific performance, potentially resulting in expectation damages), in the latter case damages are paid to the extent necessary in order to restore the pre-contractual situation. Indeed, some inventive writing has been produced in the area of pre-contractual duties, where the accent may then be on caution and on incentives to gather the right information.65 However, one could also put the emphasis on strategic behaviour, in particular the exploitation of delays. The possibility of expectation damages may then be a further discouragement to bargaining.66 58 D Faber, ‘Contract Law and Modern Economic Theory’ (1983) 78 Northwestern University Law Review 304. 59 EA Posner, ‘Economic Analysis of Contract Law After Three Decades: Success or Failure’ (2003) 112 Yale Law Journal 829 with a riposte by RC Craswell, ‘In that Case, What is the Question? Economics and the Demands of Contract Theory’ (2003) 112 Yale Law Journal 904. 60 Eg the idea that in standard contracts an ‘informed minority’ of term-conscious buyers is enough to discipline suppliers, see Y Bakos, F Marotta-Wurgler and DR Trossen, ‘Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts’, NYU Law and Economics Research Paper No 09-40 (2009); Y Feldman and D Teichman, ‘Are All Contractual Obligations Created Equal?’ (2011) 100 Georgetown Law Journal 6, critique on empirical grounds the assumption that parties may be expected to perform their contractual duties if, and only if, the legal price of breach (damages) is higher than the cost of performance. 61 I Ayres and R Gertner, ‘Filing Gaps in Incomplete Contracts: An Economic Theory of Default Rules’ (1989) 99 Yale Law Journal 87, 91–93. 62 R Craswell, ‘Offer, Acceptance, and Efficient Reliance’ (1996) 48 Stanford Law Review 481 and earlier CJ Goetz and RE Scott, ‘Enforcing Promises: An Examination of the Basis of Contract (1980) 89 Yale Law Journal 1261. 63 See R Craswell, ‘Contract Remedies, Renegotiation, and the Theory of Efficient Breach’ (1988) 61 Southern California Law Review 629. 64 See Craswell (n 62) 499ff. see also G Gilmore, The Death of Contract (Columbus, OH, 1974) 87–89 and PS Atiyah, The Rise and Fall of Freedom of Contract (Oxford, 1979) 1–7. See for the French attitude to pre-contractual liability text at n 217 below. 65 See R Craswell, ‘Precontractual Investigation as an Optimal Precaution Problem’ (1988) 17 Journal of Legal Studies 401. 66 A Schwarz and RE Scott, ‘Precontractual Liability and Preliminary Agreements’ (2007) 120 Harvard Law Review 662.

38 Volume 3: General The research confirms here the need for a limitation of pre-contractual disclosure and negotiation duties in the professional sphere. There is also some newer literature in the area of standard terms, their binding force and its extent,67 but the fact that they are basically an organisation technique of suppliers is mostly still overlooked. Game theory may do a little more when there is a strategic element, but it has the problem that new equilibria are difficult to nail down in terms of practical guidance for change and this approach soon becomes unmanageable and legally unhelpful. What is perhaps more striking is that in particular the risk management undercurrent and bias in professional dealings remains largely unexplored in these newer ‘law and economics’ approaches. The choices to be made are obviously efficiency driven but dependent on each party’s evaluations, while the bigger issue may be that much of what might happen during the contract period is barely foreseeable, as are the information and transaction costs. How the consequences are divided in terms of (objective) disclosure, (re)negotiation, and co-operation duties remains a question of default rules, which are often less than clear and in constant evolution, viz the precontractual and post-contractual regime, the impact of the notion of good faith and change of circumstances where again there seems to be little ‘law and economics’ guidance.68 Remedies and the measure of damages have caught the attention, but appear to be secondary, or rather only interesting in order better to force compliance with the contractual duties as they may evolve during the contract period. Civil law has contributed little to this discussion. As mentioned, in contract law it follows the traditional consensus idea, which is anthropomorphic, and generally still uses the older offer and acceptance terminology, now in language largely derived from the Vienna Convention, which sometimes allows conduct and reliance as an alternative (especially of acceptance) but even then, does not spell out the details, in particular whether this reliance must be considered reasonable or whether it must also be detrimental. It is no surprise that under the circumstances the DCFR does not contribute either. It sticks to the Vienna Convention’s approach to contract formation; in typical codification fashion it is the legislator or state that makes the choices here. How they do so and on what basis is not then a matter for investigation. The rules are what they are, they are not questioned, and the only academic interest is in how they are applied.

1.1.9. The Challenge of E-commerce E-commerce has become a fashionable subject, but it does not in itself present great new insights into the operation of contract law. In essence it merely adds a different layer of communication besides personal eye-to-eye contact, contact through the mail, by telephone, or by fax. Much is an extension of traditional offer and acceptance thinking and does not go beyond it. 67 VC Plaut and RP Bartlett, ‘Blind Consent, a Social Psychological Investigation of Non-Readership of ClickThrough Agreements’, www.springerlink.com; F Marotta-Wurgler and R Tayor, ‘Set in Stone? Change and Innovation in Consumer Standard Form Contracts’ (2013) 88 New York University Law Review 240; F MarottaWurgler, ‘Are “Pay Now, Terms Later” Contracts Worse for Buyers? Evidence from Software License Agreements’ (2009) 38(2) Journal of Legal Studies 309; JE Murray, ‘The Dubious Status of the Rolling Contract Formation Theory’ (2012) 50 Duquesne Law Review 35; RA Hillman, ‘Rolling Contracts’ (2002) 71 Fordham Law Review 744; AW Katz, ‘Standard Form Contracts’ ssrn.com (1998); MA Eisenberg, ‘Text Anxiety’, (1986) 59 Southern California Law Review 305. 68 Craswell (n 62) 489 suggests that neither differences in risk preferences nor differences in belief about the market have any obvious implications for the law’s choice of default rules. For this it would be necessary to identify the point at which the parties’ risk aversion differed by the greatest amount, again hardly a manageable concept.

Volume 3: General 39 It has not created great new perceptions and at least at the theoretical level has not created truly new complications either, for example as to when the contract is concluded, under which law, and with what kind of consumer or in terms of other protections under modern contract theory, except where documentation is habitually required. In that case, the question is whether an e-mail exchange complies with such a requirement, as an exchange of faxes used to do. In common law terms, this is a Statute of Frauds issue. As we shall see, under it, even sales contracts for small values may still require a document. For these contractual formalities see also section 1.2.8 below. The more formal issue then is: what is a document? Even in civil law, which tends to be more informal in this aspect (if parties so wish), sometimes a document remains required, as, for example, in the case of gifts. That also raises the issue whether an e-mail or internet communication might be sufficient. There is the obviously related problem whether, when the law or parties require a document, an e-mail signature is sufficient. In this sense one must also ask whether an e-mail offer or acceptance or other instruction (such as a payment instruction to a bank) may be considered to be sufficiently authentic to be recognised as legally valid. Conduct and reliance are here, however, also life issues but may not so far have acquired the attention they deserve. To aid and protect these communications, personal key systems will help but all the same there remains the issue of what e-mail communications legally mean. In e-commerce, types and recognition of signatures are an important issue generally, more so where a document is required or used.69 The subject of e-commerce may be broadened to include more generally the negotiation, confirmation and performance of commercial transactions by electronic means and then covers both the formation and implementation of the contractual relationship. The EU and international agencies such as UNCITRAL have concerned themselves with these matters also. In the EU, the E-commerce Directive is a case in point. It is concerned with formalities and the legitimacy of all contracts concluded by electronic means. In this connection, e-mail and internet trading are considered synonymous. For the validation of electronic signatures themselves, there is another Directive.70 The EU E-commerce Directive puts special emphasis on free movement in terms of the information society between the Member States, and on the related services (rather than defining e-commerce itself). Indeed, this is the only perspective from which the EU can broach the subject in terms of its jurisdiction to legislate in this area. The idea was to make electronic contracts workable in all Member States. In transborder transactions problems may arise especially with the applicable law, with regulation and regulated industries (such as financial services), and with protections of certain groups such as smaller investors, consumers and workers.

69 The status of documents may be all the more an issue where they are considered negotiable instruments (such as bills of exchange or cheques) or documents of title (such as bills of lading). This will be discussed below in Vol 4, Part II and may not be an immediate issue in e-commerce. In short, this negotiability is unlikely to attach to electronic imitations, as the physical element remains the essence of these documents or instruments. In the capital markets, (electronic) book-entry systems, often based on a centralised custody system of the underlying investment securities, proved the answer. The underlying securities are largely non-existent now and are in any event represented by security entitlements so that pure electronic settlement can result. This development will be discussed in Vol 4, Part III below. 70 Directive 2000/13/EC on Certain Legal Aspects of Electronic Commerce in the Internal Market [2000] OJ L178. Earlier, the EU passed Directive 1999/93/EC on a Community Framework for Electronic Signatures [2000] OJ L013. The WTO issued a Declaration on Global Electronic Commerce on 20 May 1998. The OECD Council issued a Recommendation Concerning Guidelines for Consumer Protection in the Context of Electronic Commerce in 1999. UNCITRAL concluded a Model Law on Electronic Commerce in 1996.

40 Volume 3: General In this connection, the E-commerce Directive concentrates on five aspects of commercial dealing: (a) the conditions of establishment of the service provider (country of origin); (b) the requirements imposed on commercial communications; (c) the acceptance of electronic contracts and the way orders are placed; (d) the liability of intermediaries; and (e) the online enforcement mechanism. They may not, however, always require special rules and the Directive did not mean to change the rules of private international law either. Rather, the EU meant to eliminate legal uncertainties that may exist with regard to the extent to which Member States may control services originating from other Member States through the co-ordination of national laws and the clarification of a number of legal concepts. There are no special consumer protection rules in this context in the Directive either, nor would there appear to be a need for them. As to the applicable (contract) law, under the traditional conflict of laws approach, normally the law of the party that performs the most characteristic obligation will apply (Article 4.2 of the EU Regulation of 2008 on the Law Applicable to Contractual Obligations (Rome I)). Any regulation of the service provider will be determined by its domestic regime (as the service is in that respect normally located at its place, see the country-of-origin approach in Article 3 E-commerce Directive), while consumers and workers may always invoke the protection of their own laws (Articles 6(2) and 8(1) EU Regulation of 2008). The DCFR contains a special provision on contract formation by electronic means in Article II-3:105. It requires a professional offeror or offeree to provide prior information on the technical steps it plans to take to conclude the contract, to say whether the resulting contract will be filed and made accessible, and to indicate the technical means for identifying and correcting input errors, on the language of the contract and any standard terms used. Breach of these duties results in a right of withdrawal of the other party and liability for any resulting loss. In the EU subsequently the issue of dispute resolution obtained a great deal of attention in further promoting a digital single or internal market where Germany and France are so far dominant. It published in 2016 a Digital Agenda for Europe which laid down a strategy by 2020 and highlighted this online dispute resolution (ODR) issue which it had already broached earlier in a Regulation.71

1.1.10. The Smart Contract A newer phenomenon is the operation of the smart contract which is sometimes said to be neither smart nor a contract. At least, it is likely not a contract in the more traditional sense. It is in truth a computer programme that is accepted by all participants. The idea is that the programme enforces instructions built into a code. One could also say that it is a computerised transaction protocol that executes the terms of a standard agreement. It is sometimes compared to a vending machine or ATM which executes instructions entered automatically and checks the 71 See COM (2011) 794 final which was followed in 2013 by Regulation (EU) No 524/2013 of the European Parliament and the Council on online dispute resolution for consumer disputes OJL 165(1) (2013). It established in each Member State an online dispute resolution facility that was not meant, however, to eclipse the right to access the judicial system. ODR contact points with at least two ODR advisors must be established in each Member State in cooperation with the EU Commission. The facility is limited to consumers resident in the EU and traders established in the EU. The latter must make customers aware of this facility and provide a link to it. In 2015, it was followed by an implementing Regulation (EU) 2015/1051, under which the EU created the Online Dispute Resolution Platform that is maintained by the EU Commission for Member States. After the UK left, it is no longer applied to it as it is no longer a Member State whilst its consumers do no longer have residency in the EU.

Volume 3: General 41 implementation which cannot be challenged. As such it could allow complete computerisation of the contract formation, implementation, and enforcement process. One could also say that it is the extreme of a commercial contract being seen as a standardised roadmap and instruction sheet, where one should also not ask what the drafters might have intended. Much of this discussion then tends to go back to the notion of intent which in this book in professional dealings was never considered to go to the binding force of a contract, which depends on conduct and reliance or here on instructions whose implementation becomes wholly automatic and can be instantaneously checked. There can be no argument, it is what it is, one participates or one does not. At most the organiser bears responsibility for the proper functioning of the program, see also the discussion in section 1.1.5 above where, however, the organiser was itself also a party, which would not here be the case, and for the appropriateness of the instruction code. If all can live with it and the system works (in a fashion), there is no way out. A smart contract may thus be defined as an automatable agreement, whose essence is the automation and self-execution of a pre-set conditional action plan in terms of enforceability and enforcement that can be checked instantly. The idea is that if something happens or is activated, then there is an automated follow up or sequence. The easiest example is the supply of an asset which engenders payment. A special feature may be that a car bought on credit, will not start if payments are not up to date upon electronic checking with the bank. ‘Automatable’ means in this connection automated by computer. ‘Enforceable’ means (self) execution via a tamper-proof execution. Again, there is no room for adjustment or adaptation. Once a participant enters the scheme, it is the way it is. Should there be room for disagreement, the system will explain itself. There may still be some recourse but likely only outside this framework. The practical significance is that smart contracts may allow for the transposition of contractual obligations into a digital distributed ledger for which the blockchain could be used. By having access to a (large) number of accounts, it may indeed provide the ultimate in standardisation. The provisions are complied with and enforced by means of automatic updates to each user’s account. It may even lead to a transfer of assets according to the terms of the smart contract as soon as an event—outside the blockchain or within—triggers the application of the terms. Thus, sophisticated systems may provide for automatic transactions to take place in the ledger in response to specific corporate or market events like, in finance, crediting a dividend or coupon payment, issuing and reacting to margin calls, or optimising the use of collateral. A smart contract may automatically allow to recalculate exposures with reference to agreed external data sources in order, for example, to adjust variation margin. In this manner, interoperable derivative and collateral ledgers would automatically allow the contract to call additional collateral units to asset ledgers. In the nature of all contracts for differences, on maturity dates, a net obligation would be computed by the smart contract, and a payment instruction automatically generated in the cash ledger, effectuating regular payments or closing out the deal. Based on Ethereum’s public blockchain (which is a permissionless platform in which everyone can participate), developers have been able to simulate in this way a full life cycle of derivatives and their execution through smart contracts. Their work gives a good indication as to how a future blockchain-based framework might operate, see Volume 5, section 2.6.12. For derivatives where this facility could become effective, this may be best demonstrated by a simple call option. A key challenge is that financial smart contracts need some mechanism to refer to market and reference data external to the blockchain or similar ledger in order to get the prices or valuations of the underlying assets, because so far, there are no market data publishers that are capable of reliably pushing data on to the blockchain. Developers have been able, however, to build a mock price feed that randomly and periodically mutates the values of popular financial symbols (S&P 500), with the smart contracts accessing the price feed for margin calculation and

42 Volume 3: General option exercises. In public blockchains, market data access through so-called oracles has a centralising effect: reputed centralised authorities push price information on to the blockchain, although it may render the entire system vulnerable when oracles lack in resilience. In private blockchains, standard market and reference data interfaces could be defined and then plugged into industrystandard feeds by identifiable and accountable network participants. This reduces vulnerability and would complete the standardisation. In a securitisation, see Volume 5, section 2.5.12, the implementation of a solution based on smart contracts and blockchain or similar ledgers could also result in significant efficiency gains, first at the stage of loan origination but then also throughout the entire securitisation lifecycle. A borrower could activate a loan agreement in the form of a smart contract by transmitting the necessary input to a blockchain (principal amount, repayment schedule, credit score, income verification, tax records etc). The lender/originator would validate the smart contract by placing it on the blockchain in the form of a digital token that is owned by it and contains in cryptographic form all input information and loan data. As a smart contract, the loan would have access to the borrower’s cash account so that payments would be made automatically in accordance with the repayment schedule. If the borrower defaults on a repayment, the smart contract could automatically engage a special default servicer which would take over the recovery process and the repayment history would be imprinted on the loan token and recorded on the ledger, which would be updated accordingly. This information would be available to all downstream participants upon a securitisation, which could vastly reduce downstream costs of due diligence. Downstream participants, including investors, could easily follow a loan or pool of loans from issuance through to maturity, be alerted of modifications and adjust servicing behaviour. Smart contracts of this nature remove further the subjective elements in contract conclusion and operation. In doing so, they are trying to eliminate legal sophistry, hiding behind local laws and their peculiarities, and mean to eliminate intermediaries including lawyers. In this connection, it was already pointed out that the common law of contract is not intent based in its formation and that in its operation, even when clear choices are made by the parties, intent and blame are still of modest importance, reflected in the limitation of the defences and excuses (unless the contract provides otherwise). The essence is that the common law does not rebalance the risks which parties took. It was also pointed out that in consumer dealings this may now be different and that this is more especially reflected in the civil law of contract that was always more anthropomorphic, in modern language consumer oriented, but still applied to all. But even in civil law, contract standardisation is here an important issue that may now increasingly point in a different direction. It was already mentioned above in section 1.1.5 in connection with standard terms in adhesion contracts, where the central role of the organiser was also noted and his/her responsibility for making such an organisational approach work for all participants who may be in a situation of dependency. The essence is that the terms must be normal (taking into account the nature of the scheme and its objectives) and fair (taking into account proper relationship thinking). Intent and blame in contract formation and operation are then reduced in importance, even in civil law, in exchange for protection of another nature. That reflects more readily the situation in the common law of contract that is on the whole more commercial as we have seen but will use relationship thinking still to make here proper distinctions and define the protections. If properly considered, it leads to a form of approximation between civil and common law when standardisation becomes an efficiency objective and economic need or even necessity. Above it was suggested that the smart contract may be the ultimate in standardisation and suggests the further (or even complete) elimination of subjective elements, notably intent and blame from these contracts in their formation, implementation and enforcement. There is a

Volume 3: General 43 definite shift from participants to scheme or code. But it does not discharge the organisers or operators completely. As already mentioned, they retain a responsibility for the proper functioning of the system they create and its fair and balanced operation between all participants. In particular nobody should be able to tamper with the rules and manipulate their application. The (decentralised) ledger is there to make that impossible, nobody can interfere. Even if broken into or hacked, this decentralised nature means that assets are technically not lost, although Ethereum contentiously has tried to retrieve and redirect monies in such situations by changing the rules or code. It may be the consequence of an organisation technique for which the organisers continue to bear prime responsibility and which they must make work for all, but it undermines confidence in the framework. On the other hand, it should also be realised that deficiencies in the code when known to the better informed may be used by them to disadvantage the others, another reason perhaps for the system to correct itself on occasion. All the same, it is clear that if the smart contract has been properly put into place, there is in principle no way back and participants must realise that their participation means that they conform to and accept what follows. That applies to sellers and buyers, banks or other intermediaries or markets and clients. Nobody can claim an exceptional status merely on the basis of personal circumstances or individual considerations, the idea is that no law can help them and circumstances are irrelevant. It may mean that the absence of disposition rights in underlying assets or monies, even because of a bankruptcy of the creditor, may prove irrelevant or less effective. Payment under guarantees must follow also, even if there may have been fraud or other circumstances that mitigate against it. Even so, participants or users may still have to exercise due care in the selection of others when making use of the smart contract facility and in the proper explanation of the scheme which may be opaque and is not necessarily right for everyone, especially for consumers and small investors or even students entering into student loan. Counterparties may hardly be known or identifiable. Here one sees again a distinction between organisers and users, which two functions tend to blend in standard contracts. Whilst in smart contracts, the organisation may be legally self-contained in its own code, it follows that the user dealing with others through the system still operates here under an applicable law, which should be transnationalised, fiduciary duties being the core, but could still be purely domestic, in the EU determined under Rome I. Regulatory concerns may also arise, followed by concern for privacy, especially of weaker parties; internet dealing and e-commerce may provide here some guidance. In the EU, as we have seen in the previous section, the emphasis is then on proper disclosure of sellers and their products and on the buyer being able to cancel the transaction during a short period. It concerns the E-commerce Directive of 2000, see also Volume 6, sections 3.6.7, supported by the EU Consumer Rights Directive of 2011. For fintech, other regulatory concerns may surface, so far more in particular for crowd funding and its participants in the capital markets, see Volume 6, section 1.1.18. The upshot is that participants may not be without recourse against each other following the operation and enforcement of smart contracts but it does not concern the smart contract itself whilst at least between professionals the choices so made may limit their rights at the same time. One further manifestation may be so-called ‘decentralised autonomous organisations’ or DAOs which present an interconnected system of smart contracts, therefore computer programmes stored and executed automatically, and may issue tokens that confer on the holders some control or income rights and then may start to look like companies. The challenge then is whether blockchain can effectuate a situation in which resources are pooled by token holders exclusively for purposes encoded in the smart contracts. Neither investors nor their creditors would have access once the resources are transferred. The question is whether such organisations

44 Volume 3: General can operate beyond any legal framework, although, obviously, investors or other types of participants might still be controlled in their home countries and could be constrained.

1.2. Formation of Contracts in Civil and Common Law 1.2.1. The Development of Contract Law and the Role of Parties’ Intent in Civil Law. The Notion of Consensus as the Basis for Contract Validity In modern civil law, consent or consensus is considered the essence of all contract formation. It leaves open the question what it really means and how it is expressed, but it is the central theme. Although civil law is often considered the successor of Roman law, it should be remembered that Roman law itself did not have a general law of contract based on consent or otherwise, although there was one class of contracts based on mere consensus (obligationes consensu contractae), of which the sale and the rental agreement were the most important. It was generally possible for two parties to commit themselves to each other but if the result was not one of the contracts recognised by law (ius civile), including the small class of consensual agreements, there was only a moral obligation or pactum nudum which could not be legally enforced although for some of them the Praetor later gave an action in the ius honorarium or praetorian law. The recognised contracts and some variations or extensions thereof are referred to in the Digests (D.2.14.7), which form part of the compilation of the Roman Emperor Justinian in the sixth century AD in Byzantium (see Volume 1, section 1.2.3), but even then, there was no one singular framework. Only the ius commune, which was the law developed on the West European Continent on the basis of this Roman law and which largely prevailed in this area until the time of the great European private law codifications of the nineteenth century as we have seen in Volume 1, section 1.2.4, managed to create a more coherent approach, especially since the writings of the secular natural law school of Grotius and his successors on the subject starting in the seventeenth century. It was largely based on parties’ consent but only in the sense of an exchange of promises that were compatible and had to be kept, not yet in modern terms of consensus, and was then joined by the notion of causa, insisting not only on the rationality or meaningfulness of the contract, but also on its morality as a public order requirement. This notion of causa did not indicate or require any particular form or formalities and was a corrective, not the basis of the validity of the contract itself, which was founded in the exchange of promises itself.72 This development in the direction of a more general contract law had started earlier under the influence of commercial need (through the law merchant or lex mercatoria of those days) and ethical considerations (embodied in the Church or Canon law).73 Especially in commerce, there was a growing need at least for parties to consider each other’s promises binding and this could not remain limited—as in Roman law—to sales and rental agreements. Indeed, commercial need and Canon law (money and religion) then combined to accommodate the imperative, both practical as well as moral, to keep promises more generally and to support the binding force of both informal and formal commercial contracts. On the West European Continent, this breakthrough 72 See nn 15 and 33 above for the requirement of a commencing of performance in the older law of sales in France. 73 Decretales of Pope Gregory IX of 1234 in the Liber Extra added to the Corpus Iuris Canonici, Lib I, Tit XXXV, Cap I.

Volume 3: General 45 was achieved in the fourteenth century, at the time of the greatest jurists of those days, Bartolus and Baldus,74 when Roman law was reinterpreted by them to support this development.75 It was later extended to all informal agreements, whether or not commercial, achieved by the seventeenth century with the aid of local laws. As just mentioned, the natural law school of Grotius and later Pufendorf76 in the seventeenth to eighteenth centuries completed the theoretical framework of the law of contract based on consensus as we know it today in civil law, even though at first it was still expressed as an exchange of compatible promises (much like common law still does for executory contracts as we shall see).77 It resulted in the general applicability of the famous maxim pacta sunt servanda, itself derived from the early Canon law heading of the relevant chapter in the Decretales of Pope Gregory IX of 1234, which had been at the beginning of this development (‘Pacta quantumque nuda servanda sunt’). Through the seventeenth-century works of the French jurist Domat,78 the consensus notion entered the French Codes in the early nineteenth century after the other great French jurist, Pothier, in the eighteenth century, had more precisely formulated the notion of offer and acceptance in the context of a meeting of minds or consensus.79 The enhanced emphasis on the will of the parties in this connection came later and dates from the nineteenth century, as such associated in particular with von Savigny in Germany.80 In the romantic era, it put the parties’ creative powers at the centre of the contractual rights and obligations and introduced a more psychological approach into contract formation and interpretation. The contract became intent or rather will-based.81 Offer and acceptance then acquired

74 Bartolus, Commentaria D.17.1.48.1; Baldus, Commentaria in Decretales, I De Pactis, Cap I, n 11. See for the development of the Ius Commune in Europe at that time, Vol 1, s 1.2.4. 75 Seen as early as 1283 the Coutumes de Beauvais, Cap 34, Arts 998ff. See further, A Loysel, Institutions coutumières (1607). See, however, also A Esmein, Etudes sur les contrats dans les très ancien droit français 5, 29 (Paris, 1883) for the requirement of a beginning of implementation in the older French sales laws for the contract becoming actionable. The codification dropped this requirement and may therefore be considered to have a lesser requirement for contract enforceability than the immanent transnational law, it is submitted, may have and the common law traditionally also has. 76 See Vol 1, s 1.2.6. 77 See Grotius, De Iure Belli ac Pacis, Lib II, Cap XI, iv, 1, still emphasising the mutuality of promises rather than the consensus or even the process of offer and acceptance, but cf also Cap XI, xiv and more clearly his Inleidinge, or RW Lee (trl), Jurisprudence of Holland (1953) III 10, where he noted that by contract we mean a voluntary act whereby one party promises something to the other with the intention that the other party should accept it and thereby acquire a right against the first party, cf also Pufendorf, De Iure Naturae et Gentium 1674, Lib III, Cap IV, Sec 2.7. 78 Les lois civiles dans leur ordre naturel, livre I Introduction (Paris, 1777). A key insight was here that promises are merely conditional until acceptance. 79 Traité des obligations, no 4, see also W Evans, A Treatise on the Law of Obligations or Contract by M Pothier (London, 1806). Only in the nineteenth century was this development completed and offer and acceptance were made the key elements in the formation of contracts in civil law codifications. The need for acceptance had already been identified by Bartolus, however, in connection with the use of agents: Commentaria D.15.4.1.2. It has been argued that the emphasis henceforth on the consensus deprived the new contract law from the moral imperative of keeping promises, see J Gordley, ‘Contract, Property and Will—the Civil Law and Common Law Tradition’ in H Scheiber (ed), The State and Freedom of Contract (Stanford, 1998), 82. It also de-emphasises the cause element and need for a commencement of performance at least in sales, see n 72 above. On the European Continent it gave the opening for and led later to will theories. Even in England there was an impact on early writers on contract, see nn 92ff below. 80 See n 27 above. 81 In France, Art 1188 CC (new), modified in 2016 as part of the revision of the French contract law and dealing with interpretation, again insists that the contract is interpreted according to the joint intention of the parties rather than on the basis of the meaning of the text. If the intention is not clear, there follows a reasonable person approach. The necessary distinction between the professional and the consumer contract is still not made.

46 Volume 3: General their present importance, as well as the notion that all contractual rights and obligations crystallise at the moment of formal acceptance of the offer. But from the beginning there were problems with the concept. First, the requirement of acceptance remained less clear when there was only one party committing itself.82 Offer and acceptance notions did also not solve the question of how far and for how long an offer remained open and as such binding. Civil law is divided on this issue to this day. German and Dutch law maintain that the offer remains open for a reasonable period and during that time may not be withdrawn at will by the offeror unless the offer itself allows for it. French law had no such rule but French case law increasingly accepted it also: the offeror may withdraw but if he sets a certain period for acceptance or if a reasonable period for acceptance may be inferred from the circumstances and the offer is withdrawn within that period, the offeror may be liable to the offeree if he had wanted to accept and suffered damage as a result of the withdrawal.83 In France,84 this liability may be based on tort rather than on contract.85 Another traditional issue is the time of the acceptance, which becomes vital when all rights and obligations are considered to gel at and operate from that moment. In civil law, in the traditional offer and acceptance language, it is normally considered the moment when the acceptance is received by the offeror.86 In common law, it is normally the moment the offeree dispatches the acceptance,87 the postal service being here considered the agent of the offeror, but reliance may still move the date. The 1980 CISG requires in Article 18(2) receipt by the offeror for the acceptance to become effective, but under Article 16(2), reliance may also be sufficient. That is also the approach of the UNIDROIT Principles and PECL and of the DCFR (DCFR, Article II-4:206) and of the EU Expert Group (Article 34). In all this, it must be remembered that offer and acceptance in this specific formalised sense only concerns the major contractual conditions, which must be more specifically agreed; minor terms need not be settled at the beginning for the contract to become effective, although this leaves open the question what is major or minor. In both common and civil law, the principle of formal offer and acceptance still underlies the formation and validity of the ensuing contract and its performance—in common law it was borrowed in the nineteenth century from Scottish and probably also German law, as we shall see in section 1.2.2 below, but it does not signify or support a consensus notion, the essence is that what is offered and accepted is sufficiently congruous regardless of intent. The reliance notion or offer and acceptance through conduct was also developed in this connection and is now more fundamental in common law as we shall see. But even in civil law, from a practical point of view,

82 French law still reflected this in Art 1108 CC (old), which only required the party that gave an undertaking to consent. So does s 516 of the German Civil Code (BGB) for gifts in Germany. More modern Codes, like the Dutch Code of 1992, always require acceptance in some form (Art 6.217(1) CC). So too do the UNIDROIT Principles (Arts 2.5 and 2.6), the European Principles in Art 2.204–6 being less clear: see also Art II-4:204–6 DCFR 2008. Under these modern rules, silence is not enough but acceptance may be by conduct. The idea seems to be that nobody should be bound or even derive benefits against his will, but, even in contract, duties and rights may derive from non-intentional obligations in the pre-contractual, contractual or post-contractual contract phases as we have seen. 83 See Cour de Cass, Civ, 10 May 1972 [1972] Bull Civ III 214. 84 J Ghestin, Traité de droit civil, les obligations, le contrat: formation 2nd edn (Paris, 1988) 229ff. 85 In common law, which, as we shall see in the next section, does not adhere to the consensus idea of contract but rather to the notion of exchange and bargain or consideration in the sense of an exchange of formal unilateral promises (in which some of the earlier version of consent in the ius commune may be recognised), the offer itself remains non-binding, although statutory law in the US now makes an exception for merchants if they spell this out in writing, see s 2-205 UCC but limited to a contract for the sale of goods. Reliance on an offer may, however, bring the moment of the conclusion of the contract forward. 86 See s 130 BGB. 87 Ever since Adams v Lindsell (1818) 106 ER 250.

Volume 3: General 47 it may be doubted whether the official offer and acceptance model remains intact. It has already been more generally questioned in section 1.1.4 above and is indeed more fundamentally challenged in modern contract theory, see section 1.1.6 above, which puts conduct and (detrimental) reliance at the centre and makes offer and acceptance a sub-category of it. It also means that rights and obligations may emerge and terminate at any time during the contract period. In this vein, even in terms of will theory, the other party may now often rely on what it reasonably thinks the first party meant. Even so, in civil law, the contract remains intent based, whilst in common law there is the addition of detriment at least in professional dealings. Where in civil law contracts imply consensus, built on offer and acceptance in terms of the parties’ intent, like some common platform, it suggests overlapping desires of the parties as expressed by them. This may not be much different in common law but civil law also requires a meeting of minds concerning the contractual content and each party’s contractual rights and obligations. Mere declarations or exchanges of promises in that sense are then not enough; that is the difference with common law, which here uses rather the consideration notion of a more objective formal exchange and bargain or in modern times the notion of conduct and detrimental reliance instead. It should be realised that when consensus becomes the basis of the rights and obligations of the parties in this manner, as it did in civil law, it is logical to look for the parties’ shared or common intent in every aspect of the contract: formation, interpretation, performance, defences, and excuses. This may by itself suggest some measure of objectivity but it remains a problem and continues to accentuate an anthropomorphic attitude, where intent determines the binding force of contract and the contractual rights and obligations arising. Especially after nineteenth-century notions of the will entered the picture, it became clear that for their validity contracts could not depend merely on a consensus in a psychological sense. Between natural persons it would be too easy for a later difference of view to arise, undermining all contracts. A more objective way of interpreting the consensus was thus called for short of concluding that most contracts might be void ab initio or could suffer from mistake as a valid defence virtually at the option of either party.88 Even in civil law, that was subsequently better handled through the reasonable reliance notion but there is still considerable tension, which does not emerge to the same extent in the common law of contract. The same personal element arises in the excuses, notably in the notion of force majeure, where in civil law the question becomes who is to blame or at fault rather than who bears the risk of one party’s inability to perform and the issue becomes how subjective this excuse is. It may thus be pointed out that in modern business or corporate dealings it is all the clearer that the psychological approach to interpretation can hardly suffice, if only because the person who signs the agreement is unlikely to know much of its details and merely uses its authority or power of commitment, while no single person may have dealt with the various issues and the end drafting is often left to outside lawyers. It means that a subjective assessment becomes more difficult, even irrational. What some (successive) negotiators, who often operate in teams, really want or intended is then not the decisive factor even if it could be established, but rather what reasonable expectations were raised on the other side and what that side could and did rely on and what must be considered to have made sense to both parties in the circumstances. At least in professional dealings, the contract text thus resumes its function as the major guide, subject to a high degree of literal interpretation, especially if meant as a roadmap or risk management tool 88 It is perhaps not surprising that Pothier started to view mistake as the most important defect that could occur in a contract, see Evans, n 79 above at 1.1.3.1 par 17. It received at that time little interest in English law, see n 97 below, and still does not have the same importance as we shall see.

48 Volume 3: General as we have seen. Blame, or rather the lack of it, are then less likely to enter into the excuses either unless introduced in the contract text itself. Even so, there remains substantial difficulty in these matters in civil law. Civil law students always ask: what did parties intend and, in the case of non-performance, who is to blame, rather than who bears the risk. But it has already been mentioned several times that much is not intent based even in the civil law of contract: non-intentional duties entered the picture in terms of disclosure and negotiation duties in the pre-contractual phase, duties of care and co-operation in the contractual (performance) phase, and duties to renegotiate in the post-contractual phase. These considerations helped to some extent to side-line the notion of consensus in a psychological sense also. Civil law may even allow an easier route for interpretation to develop in cases of ambiguity or doubt and facilitates gap filling in the contractual provisions without resort to an imaginary and often artificial parties’ intent. This may now be expressed in good faith language, as may even be the resort to literal interpretation of professional contracts in terms of relationship thinking, as we have seen in section 1.1.4 above, but it was also noted before that this development in civil law is by no means at an end. Intent and reliance often remain here two opposite poles, in which the former remains largely dominant. It was suggested earlier in section 1.1.6 above that a new model of contract law may be needed, more particularly in civil law, in which, for professional dealings, the intent-based nature of contract needs to be reconsidered more fundamentally and the emphasis needs to shift to (detrimental) reliance and risk management while relationship thinking needs to acquire greater prominence and the notion of fault takes a backseat. This may acquire a more explicit expression in standard terms or ultimately in the smart contract.

1.2.2. The Notions of Consideration, Exchange or Bargain in the Common Law of Contract. Meaning of Intent, Offer and Acceptance Civil and common law traditionally give a different expression to the different facets of contracting and to the determination of the contractual rights and duties of the parties under their contract. In section 1.1.6 above, it was said that especially in civil law it may be questioned whether its more intellectual anthropomorphic model based on intent and consensus fits commercial contracts. The common law of contract is also subject to modern pressures in respect of its basic attitude which resolves around the notion of exchange and bargain and consideration, but this is probably true to some lesser extent in commerce and finance as it emerged exactly from commercial dealings. It was already said that the common law is not conceptual and may not have much of a model at all but only attaches (some) legal consequences to certain fact situations which together may add up to a binding contract. At the more intellectual level, it has always been difficult to explain the concept of exchange and bargain and consideration and the case law concerning it, but the common law is largely unconcerned with deeper thought or systemic thinking in this area too and was in any event always more ad hoc and practical but probably also more circumspect. Again, it does not concern itself much with a legal model of contract formation and looks at facts and will infer certain rights and duties if there has been an exchange of promises or even assets assuming in the process that proper consideration has been given, or in more modern times that there was detrimental reliance on conduct. It means that the relevant party invoking the commercial contract must have invested in it to claim a benefit, especially an asset or a user, income or enjoyment right therein, a service, any other right to do or not to do, and/or expectation damages, especially a loss of profit, or specific performance in the case of non-performnance or default. That makes commercial sense and is the simple line followed in this book.

Volume 3: General 49 From the outset a number of further comments may be made. In common law, although a mere exchange of promises (rather than as a physical, especially monetary, quid pro quo) may be considered sufficient consideration in this regard if they are both serious and make commercial sense, see the next section, the literal approach to declarations of this nature is still preferred where there is a text, at least in commerce and finance, especially in England. This approach, which strictly speaking does indeed not depend on intent and avoids the consensus concept altogether, corresponds with an earlier phase in civil law when the mere exchange of such declarations also formed the basis of the contract as we have seen in the previous section. In common law this formal notion of contract formation is traditionally supported by the old parol evidence rule, which eliminates in interpretation all contemporary and earlier evidence against any writing meant by the parties as a final expression of their agreement (see again the next section) and finds a counterpart in the literal interpretation of statutory instruments,89 although the contract may still be supplemented and sometimes even corrected by implying conditions as we shall also see, and there may now also be pre-contractual, contractual and post-contractual non-agreed obligations often related to fiduciary duties as also noted. This is still the preferred way of handling construction or interpretation in common law, at least in professional dealings (see further the discussion in section 1.2.4 below), which were the true starting point. The common law of contract was always more concerned with risk and its management than with intent or even the subjective purpose of the agreement. As already noted in section 1.1.1 above, this approach is supplemented and fundamentally supported by a regard for the differences that may result from the nature of the relationship between the parties, the type of transaction, and dependency and reliance notions, while equity may support or cut out excess. In this manner, common law may come closer than would at first appear to a normative approach to contract and its interpretation, as they have obtained a foothold in civil law especially by expanding the good faith notion; see section 1.1.7 above. Weaker parties may be protected in this manner and the contract in respect of them may even be adjusted.90 Again, it is the area of duties of care or fiduciary duties and sets professional dealings (where there is a lesser need for protection) apart notably from consumer contracts. The resulting relationship thinking has a long history in the common law as we have seen. Also otherwise, there remain considerable differences between common and civil law, not only therefore with respect to consensus and the parties’ intent in the formation and interpretation of contract. It affects the operation of the defences against a contract’s validity and enforcement, see section 1.4.2 below. They have also long been noted.91 It also concerns the remedies where the normal recourse is only damages, not specific performance. Even the excuses are differently handled in the common law of contract as we have also seen and especially in professional dealings there is less room for both defences and excuses, see further section 1.4.4 below. But also in consumer dealings, there is no similar emphasis on consensus or a meeting of minds and the parties’ intent relates always to the individual promises and declarations only.92 Again, it is the more objective doctrine of consideration, based on the notion of exchange and bargain (or sometimes the notion of sufficient reason) which still provides the main basis for the

89 See Lord Denning, The Discipline of the Law (London, 1979) 11ff and his comments in Bulmer v Bollinger [1974] Ch 401 and Vol 1, s 1.3.3. 90 See Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, n 1 above. 91 See early Roscoe Pound, ‘Liberty of Contract’ (1909) 18 Yale Law Journal 451. 92 Chitty, however, from the first edition of A Practical Treatise on the Law of Contracts not under Seal, 3 (1826) noted the need for mutual assent, probably under the influence of Pothier, more so after the second edition of 1834 (p 10).

50 Volume 3: General validity of contracts and their binding force in common law. Here, intent does not go primarily to formation, but rather, as already noted in section 1.1.4 above, to the interpretation of the risk management provisions in the contract when clear choices have been made by the parties. In contract formation, the key remains that as long as the exchanged declarations of the parties in terms of their individual promises are compatible, there is a (bilateral or executory) contract when consideration is normally assumed, although, like in the case of detrimental reliance, best expressed by a beginning of performance without which there is no cause of action. These mutual promises must be seriously meant,93 but the emphasis remains on the exchange of compatible declarations and not on the intent of the parties individually or (even less) jointly as consensus. In fact, the importance of intent in the formation of the contract was until modern times denied altogether in common law by important American writers like Williston,94 and often it is still thought that at least in professional dealings there may be a contract even if there is no evidence of any positive intent of the parties at all to create a legal right and obligation, assuming always that the declarations overlap sufficiently and there is consideration and that the formal prerequisites for the formation of the contract also exist. In modern times, this is largely encapsulated in the more formal ritual of offer and acceptance, which terminology only became current in common law in the course of the nineteenth century. It began to be used in England as of the 1820s, for which there may also have been Scottish and continental European influence as already mentioned. In commerce, it was first used in equity.95 However, in common law, even the theory of offer and acceptance puts emphasis on the exchange of promises in the sense of formal declarations rather than on a meeting of the mind or the consensus. Again, these declarations must be intended by the party making them but that goes for each one individually. Objective similarity or compatibility of mutual declarations and not of intent thus remains the true key to contract formation in common law, at least in professional dealings. This squares with the consideration idea requiring a bargain or the exchange of a promise for a benefit to the promisor (or at least a detriment to the promisee). In a bilateral or executory contract, there will be such a promise and consideration on either side, although there may still need to be a beginning of performance for any party to have a cause of action against the other as we shall see, especially if the aim is to claim expectation damages in respect of future profits. 93 See Dalrymple v Dalrymple (1811) 2 Hag Con 54, 105. 94 1 Williston on Contracts (Boston 1957) s 21. The highly esteemed US Judge Learned Hand once remarked that even ‘if both parties severally declared that their meaning had been other than the natural meaning, [but] each declaration was similar, it would be irrelevant’: Eustis Mining Co v Beer, Sondheimer & Co 239 F 976 (1917). In this view, it did not make the least difference whether a promisor actually intended the meaning that the law would impose on its words. Even though many might now find this an overstatement, it remains useful for a proper understanding of the common law of contract and where it comes from. It still holds true especially in the professional contract, more so perhaps than in the modern consumer contract which is everywhere more anthropomorphic. It leads to a sharper distinction, here followed, between intent or a meeting of the mind (a) in the formation of the contract, where it is not relevant, (b) in the interpretation of risk management clauses when parties have made a clear choice, where it becomes relevant but only when the text is not clear or incomplete and is even then objectivated with reference to the peer group, while (c) it may be different again in the defences and excuses. 95 Earlier, in England, the notion of offer and acceptance was commonly used in marriage contracts to demonstrate consent, where it was naturally needed. It was, however, also known in Chancery, see the early cases of Moor v Hart (1683) 1 Vern 201 and Ayliffe v Tracey (1722) 2 P Wms 65, but it was only after Adams v Lindsell (1818) 1B&Ald 681 that it gained more general traction, also at law. It was never clearly explained where it came from (probably from equity as articulated by Lord Eldon in the previous year in Kennedy v Lee (1817) 3 Mer 441). It is well known that equity sometimes looked at continental practices and at the ius commune for inspiration, see Vol 1, s 1.3.1, perhaps in this connection also at the development of the offer and acceptance notion by Pothier, n 79 above.

Volume 3: General 51 To repeat, in this approach, neither intent, nor, strictly speaking, even consideration is connected with the contract itself but rather with each party’s promise, the exchange of which (in a formal sense) results in the binding force of the agreement, its coming into existence, and the parties’ commitments thereunder. Offer and acceptance language does not change this and in common law does not pretend to encompass a full legal contract formation model. It is largely directed towards establishing the time as of which an obligation arises but it is not the source of it. It has already been said that where choices are being made, they may give rise to a search for intent when they must be explained but only in an objectivated manner if the wording is not sufficiently clear, which means in the way that is understood in the marketplace by the peer group it is a performance, not a formation issue. It was already said also that the exchange and bargain aspect is best seen as a factual event to which the law ascribes legal force, sanctifies and enforces the resulting obligations, but only if the claimant has put his money on the table or made an investment. It is not a theory. In this view, detrimental reliance expresses the same idea, which means that without detriment, there will be no cause of action. That makes sense in commerce and finance and excludes especially expectation damages for breach of a promise without some economic input of the claimant. There may still be some recovery of cost by the latter as we shall see, but rather as a matter of negligence on the part of the defendant, therefore restitutional, not expectation damages. At a more theoretical level, the central role of exchange or bargain, supported by consideration, if only between two individual formal promises (rather than as a physical quid pro quo), also leads to a different approach to interpretation or construction as we shall see further in section 1.2.4 below. There is not necessarily a common platform between the parties as in the notion of consensus of civil law.96 The emphasis is on what they said (or made others detrimentally rely on). This has a direct effect on the defences connected with the inducement of the contract. Misrepresentation, the use of pressure, or the exertion of undue influence, even mistake,97 are not directly relevant and only lead to (some) relief in equity, see the discussion in section 1.4 below. It is true that the term ‘agreement’ is sometimes used and presented as a condition for the existence and binding force of the contract, but it does not truly have the meaning of consensus as in civil law.98 96 cf also Catherine Valcke, ‘Contractual Interpretation at Common and Civil Law: An Exercise in Comparative Legal Rhetoric’ in JW Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Oxford, 2009) 77. 97 Indeed mistake was not at first a major issue in the common law of contract as it had become for Pothier in France, see n 88 above. Later there was influence on the common law developments also from von Savigny, but it did not lead to a concept of contract based on consensus, avoided by the failure thereof. It is sometimes said that the doctrine of consideration proved too strong, see W Swain, ‘The Changing Nature of the Doctrine of Consideration, 1750–1850’ (2005) 26 Journal of Legal History 47, 57. It also affected the attitude to interpretation, which again could not easily be based on the notion of consensus or intent either, unless the contract itself made clear choices in terms of roadmap and risk management. Of interest may in this connection also be the dwindling importance of juries in contractual issues after the beginning of the nineteenth century, see also the text at n 103 below. As for mistake, a jury could technically find that there was no contract proper. As we shall see in s 1.4.1 below, equity eventually took over in a somewhat more comprehensive manner. This required the powers of the jury to be limited first, which in turn led to a sharper distinction between points of fact and points of law even in common law, the latter becoming the preserve of the judiciary, see s 1.2.3 below. A related development was the reduced influence of the forms of action which were ultimately abolished by the middle of the nineteenth Century, see also s 1.2.3 below. This allowed the equitable remedies of rescission to develop further. 98 For the contractual requirement of an agreement, see, eg, GH Treitel, The Law of Contract, 13th edn (London, 2011) ch 2 (and its heading), under strong German influence. In this sense, it may sometimes also be used in the US as in s 2-204 UCC. On the other hand, in common law, a distinction is rather made between agreements and contracts in the sense that agreements can be without consideration and are then not binding or exist only in equity (as in the creation of a trust), while contracts are either under seal or based on consideration and as such are always binding at law.

52 Volume 3: General It follows that there is no coherent idea of defences to a demand for performance either in the sense of a failure of consensus or effect on intent. Nor, as we have already seen, is there much subjectivity in the excuses where notably lack of blame does not exculpate the non-performing party unless a force majeure clause to the effect (or a change of circumstances clause) has been entered into the contract. As we shall see, the only true excuse in common law is the other party not performing one of the main conditions of the agreement.

1.2.3. The Development of the Consideration Notion in Common Law. The Modern Alternative of Detrimental Reliance As has been shown, in common law the consideration notion plays an essential role in contract formation. It was already said that it is not always easy to explain and text books have the tendency to become convoluted once sight is lost of the economic rationale. Historically it was used in particular to develop modern contract law out of the law of torts (the writs of assumpsit or debt) and by the middle of the eighteenth century it provided a mechanism that allowed for the development of the English law of contracts not under seal (sealed contracts had always been binding) from the idea of physical barter into a binding exchange of mere promises, at least in commerce. That was done by requiring some economic balance in the exchange, at first even a measure of equivalence in the sense of there being some just bargain or price (iustum pretium).99 In this connection, it should not be forgotten that originally the English royal courts were largely In the US, the Restatement (Second) of Contracts of 1981 distinguishes between agreements and bargains (s 3). A bargain requires an exchange of promises or an exchange of a promise and a performance. It includes barters. An agreement, on the other hand, is only the manifestation of a mutual assent, which may, or may not, result in legal consequences and may or may not be intended. In the US, bargain is thus considered a narrower concept in the nature of a contract proper. A contract is in this connection a promise or a set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognises as a duty (s 1). In this approach, an offer is the manifestation of willingness to enter into a bargain so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it (s 24). An acceptance is a manifestation of the assent to the terms of the offer made by the offeree in a manner invited or required by the offer. It may be made by the delivery of the required performance or the making of a counter-promise. Acceptance by performance may operate as a counter-promise. The offer vests the recipient of the offer with the power to complete the manifestation of mutual consent by acceptance of the offer (s 35). 99 See R Wooddeson, A Systematical View of the Laws of England (1792) 415. However, WS Holdsworth, History of English Law 8 (London, 1926) 17 argues that courts never attempted to adjudicate upon the adequacy of consideration. Yet, until the full development of the consideration notion, the writ of indebitatus assumpsit had provided protection for a contracting party only if it had relied on someone else’s promise and had performed but was not given its just reward and suffered damage as a consequence. In this manner, the notions of promise, reliance and real loss became the essence of the action. The requirement of real loss subsequently developed into the requirement of consideration, which was thus considered necessary to create contractual liability of the other party and needed to be substantial if not equivalent to justify an action. Nominal loss was not sufficient. There was an echo of this in the development of the synallagmatic innominate contracts in civil law, which at first were thought to be actionable only by the party that had fully performed, see R Zimmermann, The Law of Obligations (Boston, MA, 1992) 536. M Horwitz, ‘History of Contract Laws’ (1974) 87 Harvard Law Review 917, 936 argues that the modern will theory as of the end of the eighteenth century dethroned the equitable idea of contract, which had favoured exchange and bargain, and accepted a market-oriented attitude, which started to allow at the same time for expectation damages and did do away with consideration altogether for negotiable instruments. The acceptance of the caveat emptor notion is here seen as a development going in the same direction, associated as it is with the operation of modern markets, which were thought to be able to determine the fairness and true value of exchanges of this nature. Yet it was already submitted that the will of the parties was never the sole or even prime factor in the common law of the professional contract and is not even so today.

Volume 3: General 53 concerned with land matters and sometimes with torts endangering the peace. Only gradually did other torts become actionable, ultimately even breaches of promises, but it took longer than in civil law to develop true contract actions. As in the law of chattels, where in common law the proper proprietary defences remain in tort (see Volume 4, section 1.3.4), in the common law of contract the remedies also retain a close affiliation with the law of torts from which they derive.100 The further developments of the law of contract may have been affected in this connection and retarded by the commercial law being integrated into the common law in the eighteenth century which concentrated on the law of torts (and land).101 There were two further developments. First the impact of the forms of actions and their formalism and narrow application dwindled and they were altogether abolished by the middle of the nineteenth century (although not necessarily the thinking behind them). This left more room for an abstract concept of contract to evolve. The other development was the removal of the jury from much of contract law. The power of juries was not until that time clearly defined: the pleadings would establish the issues, judges would give directions, and a jury verdict would follow and was difficult to overturn. As even Lord Mansfield found out, especially mercantile juries could be very unruly.102 The means to reduce jury influence was a sharper distinction between fact and law, even in common law, the latter being reserved to the courts. Juries were then confined to deciding points of fact only, which allowed a more general contract law to develop further. It eventually also had its effect on the law of precedent, which equally contributed to the development of a more abstract legal environment,103 see also Volume 1, section 1.3.2, although the common law never aspired to conceptualisation and intellectual coherence. Again, in this evolution of contract law, first in commerce, there was never much room for the parties’ intent as the source for the binding force of contracts, although in the eighteenth century the Lord Chief Justice of the time, Lord Mansfield, accepted the seriously intended promise itself as the basis for contractual liability or ‘honesty and rectitude’ being sufficient consideration.104 This could have opened the way for the later continental consensus and good faith interpretation approach to the binding force of contracts, but he was soon overruled.105 Yet after the eighteenth century, at least the exchange of mere promises could provide sufficient consideration and needed no longer be physical in the manner of barter,106 in which context the notion of equivalency or

100 See also n 34 above. 101 See Vol 1, s 1.3.1. 102 Hollingworth v Tattersall (1778), see J Oldham, 1 The Mansfield Manuscripts, 332–333 (1992), and J Oldman, The Varied Life of the Self-Informing Jury (London, 2005). See further MS Arnold, ‘Law and Fact in the Medieval Jury Trial Out of Sight Out of Mind’ (1974) 18 Am J of Legal History 267 and Swain, n 97 above, referring also to Holt CJ in Ash v Ash, (1696) Holt 701 at 702 and later Butler J in Appleton v Sweetapple, 3 Doug 137 at 140 (1792). 103 See again n 98 above. See for the subsequent development of precedent in common law, also N Duxbury, The Nature and Authority of Precedent (CUP, 2008) and GJ Postema, ‘Law’s System: The Necessity of System in Common Law’ (2013) UNC Legal Studies Research Paper No 2324438. 104 Pillans v Van Mierop (1765) 97 ER 1035 (KB), reversed in Rann v Hughes (1778) 101 ER 1014 (KB). Ever since, the doctrine of consideration has been upheld, importantly so in Foakes v Beer (1884) 9 App Cas 605 (HL), holding that a contract between a debtor and his creditor to forgive interest on a debt was unenforceable without proper consideration being given for the release. This is still good law. 105 See Holdsworth (n 99) 45, and further also Vol 1, s 1.1.3. See for a more recent contribution to the development of the consideration notion, S Waddams, ‘Principle in Contract Law: the Doctrine of Consideration’ in JW Neyers, R Bronaugh and S Pitel (eds), Exploring Contract Law (Oxford, 2009) 50 and AS Gold, ‘Consideration and the Morality of Promising’ in ibid at 115. 106 Section 71 of the Restatement (Second) of Contracts of 1981 states: ‘(1) To constitute consideration, a performance or a return promise must be bargained for. (2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.’

54 Volume 3: General a just price was also abandoned together with, as it seems, the important notion of reliance used earlier.107 The development of the purely executory contract as a contract based on an exchange of (formal) promises was thus achieved in common law.108 It left open the questions whether there should still be a commencing of performance as a signal of commitment in the consideration tradition and whether without it expectation damages could still be claimed, that is without any actual investment or action on the part of the claimant, which remained doubtful.109 It can only be repeated that in common law the more incidental approach to determining contractual rights and duties always prevented any abstract theory of intent or consensus from developing.110 Rather, in commerce, investment and risk management were the key concepts and concerns. Crucially, this also left room for a strong reawakening of the reliance notion in modern times. Reasonable or justifiable reliance on the conduct of the other party, which also had to be detrimental—the notion of investment—now supplements, or may even have replaced, the more traditional emphasis on the exchange of formal promises and declarations in the consideration tradition. This return of the equitable reliance notion in the form of promissory estoppel may be traced back to developments in the US, where, since the 1930s, the importance of detrimental reliance on an offer (or promissory estoppel) has been stressed to create contractual rights and duties besides the exchange or bargain notion,111 and is now widely accepted and may well have overtaken the consideration notion, also in England, although not the idea of investment behind it. Thus, if there is a justified and detrimental reliance on an offer, the lack of consideration proper need no longer be a problem. To start hiring people or to begin a project in justifiable reliance on a promise of a construction contract or to seek adequate funding may be sufficient, but the mere hiring of a lawyer, for example, may not be enough. Indeed, in England, Professor Atiyah has suggested that, in order to assume the binding force of a contract, detrimental reliance and a commencing of performance is always the true key to the validity of the contract and necessary before there is a cause of action and any enforcement claim can be based on it.112 A promise-based notion of contract is then abandoned altogether. Again, this more radical proposition, which in the common law perception appears tort related, may also lead to a curtailment of expectation damages in favour of restitutionary or direct damages only. It was submitted before that this may be so especially in professional dealings,

107 See Holdsworth (n 99) 2ff. 108 Thus Story considered the extent of the contractual obligation dependent upon the conveyance of individual desires; in the US that was also the idea of Holmes. See W Story, A Treatise of the Law of Contract not under Seal (Boston, MA, 1844) 4, and OW Holmes Jr, The Common Law 1st edn (Boston, MA, 1881, 58th printing) 293–94. 109 It may be recalled in this connection that this was also a requirement in early French contract law, see A Esmein, Etudes sur les contrats dans le très ancien droit français (Paris, 1883), supplementing notions of exchange of promises (rather than consensus) in the natural law school; see nn 33 and 72 above. 110 See eg AG Chloros, ‘Comparative Aspects of the Intention to Create Legal Relations in Contract’ (1959) 33 Tulane Law Review 606, 611, but cf also for the modern struggle with intent in the common law of contract, G McMeel, The Construction of Contracts: Interpretation, Implementation and Rectification 2nd edn (Oxford, 2011), and the search for an objective standard of intent in England in this connection. 111 In the US, the modern reliance doctrine may be traced to LL Fuller and WR Perdue, ‘The Reliance Interests in Contract Damages’ (1936) 46 Yale Law Journal 52, 73. The important case is Hoffman v Red Owl Stores Inc (1965) 26 Wisc 2d 683, 133 NW 2d 267 allowing compensation for losses caused by reasonable reliance on the declarations made in the course of negotiations without an element of consideration or even unjust enrichment. 112 PS Atiyah, ‘Contracts, Promises and the Law of Obligations’ (1978) LQR 193: see also PS Atiyah, The Rise and Fall of Freedom of Contract (Oxford, 1979) reviewed by C Fried in (1980) 93 Harvard Law Review 1858 and PS Atiyah, Promises, Morals and Law (Oxford, 1981) 202–15, critically reviewed by J Raz in (1982) 95 Harvard Law Review 916. The idea here is indeed that promising itself is not a creation of the law but that the law will enforce a promise if the counterparty has effectively committed itself—the notion of detriment or investment—which is then ultimately translated in the measure of (expectation) damages upon breach.

Volume 3: General 55 when there is no clear breach of promise, but rather breach of other (additional) non-intentional duties within the contract, such as disclosure or co-operation duties, duties of cooperation and even renegotiation duties in certain circumstances often depending on the various phases of the contract.113 This approach has not found full acceptance in common law so far, but it shows a modern reorientation in the common law and may also be useful in a transnational context. In the previous sections, the emphasis on conduct and (detrimental) reliance in this manner was already noted as the better approach,114 also in civil law. Offer and acceptance then become a subcategory. It is submitted that this is a development well under way in professional dealings and therefore likely to be one of the main features of transnational contract law in the professional sphere. Certainly, if there has been detrimental reliance, even more so a commencing of performance in justifiable reliance on the declarations or actions of others (taking into account also proper relationship thinking), it may be right to assume a binding legal relationship. Still the offer itself continues to play an important role, also in the reliance theory. It is foremost a question of initiative, but, as a model, the ritual of offer and acceptance is becoming out of date, also in common law, while the more formal notion of consideration becomes less relevant as well. It also means that the emphasis shifts from a fixed moment as of which the contract and its rights and obligations are determined, they arise and are extinguished all the time in a dynamic approach to contract formation. Again, all is proper reliance, investment and risk management during the period of the contract, more especially clear in duration contracts at least in commerce and finance, but it takes time before this is fully realised and properly expressed in legal texts and case law. In the meantime, the UCC in the US to some extent follows the earlier line of Lord Mansfield for the contract of the sale of goods with its emphasis on agreement between the parties but also on their conduct, including the commencing of performance (see sections 2-204 and 2-206 UCC). This was achieved at the expense of the more traditional consideration notion, the lack of which under section 2-205 UCC also no longer stands in the way of offers by merchants being binding if they have been stated in writing to remain open. Yet, even though Article 2 UCC in its formation provisions no longer makes reference to consideration (except indirectly in section 2-205), the notion is not abandoned, only de-emphasised. In particular, it does not mean that contracting in the US is becoming mere intent based or purely consensual, see also the reference to the notion of ‘agreement’ in footnote 98 above. In England, in 1975, the abolition of the consideration notion altogether was advocated by the Law Commission (Working Paper No 61).115 But again, it is important to appreciate in this connection that although this would do away with the inconveniences of the doctrine, it would not replace the notion of an exchange of promises or bargain with the continental idea of a consensus or a meeting of minds leading also to a more comprehensive interpretation technique in that manner.116 The 1980 CISG (Vienna Convention), on the other hand, largely accepted the civil law notion of intent but uses the formal offer and acceptance language of common law geared to a fixed moment of contract formation.117 It notably does not require consideration 113 See also the comment in n 34 above. 114 See also n 33 above and accompanying text. 115 See also Lord Wright, ‘Ought the Doctrine of Consideration to be Abolished?’ (1936) 49 Harvard Law Review 1225; AG Chloros, ‘The Doctrine of Consideration and the Reform of the Law of Contract’ (1968) 17 ICLQ 137; and PS Atiyah, ‘Consideration: A Restatement’ in Essays on Contract (Oxford, 1986) 179. 116 See the early Dalrymple case, n 93 above. 117 It refers to the process of offer and acceptance as formation. It requires in Art 14 that there is an intention on the part of the offeror to be bound by the acceptance but has no similar language for the offeree (Art 18). Wider questions of validity do not concern it and are not covered by the Convention (Art 4).

56 Volume 3: General (nor causa)118 but still allows offers to be withdrawn before an acceptance is dispatched unless the offeree acted in reasonable reliance upon the offer, in which connection it does not dwell on pre-contractual negotiation duties (Article 16(2)). Conduct may also signify acceptance, see Article 18(1). The English, who did not accede to the Vienna Convention, were willing to give up the notion of consideration for international sales when ratifying the 1964 Hague Sales Conventions, which were the predecessors of the Vienna Convention, and the US was willing to do so when ratifying the 1980 Vienna Convention. This is clearly a trend, at least in international sales, although again it is not necessarily the prelude to acceptance of an intent-based contract model instead. It could also mean a stauncher advance of the conduct and (detrimental) reliance notion. The requirements of consideration are also absent from the UNIDROIT Principles for International Commercial Contracts, from the PECL, and from the DCFR, which, as already mentioned, still put the consensus of the parties at the centre ‘to be determined from [each] party’s statements or conduct as reasonably understood by the other party’ (Article II-4:102). These models follow the offer and acceptance language of the Vienna Convention, which historically derived from civil law. The direction shown here is towards the intent-based concept of contracting: see also its Article 8. There is some reliance language but no further elucidation of the concept (or of proper relationship thinking in this context). The key notion remains here intent in the anthropomorphic nineteenth-century Continental European fashion. It is unlikely to reflect modern contract theory in professional dealings. In the meantime, it may well be that in international transactions the more traditional requirements of consideration have lapsed, even in contracts chosen by the parties to be the law of a common law country, but this may be limited mainly to its inconveniences, notably offers not being binding and releases or price reductions not being legally enforceable (see further section 1.2.5 below). Again, it does not necessarily mean its replacement by the notion of intent and consensus, it is more likely detrimental reliance instead.119 The future direction is not clear, either in terms of a consensus and an intent-based approach or in terms of a reliance-, investment-, and risk management-based approach, but especially in international commerce and finance, it was submitted, the emphasis is likely to be on these latter features. It may be different for consumer contracts where anthropomorphic notions of intent and consensus may remain more vivid, particularly in the civil law thinking on contract, although it may even fit in the common law concerning consumer dealings. But proper relationship thinking sets professional dealings apart and a different approach is likely to be retained in the common law. It is argued that it would also be the starting point for the transnationalisation of contract law in the professional sphere.120 118 It does not appear that it may be reintroduced through application of a national law pursuant to applicable conflicts rules under Art 7(2) as a matter of gap filling in the area of formation or outright as a matter not covered by the Convention at all. 119 The question of the significance of consideration in international transactions has more generally arisen where, for example, English law is made applicable through a contractual choice of law clause. It is now often believed that such a choice does not necessarily mean to introduce consideration notions in international commercial contracts, at least if it leads to an invalid agreement while there are no other main contacts with English or common law. The idea is here that, through a contractual choice of law, parties cannot have meant to enter into an agreement that was never binding for lack of consideration, see also O Lando, ‘The Lex Mercatoria in International Commercial Arbitration’ (1985) 34 ICLQ 747 and further JH Dalhuisen, ‘What Could the Selection by the Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law: A Liber Amicorum (Oxford, 2009) 619. Again, intent may then be considered the more dominant notion, but it could also have been (detrimental) reliance. 120 As a curiosity it may be noted that in the DCFR there is one reference to detrimental reliance, unexpectedly in the definition of the good faith notion in s I-1:103, see n 170 below for the text.

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1.2.4. Contracts: Construction and Remedies in Civil and Common Law. The Parol Evidence Rule As we have seen, in common law the ambivalence towards the notion of contractual intent prevented a more conceptual approach of consensus and failures of consensus and therefore of contractual validity from developing. There is no single concept. Rather, it was noted, the common law reacts to certain facts as exchange and bargain and then attaches legal consequences when there is consideration or, in a more modern version, detrimental reliance. It was noted also that an important consequence is that there is no clear-cut approach to contract interpretation or construction and it remains more casuistic, depending therefore on facts. An important aspect is that although lack of disclosure, mistake, misrepresentation, abuse of power or undue influence and fraud at the time of the conclusion of the agreement, may all affect the validity of the contract, this is not primarily perceived as a failure of consensus as it is in civil law. The types of relief given in these circumstances are even now more incidental and were ultimately developed separately in equity in terms of the so-called rescission remedy as we shall see in section 1.4.2 below. They are primarily defences against a request for performance—not issues of contractual validity per se—and result in a fractured system of relief, largely depending on factual situations, and may notably not lead to voidness with automatic restitution or title return under a sales agreement considered to have failed. It was already said that the scope of contract seems narrower in common law than it is in civil law, and remedies sought in connection with contractual dealings soon become tort based, for example where there was misrepresentation or abuse in the demands for enforcement. Fair dealing may lead here also to notions of unjust enrichment and restitution remedies.121 As a consequence, not only the approach to validity and interpretation, but also the framework of common law remedies is different from civil law; they are more incidental, based on the requirements and circumstances of the case at hand and may not be purely contractual— again it may suggest that contracting is still a narrower concept in common law. Analytically it may be best to divide the discussion into three parts as already suggested before: (a) formation issues in contract and formation defects and problems (defences) being separately considered, construction not being intent based in that context; (b) risk management and distribution issues, construction in this context being based on an interpretation of what parties intended, but being literal when clearly expressed in a text or otherwise determined by industry perceptions; and (c) the excuses of performance, these issues again being separately considered and not on the basis merely of anthropomorphic and personal notions of blame or fault, which are also subjective. Again, in common law, there is no single concept of construction in contract law and there continues serious ambivalence with regard to the notion of intent. It suggests, nevertheless, that in particular under (b), in terms of risk management, notions of intent remain important when choices have been made, but in commercial dealings they also assume proper relationship thinking. It means that the approach is different in commerce and finance and not primarily psychological. Thus, the contract text, if a roadmap and risk management tool, is given a strict 121 Thus reliance, notions of dependency and fiduciary duties, and of fair dealing can be and have been explained as giving rise to non-contractual, tort or restitution protections rather than to contractual remedies, therefore to remedies not strictly belonging to the contractual order, which in that view is limited to the old bargain approach or to the area of voluntary promises, which may, however, also cover implied conditions. It was already said that this may make a difference to the amount of damages that may be recovered, especially any lost future profits under the (anticipated) contract. Thus expectation damages may become less normal or may be more readily curtailed and damages may only be restitutional: see also n 34 above.

58 Volume 3: General interpretation in professional dealings even if lack of clarity and gaps may still be dealt with through implied conditions. Somewhat inconsistently, construction would appear to swing here from the objective or literal approach to the subjective or psychological approach in gap filling, but these implied terms are also more objectively handled, especially when reasonableness, ways of dealing, or custom are invoked in this manner. While it has allowed ‘reasonable man’ considerations to be implied (assuming always that parties have not expressed themselves better),122 it is tied to the type of business concerned and its perceptions in order to avoid fantasies about what the parties might have thought or intended. A similar person in the same situation is likely to be as perplexed as the parties and that concept is insufficient to provide an objective standard. Rather, it is the perception of the peer group as a whole that then counts. To repeat, the more limited role of intent in contract formation and interpretation means that, when it comes to contract implementation, defences and excuses are limited except in the case of the latter when the contract itself deals with them and defines them. It was already said in section 1.1.4 above those arguments such as: ‘I did not mean it, I cannot help it, it is not my fault’ do not go far in the common law of contract concerning professional dealings and is more compatible with the anthropomorphic consumer law ethos of civil law. Again, in the common law of contract there may still be room for implied terms if there are gaps in the contract text or if it does not state enough to have meaning. In extreme cases, it may then even make allowance for notions of force majeure or hardship in the case of changed circumstances, especially in duration contracts, but it remains exceptional and they will only be deemed implied in pressing cases.123 It might be easier in consumer dealings. It has already been noted in section 1.1.7 above—see further section 1.3.7 below—that this more modern use of implied terms of reasonableness and fairness124 may compare with what in civil law is the normative approach to the validity and interpretation of contracts, often operating behind the good faith notion. So do the reliance and dependency concepts, which in proper cases have a similar effect in common law. Still, implying conditions remains a narrow facility in common law.125 The approach to intent, the impact of relationship thinking, and the literal interpretation technique of contract texts, all suggest a more business-like attitude and avoid especially the danger in civil law that implied consumer protections waft over into the professional sphere on the tails of contract types. The English attitude was highlighted in England by Lord Reid: There is no need to consider what the parties thought, or how reasonable men in their shoes would have dealt with the situation if they had foreseen it. The question is whether the contract they did make is, on its true construction, wide enough to apply to [a] new situation; if it is not, then it is at an end.126 122 See Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913 and BCCI v Ali [2001] 2 WLR 749. The literal attitude towards statutory enactments is largely intact and remains the starting point in contract, see s 1.1.6 above at n 46. In Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, which deals more properly with implied conditions, the emphasis (again per Lord Hoffmann) was on what the instrument meant to the reasonable addressee. The attitude remained, however, also that if parties did not expressly provide for an alternative, the loss still lies where it falls. Nothing is to be adjusted. Only if the contract must mean some more in order to make sense may a term be implied, see further nn 30 and 52 above and nn 122, 158 and 195 below. 123 See Taylor v Caldwell (1863) 3 B&S 826, (1863) 32 LJQB 164. 124 See for English law Bankline v Arthur Capel [1918] AC 435 and Metropolitan Water Board v Dick [1918] AC 119. 125 See for implied terms also nn 30 and 122 above and n 197 below. They do not operate as a general counterbalance or independent source of contractual rights and duties or amount to a validity test of the contract, see the House of Lords in British Movietonews v London and District Cinema [1951] 2 All ER 617, rejecting Lord Denning’s broader approach in the Court of Appeal in this case, see [1950] 2 All ER 390, 395. 126 Davis Contractors v Fareham [1956] 2 All ER 145.

Volume 3: General 59 It leaves open the question what true construction is and that still allows some room for flexibility, but the old parol evidence rule underpins here also a restrictive and objective attitude.127 It does not allow any contradictory contemporary or earlier evidence (and in the opinion of many, even later behaviour) against any writing intended by the parties as a final expression of their agreement. This attitude does not stand alone and, as already mentioned, a similar attitude may be found in the literal interpretation of statutory instruments in England. In the US, section 2-202 UCC retained the parol evidence rule, although it allows a course of dealing or usage or the consistent use of additional terms to be pleaded regardless.128 In common law, there is also little room at the theoretical level for the introduction of more general equitable principles to balance the contractual autonomy.129 It has already been pointed out that equity itself presents in the common law a fairly precise set of incidental remedial rules and is certainly not a general source of supplementary law as good faith or reasonableness and fairness increasingly might be in civil law. It limits itself generally to averting excess in individual cases or specific situations only. As discussed in Volume 1, section 1.3.1, equity is no general counterbalance or independent source of rights and duties and does not amount to a test of the validity of the contract or facilitates the interpretation process, again quite unlike good faith now may be in the civil law of contract.130 Thus, the normative approach to contract interpretation, implying a balancing of intent by notions of good faith, remains largely a civil law facility and does not find its parallel in equity unless there is clear excess or abuse, but any normative approach is expressed in the different ways here explained: the nature of the relationship of the parties, fiduciary duties especially in situations of dependency, implied terms, and through reliance or sometimes with reference to natural justice. There may thus also be extra-contractual duties derived from other autonomous sources of law. In England, following relationship thinking, notions of protection of weaker parties, especially against onerous terms, thus gained ground early.131 It fitted and was done on the basis of a better developed framework, which made a proper distinction between types of parties.132 There may also be supporting customary law, which in the civil law of contract is only accepted as a source of law in the interpretation (in contract especially behind the notion of good faith).

127 It is now mostly seen as a rule of construction and not one of evidence. 128 Some of this may in England derive from the Karen Oltmann case [1976] 2 Lloyd’s Rep 708 (QB). Art 8 CISG contains an interpretation provision and allows not only statements but also conduct to be considered in determining the meaning of the contract according to their reasonable interpretation. Due consideration is thus given to all relevant circumstances of the case, including the negotiations, practices and usages and any subsequent conduct of the parties. It is clear that Art 8 does not follow the parol evidence rule, cf also Art 2.1 UNIDROIT Contract Principles and Art 2.101(2) PECL, which also allows a contract to be proved by any means, including witnesses, see equally DCFR, Art II-1:106(1). 129 The doctrine of consideration may sometimes still do, see also text at n 133 below. 130 See again British Movietonews v London and District Cinema [1951] 2 All ER 617, rejecting Lord Denning’s broader approach in the Court of Appeal decision in this case [1950] 2 All ER 390, 395. 131 See Parker v Smith Eastern Railway Co [1877] 2 CDP 416 and Hood v Anchor Line (Henderson Brothers) Ltd [1918] AC 837. 132 In England in more recent times, consumer protections have mostly been left to statutory intervention, but see still J Spurling Ltd v Bradshaw [1956] 1 WLR 461; McCutcheon v David MacBrayne Ltd [1964] 1 WLR 128; Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 and Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd, cited in n 1 above. Hence the Consumer Credit Act 1974, the Unfair Contract Terms Act 1977, and the Financial Services Act 1986, now superseded by the Financial Services and Markets Act 2000. In fact, consumer and investor protection has been a matter of statutory intervention in most countries, also in civil law, where the normative approach to interpretation could have dealt with it if it had developed a better relationship thinking approach. This also applies to the use of standard terms in contract; only in Switzerland is it still felt to be satisfactorily dealt with under general legal principles, including the normative approach to interpretation.

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1.2.5. The Practical Significance of the Consideration Requirement in Common Law In common law, the concept of consideration is sometimes thought to highlight and to give expression to the dynamic role of contract and to the continuing ability of the contracting parties to plan their business or life without (too much) interference from other notions, principles or imperatives.133 It is then closely aligned with the offer and acceptance process but even then, not with notions of consensus as the basis for the binding force of the contract and contractual liability. As everywhere else, party autonomy (and more in particular the roadmap and division of risk between the parties that it implies) is an important aspect of contracting, especially in contracts between professionals, more clearly in duration contracts, but as we have seen the initiative of the parties (rather than their consensus) is not or no longer always the only source of the binding force of contracts and of their content, and the parties’ rights and duties are in any event not determined by party autonomy alone, which should also not be viewed subjectively: see particularly the discussion in section 1.1.4 above. As noted, before, there may now be pre-contractual disclosure and negotiation duties, contractual co-operation duties or duties of care, and postcontractual renegotiation duties, none of which can be reduced to the parties’ intent proper. There are other supplementary sources of contractual rights and obligations. Reliance, dependency, implied terms and the nature of the relationship have already been mentioned. In common law, they operate besides the consideration requirement although the notion of consideration may itself sometimes also stand for good sense, even if not necessarily amounting to good faith and similar notions of contracting in a civil law sense as we have seen. It may be repeated in this connection that in civil law party autonomy as such is no longer an independent source of law. In codification theory, it is the state that allows it to operate but only in the manner it prescribes even if the good faith notion may now help to interpret, supplement and sometimes even vary the contractual terms while reintroducing in doing so the more traditional sources of law which codification had meant to eject. They were identified as fundamental and general principle, custom and practices, and indeed party autonomy itself besides statutory instruments in a hierarchy that may allot it a lower place than fundamental principle and customary law. How this operates in transnational law was the subject of Volume 1. Returning to the notion of consideration proper, in modern times accompanied and perhaps outflanked by the detrimental reliance notion as we have seen, in common law, there survives nevertheless the idea that in matters of contract formation and enforceability only consideration truly matters.134 The key remains then the exchange of commitments or promises of the parties (which may or may not prove to have been intended as long as the declarations are sufficiently similar and congruous in a formal sense) when there is consideration, which ultimately may stand for a kind of commercial rationality in terms of some worthwhile economic exchange. This continues to be of fundamental importance and is still one of the main conceptual differences from civil law, although in modern times consideration itself is often of little direct consequence. To put it another way: normally it is there, why otherwise contract? In commerce and finance, few are in the business of making gifts even if it is true that co-operation rather than exchange

133 See C Fried, Contract as Promise: A Theory of Contractual Obligation (Cambridge, MA, 1981). The emphasis is here on the self-binding nature of the promise (conceivably as an autonomous source of law) rather than the bargain theory of contract. The key then is intent, but of each party separately. 134 See R Unger, ‘Intent to Create Legal Relationships’ (1956) 19 MLR 96.

Volume 3: General 61 may also be the objective of contracting but in the common law of the professional contract this cooperation would still be assumed to be for commercial gain. An important point to recall in this connection is that the notion of consideration in the more traditional sense no longer requires equivalence between the value of the mutual promises or a fair price as we have seen. It is now left entirely to the parties to determine what is proper consideration in that sense and it can thus easily be provided. In the US it is quite normal, for example, to enter into option contracts by paying (or promising to pay) one US dollar. Although the exchange must be serious and seriously meant, the value of the consideration given may thus be nominal (a peppercorn) but it may not be illusory or fictitious; often it is now the exchange of mere promises of whatever value, although there must be some. If we translate this in detrimental reliance or a beginning of contractual performance on the part of the claimant, the investment in the contract need not be considerable before a cause of action arises but it must be real. In fact, the consideration requirement may altogether easily be circumvented by entering into a contract under seal, which means no more than affixing a mark on the contract or writing on the contract that it is under seal and having it witnessed by two persons. The promise contained in such a contract must somehow be expressed, but the handing over of the document is normally considered sufficient in this connection. In the US, in states like New York and California, this circumvention route was eventually blocked—see also section 2-203 UCC—but not in England. However, there are still a number of practical consequences that cannot be ignored. The requirement of consideration remains particularly relevant in that offers without consideration of the offeree are not legally binding until validly accepted. Again, detrimental reliance by the offeree may cure the problem.135 Other examples of the residual importance of consideration are in contractual amendments. Although they can now be freely entered into without giving additional consideration, that is not necessarily so if a discharge, release, rescission, or novation is intended. It follows that when work is agreed to be performed against a certain price, any amendment of the price is still likely to have no legal effect, even if an extra effort is required to complete an already agreed project.136 Surety contracts or guarantees may also still fail for lack of consideration, as may contracts that impose only a unilateral obligation. Past consideration is also not sufficient, for example where an annuity is promised for past services, or as a reward for a heroic act after it has been rendered. Contracts to perform a moral or religious duty, such as refraining from smoking or going to church, may also fail for lack of consideration even if money is offered. The moral or religious duty itself is not then considered proper counter-value. Most of this is undesirable and modern case law may distinguish on the basis of particular circumstances. Commercial agency agreements were traditionally also thought to lack consideration, although it was later found in the commercial agent promoting the business. An oral promise to make a gift is not enforceable even if accepted and a written promise to give is only valid if in deed form or supported by statute. This is perhaps more understandable. It is the same in most civil law countries on the basis of statutory law in order to avoid rashness, although in civil law a rash gift actually made will normally stand.

135 The legal rule that an offer is already accepted upon dispatch (rather than upon receipt) of the acceptance and cannot be legally withdrawn thereafter may be seen as an earlier practical effort to limit the effect of the consideration doctrine in this area. See for the situation in the US, MA Eisenberg, ‘The Revocation of Offers’ [2004] Wisconsin Law Review 271. 136 See also M Chen-Wishart, ‘Consideration: Practical Benefit and the Emperor’s New Clothes’ in J Beatson and D Friedmann, Good Faith and Fault in Contract Law (Oxford, 1995) 123.

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1.2.6. The Common Law Notion of Consideration and the Civil Law Notion of Causa Compared Consideration as a more objective source of contract validity operating besides or completing modern notions of offer and acceptance has sometimes been compared to the civil law notion of causa. It may be that both are more objective notions but it should be doubted whether there is here a true similarity. The civil law notion of causa has several meanings (cf Articles 1108, 1131 and 1133 of the French Civil Code (old CC)) but requires a contract essentially to make some sense, be rational, seriously intended and have some meaning. We have already seen that originally it was primarily meant to overcome formalism although it was also used to avoid contracts on the basis of impropriety and is then a public order concept. At certain times, it was even explained as requiring a reasonable quid pro quo.137 That seems to bring it closer to the consideration requirement in some of its earlier forms but this was not pursued. Both concepts (consideration and causa) were sometimes also invoked as objective standards to cure contractual excess and may in that respect sometimes also be similar, but there are increasingly other tools available to make adjustments, such as the use of the good faith concept in civil law. In civil law, the requirement of a causa was often considered obscure and has progressively been abandoned, at least in the sense of requiring the contract to make sense according to some objective standard—compare the Dutch Civil Code of 1992 and earlier the German Civil Code (BGB) of 1900. Again, the normative contract interpretation or good faith facility discussed above in section 1.1.7 can now cover the same ground if necessary. In civil law countries that retained the notion, notably France, it was used mainly to avoid contracts that were clearly immoral or that concerned gambling, but even in France the requirement was dropped after much debate in the revision of the law of contract in 2016. It always stood for some public order element, although more relaxed moral attitudes and the speculative element in many modern financial structures have led to ever less emphasis on causa restrictions even in this narrower sense, see for example Article 3.40 of the Dutch CC of 1992. In any event, it has already been noted that the Dutch CC no longer uses causa language and limits itself to the notion of illegality in this connection. However, as just mentioned, French law in particular maintained the notion, which therefore retained residual importance until 2016, possibly also because the notion of good faith was still less pervasive in balancing the contractual intent in France. In all this it should be remembered that in civil law the causa operated next to the consensus as an occasional corrective only, while in common law, the notion of exchange and bargain with the consideration requirement became basic for the formation of all contracts (except if under seal). Although the notion of the causa may well have had an early influence in England and may have contributed there to the consideration requirement in its emphasis on circumstance, seriousness and reasons for a promise,138 in civil law the notion of causa never acquired anything 137 In this limited sense, the concept of causa could be traced back to Roman law. Under Justinian law, the vendor of land could require the return of the asset if it proved to be worth more than twice its price: D.4.44.2. This was the theory of the laesio enormis, later supported by Canon law. There is a remnant in Art 1118 French CC, but most normal contract types are no longer affected by it. Under Art 1448 Italian CC, there is also a possibility of setting certain contracts aside because of disproportionality, but there must be another element such as abuse or exploitation. That is also the gist of German case law under s 138(2) BGB. 138 See AWB Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit (Oxford, 1975) 199.

Volume 3: General 63 near the central role consideration did in the common law of contract and these two concepts should therefore not be equated as they sometimes were in legal scholarship. Finally, a brief further comment on the history of these concepts of consideration and causa may be useful. It confirms among other things that they have by no means the same significance or origin. In England, the doctrine of consideration was first formulated within the development of the writ of indebitatus assumpsit, as we have seen, and was particularly used to propel the notion of contract out of its primitive phase of barter into its modern form of an exchange of promises for the future, therefore of a bilateral or executory contract.139 The notion of causa in civil law developed, on the other hand, in the ius commune, which under scholastic influence looked for a cause in all legal (and other) acts. It is therefore much older than the notion of consideration and believed to have first been formulated as a general contractual requirement in the fourteenth century by Baldus.140 It was combined with his then new view on the binding effect of the promise, which was itself inspired by the requirements of commercial practice and canon law as discussed above.141 This notion of cause allowed the abolition of the formalities earlier thought necessary to prevent rashness. Instead, the causa required an objectively serious intention for contractual engagements to be binding, but it sometimes came also to be seen as requiring some balance in the parties’ interests, as was indeed also notable in the early consideration requirement in common law as noted. Grotius, while developing the consensus notion, retained the notion of causa, requiring a reasonable cause for a contract to be binding.142 It also remained popular in eighteenth-century France.143 From there it entered the French CC (Articles 1108, 1131 and 1133) and continued to be strongly defended by more modern French authors such as Capitant.144 French law required the valid cause to remain existent all through the life of the contract. This was unlike case law in the Netherlands based on similar provisions (before its new Code), which required a valid cause only at the time of the conclusion of the contract.145 Again, corrections of this sort to the parties’ intent may in civil law now increasingly be obtained through the notions

139 It was virtually abandoned by Lord Mansfield in the eighteenth century in favour of a much more continental approach, as we have already seen, but it did not persist: see n 105 above. 140 Commentarius Codicis ad C.4.30.13 at 22 and 23. D. 2.14.7.4 already mentioned the concept and proved a ready base for its further development. 141 See s 1.2.1 above. 142 Inleidinge tot de Hollandsche Rechts-geleerdheid [Introduction to Roman Dutch Law], II.1.53. See for the development of the will notion in Germany in this connection, J Gordley, The Philosophical Origins of Modern Contract Doctrine (Oxford, 1991) 162ff. A well-known protagonist of the will was von Savigny, 3 System des heutigen römischen Rechts (Berlin, 1840) 258, against R von Jhering, Zweck im Recht, 3rd edn (Leipzig, 1898), who continued to emphasise the purposes for which people contract and the reasons the objective law enforces their commitments, see also n 27 above. L Duguit in France followed but went further: Les transformations générales du droit privé depuis le Code Napoléon, 2nd edn (Paris, 1920) 72 and 97 and even denied the independent existence of subjective rights, including those under a contract, believing them to be entirely dependent on the social order. 143 See Pothier, Traité des obligations, no 42, who limited it to an ‘honest cause’. 144 H Capitant, De la cause des obligations (Paris, 1928). M Planiol, Traité elémentaire de droit civil 2 (Paris, 1949) 291 proved critical of the cause concept, however. 145 See HR, 6 January 1922 [1922] NJ 265. The use of the causa notion in the sense of requiring a proper balance or just price was explicitly rejected in modern times by the Dutch Supreme Court in 1936: see HR, 13 November 1937 [1937] NJ 433. In the Netherlands, the cause notion was particularly criticised by the original designer of the new Civil Code: see EM Meijers, Nieuwe Bijdragen omtrent de Leer der Consideration en Causa [New Contributions to the Notions of Consideration and Causa], Verz W [Collected Works] (Leiden, 1955), III, 301, and does not appear in the new Civil Code, except in the context of an immoral cause: see Art 3.40 (but phrased in terms of illegality). See for the causa notion also M Storme, ‘The Binding Character of Contracts, Cause and Consideration’ in A Hartkamp et al (eds), Towards a European Civil Code (Dordrecht, 1998) 239.

64 Volume 3: General of fairness and reasonableness or good faith in the context of the objective or normative interpretation method, at least in countries like Germany and the Netherlands. Indeed, by the end of the nineteenth century, the causa requirement was no longer considered necessary by German scholars. They increasingly depended on will theories rather than on internal contractual logic or virtue. But the will was then operated only by state fiat, subject to the requirements of the codification while party autonomy was no longer an autonomous source of law. In these circumstances, the concept of causa lost much of its meaning and need and it was no longer retained in the German BGB of 1900, while public order concerns with the contract were expressed differently, primarily through notions of invalidity or illegality in more specific cases. Again, the good faith notion in contract was additionally used to introduce normative and moral elements at least in private (consumer) dealings. As just mentioned, even the French did do away with the concept in 2016 although the Belgians plan to retain it in the present revision of their Civil Code. The fact that fairness notions are less accepted as correctives in the common law of the commercial contract and in some civil law countries may have favoured the survival of the more objective consideration doctrine in countries of the common law and the more objective causa notion in countries like France, but in different ways: the consideration requirement was used to keep out these more abstract notions of fairness and the causa as a way to introduce them. In this connection, it may also be noted that the notion of a just price has not completely been abandoned either and stages regular revivals, more particularly in civil law, although in the end it has always proved an impractical criterion for contract validity or adjustment.146 The above discussion has relevance for law formation at the transnational level in the question how party autonomy as an independent source of law may be balanced by (higher) fundamental principle, or related public order considerations, or custom or general principle of a mandatory nature expanding on such principles. It could also be achieved through the notion of good faith, which, as we have seen,147 in professional dealings may now often substitute for other, higher sources of law, or through direct references to public order requirements or illegality, either of the local variety if sufficiently impacting on an international case or otherwise of the transnational order itself. Note in this connection, however, also Article II-7:301 DCFR, which only refers back to the mandatory laws of EU Member States.

1.2.7. Other Aspects of Contractual Validity: Capacity and Authority Capacity to contract is truly only a fundamental issue for natural persons who may be minors or otherwise incapacitated. In the professional sphere, under normal circumstances, it should no longer have relevance as legal not natural persons normally operate there, although their legal existence itself may still have to be verified. As far as directors or managers are concerned, particularly in the corporate sphere they may operate outside their authority or ultra vires, but it has long been established that this is the risk of the company rather than of a counterparty acting in good faith. There is no need therefore for counterparties to verify the powers of those who act for a company and they may depend on apparent authority provided there are no obvious reasons to doubt it. Legal capacity is assumed. Thus, in the EU, already in the First Company Law Harmonisation Directive (68/151) of 1968, the so-called ultra vires doctrine was abolished for companies and their dealings. It has more 146 See, eg, O Schachter, ‘Just Prices in World Markets’ (1975) 69 AJIL 101. 147 See Vol 1, s 1.4.3.

Volume 3: General 65 recently raised its head, however, in England in dealings with local authorities which are not companies. Swap contracts with them have been considered ultra vires in the sense that these authorities were not considered to be empowered to enter into speculative interest rate instruments or derivatives. These agreements were as a consequence voided and local authorities and municipalities were not required to pay under them.148 It posed the question of the legality of payments made to local authorities under similar contracts which subsequently gave rise to much litigation and many restitution claims where local authorities had already collected under these swaps. The argument of ultra vires was also used in the US by Orange County in its suit against Merrill Lynch in connection with its own disastrous derivative losses in the 1990s. The pressure on the judiciary to protect local authorities in this manner may be understandable, but the use made of the capacity argument to undermine apparent authority and justifiable reliance may be seriously questioned. In trusts, the situation may be different and one has to look at the powers and capacity of acting trustees but not in terms of what the trust deed allows them to do, which is irrelevant in respect of third parties as trustees always act in their own name as owners of the trust fund at law. It is relevant, however, in terms of their own capacity as natural or legal persons. Especially in the latter case, ultra vires arguments may no longer apply either for the reasons already given. Lack of capacity should be clearly distinguished from lack of disposition rights or authority in that sense. The thief has legal capacity but no disposition rights in the stolen assets in which s/he cannot therefore transfer valid title. That goes for all non-owners of assets, although buyers may be protected because of their bona fides, at least if there is delivery, which is especially relevant in respect of chattels in civil law. That will not normally cover lack of capacity to contract for a sale: it is a different issue, see for the consequences more particularly Volume 4, section 1.4.5 below.

1.2.8. Other Aspects of Contractual Validity: Formalities As regards formalities, in France, Article 1341 CC required until 1980 all contracts with a value in excess of 50 French francs to be expressed in writing. The amount is now set by decree and can therefore be more easily updated. If such a record in writing does not exist, evidence of its existence by witnesses may not be given. A similar rule obtained in the Netherlands until 1923. It has a long history and may be traced back to Article 54 of the French Ordonnance de Moulins of 1566, but did not apply to commercial contracts. Even in non-commercial contracts, its impact has been reduced in France by allowing a beginning of written evidence to be sufficient. Also, recordings are now accepted as sufficient evidence of a contract with a value in excess of the required amount. Most importantly, admission or recognition may overcome the impediment or, to put it differently, if the voidness for lack of form is not invoked, the contract stands. In common law countries, there is in this connection traditionally the Statute of Frauds. The English Act dates from 1677 and requires a written document in a number of cases. The most important ones are real estate contracts and guarantees or sureties. Only for these two does the Act remain in force in the UK. In these cases, lack of formality does not, however, void the transaction per se but makes it unenforceable at the request of either party. In the US, under Article 2 of the UCC (section 2-201), the sale of goods must still be evidenced by a written document if in excess of US$500 in order for such a sale to be enforceable. Again, recognition or admission cures 148 Hazell v Hammersmith and Fulham London Borough Council [1991] 1 All ER 545.

66 Volume 3: General the defect. A similar formal requirement is not contained in the English Sale of Goods Act and it is also not a requirement under the Vienna Convention. The requirement of a document for a sales contract in respect of real estate is fairly common on the other hand and has now also been introduced in the Netherlands in its new Code in 1992. Also in Germany, a notarised deed is necessary for the sale of land—section 311b BGB—but a buyer may, if good faith so requires, still prove the agreement by other means and may demand possession even without the form being observed. On the other hand, the seller may repossess the land for lack of formality if good faith so dictates. It clearly depends on the circumstances. The requirement of a written document is commonly considered to guard against light-heartedness but may lead to abuse as it allows sellers to accept higher offers before a written contract is signed. They commonly do so in real estate transactions in England (gazumping), increasing the uncertainty and cost for the buyer. Here the German system seems to render fairer results. It is true that in common law there is the doctrine of part performance under which a vendor may be forced to perform if he knows that the buyer is acting in reliance on his oral promises, but this does not prevent gazumping in England. Other contracts that often require written form are assignments of intangible assets. This is so in France and the Netherlands. It is a great drawback in bulk assignments if individualised. Equitable assignments in England do not, and this goes for all assignments in the US (except in the case of an assignment under Article 9 where non-possessory collateral must be described unless there are other forms of control, section 9-203(3)(A) and (D)), but one document may cover assignments in bulk; Article 9 does not cover individual assignment. In many countries, secured transactions in movables also require a written document even in the contractual aspects. So it is in the Netherlands, where they must also be registered (if not notarial). Third-party guarantees always require a document in Germany, see section 766 BGB. It poses the question what a writing is or what is the proper written form. It seldom goes as far as to require a written signature. In all these cases there is the further question whether, in the absence of the proper written document, the contract may still be proven. Another question is whether recognition may overcome the absence of the proper form and how abuse is to be countered. As we have seen, there is no single answer to these questions. The international lawyer needs to be aware of the risks.

1.2.9. Other Aspects of Contractual Validity: Definiteness As to the requirement of definiteness, traditionally it may be said that most contract laws require some specificity as to a contract’s object. Even French law after the 2016 amendments retains the requirement explicitly, Articles 1114 and 1128(3) (new). In sales agreements that translates into clarity on quantity, quality, price, and place and time of delivery. In the law of property and its transfer (the proprietary aspect of a sale therefore), it has a much more important role and translates there in the requirement (or not) of identification and specificity of the underlying asset, which may render ineffective all transfers of assets which are future or appear in bulk (or both). It also raises the issue of sufficient disposition rights in them: see the discussions in Volume 4 below. In common law in England, lack of clarity may be an issue in this connection. ‘Best and reasonable endeavour’ clauses were thus questioned as being too imprecise to give rise to obligations.149 149 See s 1.3.13 below.

Volume 3: General 67 Under Article 2 UCC in the US, a contract for the sale of goods does not fail for lack of definiteness, however, if one or more of the basic terms are left open, as long as there is a reasonably certain basis for an appropriate remedy. The UCC requires as the minimum for the validity of a sales contract only agreement on quantity. It need not even be accurately stated but enforcement is limited by what is said, while the price, time and place of payment or delivery, the general quality of the goods or any particular warranties may all be omitted, see section 2-204(2) and also the Official Comment at section 2-201. General market conditions or common or standard terms may then take over. Similarly, the Vienna Convention on the International Sale of Goods or CISG insists in Article 14 only on some clarity as to quantity and price: at least the offer must be sufficiently definite in these respects, although as far as price is concerned, Article 55 gives some further guidance. Article 19(3) of the CISG also suggests other material elements, such as payment, quality, and place and time of delivery, but they need not be spelled out in the contract for it to be binding and for most of them the Convention gives additional (directory) rules.150 The question of definiteness may also arise in other types of contracts. Mortgage arrangements must often be precise as to what asset is secured for what type of debt. In assignments, the assigned debts may have to be described with sufficient precision. More generally, contracts for the sale of future assets (or for the creation of security interests therein) may be undermined when they are not certain to emerge, although this may impact more on the validity of any transfers thereunder, therefore again on the proprietary aspects of the sale. Indeed this then goes to the notion of identification and specificity in property law and it may often still be said that although for proprietary effect they are necessary, in contract, therefore for contractual effect between the contracting parties, the identification and specificity requirements are not of a similarly important nature, while under more modern property law, classes of assets may now also be transferred and individual assets need no longer be identified, although especially in civil law countries, this may remain exceptional and therefore problematic, see Volume 4, section 1.1.3 below. In common law countries, this is the province of equity.

1.3. The Normative Interpretation Technique in Practice: The Civil Law Notion of Good Faith, the Common Law Alternatives, Liberal Interpretation and the Role of Other Sources of Private Law 1.3.1. The Modern Normative Approach and the Concept of Dynamic Contract Law Interpretation or the notion of contractual construction has already been mentioned several times before and modern contract theory, which has a considerable bearing on the subject, was introduced in section 1.1.6 above. The newer approach is in civil law countries sometimes also 150 The Vienna Convention does not itself deal with the subject of validity any further, see Art 4, and therefore does not concern itself either with the effects of incapacity, mistake, misrepresentation, undue influence, fraud and illegality on the existence of the sales contract. The consensus, the importance of the parties’ intent, the subject of implied conditions, and the impact of their pre-contractual duties on the conclusion of the sales agreement are also not covered. The Convention does not deal with representation or agency powers and their proper use

68 Volume 3: General referred to as the normative interpretation technique (see also section 1.1.7 above), then mostly associated with the operation of good faith in contract.151 In that context, it may acquire a special meaning or significance. It was already said that in civil law, good faith may then no longer be the mere opposite of bad faith, but becomes an interpretation technique, at least in the commercial sphere, although there remains much confusion on the subject (see, for example, Article I.-1:103 cf Article III.-1:103 DCFR, and further section 1.6.4 below) and much remains to be done. Following the discussion of the modern civil and common law approaches to contract and their development in the previous sections, this important subject now needs to be revisited in some greater detail. In the codification countries of the civil law, in modern times, it poses more particularly (but not only) the question of the relevance of other (competing) sources of law in business transactions, perhaps especially so at the transnational level (see Volume 1, section 1.4.3), a subject which the modern common law cannot truly avoid either. But the main concern may be the ever-greater gap between law and fact, contract and contract normativity, and the ever-changing factual patterns a contract means to or must cover. All contracts, like all other legal relationships, need a measure of interpretation, whether they are informally or formally expressed. In contract, this is obvious in the case of informal agreements, when there is no writing and there may be no more than inferences based on conduct. However, even if there are declarations or there is a text, words by themselves may not be clear152 and in any event are likely to derive their true meaning from their present day context or, in the case of contracts, from the types or nature of the parties, from their objectives, or type of dealings, and from the environment in which they mean to operate and ever changing situations or eventualities they must cover or can no longer do so; in this book it leads to a different contract law for consumer and professional transactions. That is relationship thinking.

either; in fact it expressly removes undisclosed agency from its scope: see Art 1(2). The UNIDROIT Principles for International Commercial Contracts are more comprehensive and also cover agency relationships. 151 The concept of good faith in contract should be clearly distinguished from the concept of bona fides in the acquisition of assets, therefore in proprietary matters, see Vol 4, s 1.4.8, also relevant with regard to charges in assets which a bona fide purchaser or purchaser in the ordinary course of business of commoditised products might be able to ignore upon a sale and purchase: see s 9-320 UCC. There it is largely a question of knowledge. That is also relevant for the concept of the holder in due course of bills of exchange or promissory notes. In these situations, it concerns the important issue of transactional and payment finality, which is a proprietary issue; see also the discussion in Vol 4, ss 1.4.5ff. Like in the case of contractual good faith, one major question then is whether bona fides of a transferee or payee in this regard is of a more subjective or objective nature. In other words: may buyers depend on their lack of knowledge or is what they should have known but did not find out also relevant? Is there a search duty and how far does it go? It is clear in this respect that where charges or liens are filed, omitting to check the relevant register may not excuse buyers, at least not in real estate transactions. They have constructive notice, but it may be notably different for chattels and intangible assets under Art 9 UCC, where there is no search duty for buyers in the ordinary course of business in respect of filed charges or liens. The modern tendency is to protect the commercial flows in all movable property, especially in commoditised products including money, see Vol 4, s 1.10. That means protection of all transactions in the ordinary course of business regardless of adverse interests unless it amounts to abuse of right or fraud. Again, it is the idea of transactional and payment finality, but it is a newer concept that has not yet found more general expression, even by G Gilmore, ‘The Commercial Doctrine of Good Faith Purchase’ (1957) 63 Yale Law Journal 1057. Good faith or bona fides in this sense is in civil law also important in connection with acquisitive prescription, see Vol 4, s 1.2.3 below. Here again there are important variations: German law requires the bona fides to hold during the whole prescription periods, Dutch law only at the beginning. As we shall see in Vol 4, acquisitive prescription has no significance in common law countries. 152 A concern also well known in the US, see Justice Traynor in Pacific Gas & Electric v GW Thomas Drayage & Rigging Co 442 P2d 641 (Cal 1968).

Volume 3: General 69 In day-to-day life, the determination of the rights and duties of the parties under the contract becomes the prime issue and the progression of the contract until its natural end the major concern. This is not primarily a question of litigation or dispute resolution but foremost one of practical guidance throughout the life of the agreement. It may well go beyond mere interpretation and also cover supplementation or even correction of the contractual terms where appropriate. Litigation is or should be the exception, much to be avoided, and rather suggests a contract’s and the law’s failure. It only provides the ultimate test in terms of allocation of a contract’s consequences which was already earlier identified as an imperfect art. It cannot be the sole object or even prime objective of the law of contract, which is above all to make life easier and better in all of our daily endeavours through co-operation rather than conflict. In international transactions, conflicts should not derive merely from differences in local laws either, unless fundamental policies are involved, which are in any event likely to become more uniform in globalising professional dealings.153 How much interpretational freedom judges or even arbitrators have when applying rules to factual situation, whilst potentially recasting them, was earlier identified as an institutional and in many countries, for the judges, even a constitutional issue: see further the discussion in section 1.3.5 below. This freedom cannot be unlimited but in the normative approach has acquired a different dimension because of ever faster social and economic change, although arbitrators in particular remain here primarily dependent on the representations or submissions of the parties; they are not judges or authorised spokespersons for any law unless perhaps the public interest becomes seriously engaged (see Volume 2, section 1.1.10). In practice, the text of the agreement but also the offer and acceptance that precede it and, in a more modern approach, the broader notion of conduct and (detrimental) reliance will be considered first and foremost, but it must now also be accepted that other more objective considerations may enter and expand or ultimately even correct any original intent, promises or expectations. To repeat, especially in transnational commerce and finance, other sources of law are to be considered in this regard as there are fundamental principle, custom and practices, treaty law (if existing), general principle besides party autonomy. Further considerations may be pressing notions of justice, social peace and efficiency, it was already said several times also, the latter more especially in professional dealings. There is also public policy. We have seen that these more objective notions impose now potentially also pre-contractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation duties, there may be others, even if perhaps they are less urgent in professional dealings; again, that is the consequence of relationship thinking. Another essence is relationship thinking, therefore different especially in respect of professional and consumer dealings. The essence is that there are or may be important non-intentional/non-consensual or objective considerations in contract, its formation and operation, see section 1.1.4 above. On the other hand, it has also been noted that even the parties’ autonomy, although a central building block, both in contract and movable property is likely to be explained at least in modern transnational law or the modern lex mercatoria in a more independent or objective manner. It is on the one hand not a state licensed concept but on the other not intention or consensus dependent either. It was already mentioned that this may become clearer especially in the corporate professional 153 This is an important and contentious subject that begins to distinguish between the law in action and the law in litigation: see for this discussion Vol 1, s 1.4.17. It means that law, at least if it is not absolutely mandatory as a governmental command or public order requirement, is default rule (or directory law) and as such only guidance and even in litigation is likely to be applied differently, therefore with greater flexibility and an eye for the circumstances and nature of the relationship of the parties and their objectives.

70 Volume 3: General sphere where many people or teams are involved and the existence of psychological intent in terms of the parties’ consensus was always less real. It was submitted that transnationally, this more objective approach to party autonomy may be especially important as it enhances its status and legitimacy as an independent source of law and eliminates the earlier anthropomorphic features and excessive governmental concern about their manifestation, leading in civil law to party autonomy having lost its independence and its operation nationally having become subject to government licence in the codes. It may be recalled in this connection that in pre-codification times, there was no need for such licence. The limit was only in public policy, in those days expressed in terms of justa causa, see section 1.2.6 above. Importantly, this kind of party autonomy may now also move into property law, as we have seen, equity having been the conduit in common law countries. It was noted before that this may narrow the traditional distinction between contract and property significantly in professional dealings, potentially also transnationally. Another instance is the area of set-off and netting where at least in the swap market increasingly supported by transnational customary law, the ISDA Master Agreement has started to prevail and gives contractual parties substantial power over third party creditors in the expansion of their recovery rights. It means that parties must be aware that rights and obligations may independently arise and terminate during the entire contract period and are not solely determined by them or even absolutely fixed at the time of acceptance of an offer, which also results from the more modern conduct and reliance nature of creation and termination of contractual rights and obligations which was identified as a continuing process in duration contracts and confirms the dynamic nature of modern contract law. It was said, however, that at least in professional duration contracts, the contract text is likely to be interpreted literally and remains therefore an important anchor and that, beyond this constraint, the contractual rights and duties are often defined by risk acceptance in respect of developing eventualities within the scope of the contract unless this becomes manifestly unreasonable taking properly into account relationship thinking. Defences and excuses thus become objective and are limited and explained accordingly unless the contract itself says otherwise, and the objective law is then unlikely to change the risk profile. The only true objective excuse is the other party defaulting in a major condition of the contract. The ascertainable objective purpose of the agreement may also play a role in this connection, more particularly the idea behind purposive and teleological interpretation, although it may well go beyond it. That is the common law approach, which is likely to be followed transnationally in professional dealings. It has already been posited several times that in civil law a more objective concept of good faith may increasingly be apt to express and support similar notions or attitudes, when good faith then stands for a liberal interpretation technique reintroducing the traditional sources of law, in particular fundamental and general principle, custom and practices, at least in the context of interpretation to help bridge the ever greater divide between norm and fact, rule and need, and is then not merely the opposite of bad faith, whilst consideration of justice, social peace and efficiency may also enter when sufficiently pressing. Importantly, proper relationship thinking also becomes part of it. Good faith has much further to go here. Article I.-1:103(1) DCFR, while referring to the relationship between the parties may be here of interest, but it is relevant only in connection with its narrow notion of good faith, still as the opposite of bad faith, and the requirement of openness of parties in their dealings. Public policy or order should remain separate although often also identified with this good faith or normative approach, but is then no longer strictly private law. Another facet is that it may still be national, even in transnational relationships to the extent transactions in conduct and effect come demonstrably on shore in the particular country, see further the discussion in Volume 1, section 2.2.6 following.

Volume 3: General 71 An altogether more modern model of contract was proposed—see section 1.1.6 above— which generally puts the emphasis on justified expectations determined by conduct, detrimental reliance or a commencing of performance, duties of care and co-operation, of disclosure where appropriate and necessary, of investigation and loyalty, sometimes of renegotiation, and on what objectively can be marked as the contract’s purpose. Again, it should immediately be added that in professional dealings the emphasis is likely to be on roadmap, risk distribution and management, and efficiency, including a large degree of risk acceptance of subsequent external events unless becoming manifestly unreasonable for the professional debtor in its business overall unless the contract says otherwise but it is even then literally and often restrictively interpreted. In this approach, intent and any related wishful thinking or ideas of blame or fault are not relevant. In this connection in civil law, good faith, once properly understood, may also require a considerable degree of literal interpretation of the contractual text and become more careful in the defences and excuses. Again, this was earlier identified as a typical expression of relationship thinking.154 As we have seen in sections 1.1.5 and 1.1.6 above, modern contract theory increasingly supports this and maintains as a consequence a dynamic concept of contract law, which then also becomes the modern test in litigation, to be supported in civil law by the normative interpretation technique.155 It was submitted that this insight is of fundamental importance in transnational dealings between professionals, therefore in the modern lex mercatoria, and may go well beyond teleological interpretation, especially where it also takes into account pre- and post-contractual negotiation or renegotiation duties as well as pressing ethical, social and efficiency considerations or public policy and public order considerations.156 In civil law, the development of the good faith concept has here proven to be of great importance, but it has much further to go in resolving these issues and, as we shall see, there is hardly any unanimity on what it stands for. The introduction of an altogether dynamic notion of contract, which would be its focus, itself remains contentious, especially in Europe, also in the common law of the English variety, to which case law testifies. It is considered to sit uneasily with the notion of certainty which may prove to be of such low quality that it becomes destructive and is in any event, it was submitted, only of major importance when it comes to transactional and payment finality, which is a proprietary concept.

1.3.2. Roman Law, Ius Commune, Nineteenth-Century Thinking, and the Modern Revival of Multiple Sources of Contract Law in Civil Law Behind the Good Faith Notion It would appear that Roman law and the ius commune did not develop a coherent approach to contract interpretation in this (or any other) connection (see also the discussion in Volume I, section 1.2.13), perhaps not even of contract, although as we have seen, it accepted many sources of law and also managed to develop some more general framework. As far as interpretation

154 See n 4 above for the situation in civil law countries. 155 In n 47 above, it was noted that the term ‘normative’ is used here as legally normative or relevant, not merely in the sense of what is morally or otherwise desirable as is more common in the positivist tradition. Extra-legal objectives, not only as urgent moral, but also as sociological or economic considerations, may then enter into the law as legal norms (hence they become legally normative) and as such be taken into account in its interpretation. As we shall see also in s 1.3.4 below, this does not then always mean the moral high ground per se and good faith interpretation can be entirely pragmatic or common sensical. 156 They were previously discussed also in connection with statutory interpretation in Vol 1, s 1.3.3.

72 Volume 3: General was concerned, in the course of time it abandoned a restrictive construction of the wording of the contract in favour of greater flexibility, but still with a bias towards a literal attitude to the wording of the agreement if expressed in writing. Even in the natural law school of Grotius and Pufendorf, there was no fundamental new beginning, although it started to focus also on the role of aequitas.157 This may still sound familiar to the common law lawyer. In civil law countries, this approach to contract and contract interpretation was, however, succeeded by typical nineteenth-century will theories,158 which led to interpretation in a more subjective manner, in which consensus of the parties and the moment of contract formation moved to the centre and offer and acceptance became the key. In its focus on the creative force of the individual, will theories reinforced in this manner the anthropomorphic attitude to contract and all other forms of co-operation, even though the notion of consensus implied at least to some extent a joint will, which was then perhaps more objective and came, as we have seen, eventually also to include a feature of reliance on what a party could truly believe the other’s intention was. All the same, the emphasis in contract interpretation was on finding the presumed intent of the parties as crystallised at the moment of the formation of the contract, which was connected to the moment of the formal acceptance of the offer and the idea of the consensus. Its corollary was the notion of blame or fault in the case of non-performance, which again underlined the subjective aspect of the contracting facility in civil law and its anthropomorphic nature. But even in a more personal setting, particularly in labour and consumer dealings, there came some more objective normative impulse in the protection of weaker parties regardless of the (clear) wording of the contract. This may now also find expression in notions of protection of investors against their brokers or other financial intermediaries, marked further by notions of dependency and may go for all consumer law more generally. Again, in civil law, this type of relationship thinking is by no means fully developed as we have also seen and there is in particular still an inclination to extend consumer protections of this and any other kind to all under similar types of contracts, therefore even to professional (corporate) dealings and activity.159

157 See for this potential supplementation of the parties’ rights and duties by notions of fairness in the ius commune R Zimmermann, The Law of Obligations (Boston, MA, 1992) 548, 621ff and 807. 158 See n 27 above. It has already been noted that the subjective interpretation technique was in its consequences untenable, and was from the first tempered by a more literal interpretation based on declarations. Hence the psychological versus the literal interpretation of the contract, sometimes also referred to as the subjective versus the objective interpretation methods. Yet as the focus of interpretation, neither ‘will’ nor ‘declaration’ proved satisfactory. In fact, at times, they could often hardly be distinguished as in the subjective method, the wording of express agreements, therefore the declaration, still had to be the starting point for interpretation while in cases of doubt or incompleteness even in the declaration or literal interpretation method, there would still be a search for the parties’ true intent. It was later followed by a more objective or normative approach to interpretation of the contractual rights and obligations of the parties, heavily dependent on reasonably reliance notions, as we have seen. It meant an objectivity of a different sort, much guided by the good faith concept. Note for the more objective as against subjective notion of contract also n 41 above and accompanying text. Traditional common law also shows these problems: declarations are greatly important and often still taken literally as we have seen, but in the case of doubt, ambiguity or contradiction or when there are gaps in the contract, implied terms must often come to the rescue, see for these also nn 33, 88 and 97 above. It was noted that this suggests an instant shift from the one extreme of the objective approach to the other of the subjective approach. This clearly proved undesirable and was balanced by the reasonable person approach, different for different trades, and in business much dependent on the perceptions in the trade concerned. It only suggests that it has never been easy to find a single convincing approach to interpretation anywhere. Ultimately in common law, traditional pragmatism continued to prevail in an atmosphere of restraint and caution. Unlike in civil law, in business, there was no tendency towards an approximation of consumer protection. 159 See also the comment in n 4 above.

Volume 3: General 73 Although in civil law, the use of the good faith notion thus became indicative of a more normative and therefore more objective approach to interpretation, it was noted before that there is no uniformity in its precise scope and extent and in any event the attitude should be different for consumer and professional dealings At least in the latter, it was submitted that good faith if properly understood reintroduces into contract interpretation the other traditional sources of law which the codification effort had tried to eliminate. To repeat, what it may then in particular purport to do is to allow the norm from whatever source to respond and be tailored better to the facts or allow for a selection of the facts that will relate them better to the appropriate norm or will result in the application of another norm or of an adjusted norm on the basis of what is in result more practical, normal, fair or (in business) makes more sense, particularly important in a fast moving society. This was spotted as an important institutional or structural issue, which in dispute resolution concerns the power of judges and arbitrators, especially the former. The latter depend on and are more limited by the submissions of the parties in this connection. The drawback is that it introduces an uncertain element at the moment of contract interpretation, in particular when it comes to litigation, and then relies a great deal on the insight, experience, discipline and restraint of the judiciary or arbitrators (although again potentially quite different for either).160 160 See for this discussion also Vol 1, s 1.4.18 and Vol 1, s 1.1.10 and text at n 158 above. Summarising the foregoing and allowing for differences between various countries, it may be said that in civil law, the evolving normative approach to contract interpretation in professional dealings (see s 1.1.7 above) may ultimately align with modern contract theory (see ss 1.1.4-6 above) and achieve in particular the following: (a) As to the formation of the contract, it may still use the consensus notion but abstracts it from the individual desires of the parties and considers in that context not only declarations but rather reliance on the expressions, actions or conduct of the other party if such is reasonable in the circumstances as it is perceived to be in the particular situation or in commerce in the particular trade or business. Ultimately offer and acceptance may become a sub-category of conduct and reliance. In business, it may require this reliance to be detrimental, suggesting a need for investment before a claim can be made under the contract. (b) It distinguishes in this connection increasingly between the pre-contractual, contractual, and postcontractual phase of the contract. At the time of formation, in the pre-contractual phase, it may then impose extra information or disclosure duties and duties to (continue to) negotiate. Thus besides the contractual terms, fundamental legal principles may be considered, justifiable reliance may be honoured, and abuse avoided. It confirms that contractual rights and duties do not merely emanate from the parties’ intent or party autonomy and emerge continuously during the contract period. But there will also be relationship thinking: pre-contractual duties may thus be less relevant in business than in consumer dealings; in the performance phase, special co-operation duties may similarly emerge besides the contract and in the post-contractual phase special renegotiation duties. Again this is balanced by relationship thinking. (c) In doing so, the normative approach to contract interpretation may increasingly put the contract in its context and especially in the case of doubt or ambiguity will also look at what the objectively ascertainable purpose was, what is practical and makes sense or is reasonable in the circumstances, that means in commerce, in the trade or business concerned, taking into account peer group thinking, understanding and perception. In considering the broader environment in which the contract must operate, it may then also consider the moral, social and economic context of the contract, if sufficiently pressing, more clearly in contracts with illicit purposes, in gaming contracts and contracts in restraint of trade, which may then even protect third parties against anti-competitive behaviour. (d) In extreme circumstances, it may even correct the express language of the agreement, especially when clear hardship or manifest unreasonableness results. Alternatively, the notion of abuse of rights (exceptio doli) in seeking strict performance may be used but may amount to similar relief, always taking into account proper relationship thinking and in commerce and finance the business environment and what is considered normal in those circles. (e) The normative approach to contract interpretation, when properly adopted and while seeking to take into account also the nature of the professional or other relationship between the parties, may thus lead to a higher degree of risk acceptance for professionals. This is an approach which may be aided by the fact that in corporate dealings an anthropomorphic idea of will and intent is hardly realistic any longer. Good faith

74 Volume 3: General Again, what happens here when properly considered is that other sources of law, such as fundamental principle, now sometimes human rights or public order related (in the latter case especially to combat abuse, including anti-competitive behaviour) revive behind the notion of good faith or in the normative interpretation approach, and overtake even domestically the codification texts and its system thinking, including extreme will notions, which figured large in that context, at least in contract. It may also revive custom and industry practices, and general principle (separate therefore from the system of the relevant codes). Even party autonomy may thus regain its original independent status as a source of law (no longer depending on statutory licence, but probably in a more objective manner). That would be so more especially in professional dealings. This was traced for the EU in Volume 1, section 1.4 particularly in respect of fundamental and general principle. To repeat, good faith then stands not only for institutional change in terms of the power of the judiciary in the interpretation process and its approach to construction, but more precisely for the revival of these independent sources of law. Most importantly, in this context it may even stand for the recognition of different legal orders in which these sources of law may play out (differently), such as the transnational commercial and financial legal order for professional dealings, and domestic legal orders in which the consumer operates and is protected. Good faith may then even promote the transnationalisation of private law in professional dealings. Again, the nature of the parties and the legal environment of their dealings lead to this and the modern good faith notion may respond. For professionals, efficiency considerations and cost benefit analysis may point in a similar direction. Civil law, if it wishes to, can progress much further in this way but is in a timid phase in which academia hides behind nationalistic system thinking and extreme legal positivism, thus creating considerable tension that leaves the appellate jurisdiction also struggling. As mentioned in the first Volume, even the German Academic Council is exasperated by this ‘positives Norm und Applikationswissen’ (‘positivist norm and application thinking’) that is not interested in interdisciplinary and empirical research and ignores transnationalisation.161 In matters of interpretation or construction, common law generally remains more circumspect. As we have seen in section 1.1.6 above and will see further in particular in section 1.3.7 below, at least for professionals it depends largely on a literal interpretation of the parties’ declarations, supported by the parol evidence rule, although it was also pointed out that it has other tools to reach acceptable results. It is relevant in this connection that common law never systematically monopolised the scene or eliminated the various other sources of law altogether, even if non-state law such as custom also became less dispositive, but it retained more force in commerce.162 in respect of professionals may then become a narrowing rather than expanding concept and lead, eg, to literal interpretation of their contract, especially if expressed as roadmap or in terms of risk management and risk acceptance. It has already been said that good faith does not therefore always give more rights; it may give fewer which may for professionals also mean fewer pre-contractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation duties. (f) The normative approach is then also likely to have a fundamental impact on the defences and excuses, which are more likely to be narrowly construed in respect of professionals unless the contract itself suggests otherwise. (g) Damages will be the normal remedy, not specific performance, and expectation damages only to the extent clear promises have been made and have been (detrimentally) relied upon. 161 See Vol 1, n 56. 162 It has already been noted that common law also uses a more objective notion of party autonomy (which may at the same time reinforce its status as independent source of law), see s 1.1.4 above; it is stronger therefore in common law countries. Moreover, equity continues to operate in the areas in which it has always been active, see especially s 1-103 UCC in the US, even though, as was pointed out before, especially in England (but not in the US) the autonomous status of these sources of law, even of custom within the common law, also weakened because

Volume 3: General 75 Also from this point of view, the practice of the common law needed the notion of good faith less. These other sources of law, especially custom or practices, could even be transnational, although in international transactions again in England transnational custom may remain particularly suspect, probably much more so than under the UCC in the US. Indeed, it may be observed that the English legal profession remains less impressed with legal transnationalisation currents than, for example, the French. Also, the Americans are less parochial. It suggests extreme nationalism, an often mistaken idea, and veneration of the notion of certainty behind borders (see Volume 1, section 1.1.7). It helps the legal profession in terms of the credibility of their advice, which may otherwise become more speculative; hence also the addiction to a most formal nationalistic approach to conflicts of law resolution. It is odd, though, because the common law has ample means to recognise, for example, international custom and practices while its legal profession stands to gain greatly from a more open attitude in this respect, enabling it better to protect the international commercial and financial business sector and its flows, where it also has the English language on its side as well as the fact that the common law was in essence always more commerce oriented and often more practical and finds much support in equity.

1.3.3. Interpretation and the Notion of Good Faith in Civil Law Traditionally, references to good faith may be found in civil law codes in connection with contract interpretation, in Germany especially in sections 157 and 242 BGB (reference may also be made in this connection to sections 119, 226, 819 BGB), in France in Articles 1134 and 1135 (old) Cc, since 2016 more generally accepted in all phases of the contract under Article 1104 (new), in Italy in Articles 1337, 1366 and 1375 CC, and in the Netherlands in Articles 6.2 and 6.248 CC. As we shall see, it is not commonly a defined term and in its modern version good faith has very much proven to be a multifaceted notion, not therefore at all of one kind, and plays many roles, now also beyond these statutory references in contract, and may operate in principle in all inter-party relationships, although potentially in very different ways, again that is relationship thinking. It was already said several times that as such it is not then merely the opposite of bad faith but acquires another function and potentially many other meanings, see further section 1.3.4 below. Upon a proper analysis its main function is, it was submitted, as a (more liberal) interpretation tool, at least in professional dealings, through which (a) facts and law can be better related and rules and needs better considered, and (b) all other sources of law return, through which it sometimes stands for fundamental principle and may then become the opposite of bad faith, which appears to remain the view of the DCFR. But good faith as interpretation tool may also refer to custom, general principle and enhanced (or more objective) notions of party autonomy. It is then seen as absolutely mandatory only where it appeals to fundamental principle. As an interpretation tool, pressing notions of justice and social peace or similar values may also figure, as well as, in appropriate cases, the notion of efficiency and cost/benefit analysis. It may then even appeal to notions of public policy as previously noted, although public policy is probably best seen as a separate normative category. The above-mentioned statutory references show that good faith was traditionally more especially important as an interpretation tool in the performance of contracts but figured perhaps in all of the nineteenth-century English idea that all law issued from sovereigns—see Vol 1, s 1.3.3. However, at least the status of custom and industry practices was less affected in commerce and finance, while even in respect of party autonomy as an independent source of law, there is no doctrinaire attitude, see Vol 1, s 1.4.8.

76 Volume 3: General inter-relational situations. It was already said that in this connection, it acquired early on special relevance in respect of weaker parties as an expression of relationship thinking, like workers, later becoming important for consumer protection more generally and later still for the protection of smaller investors against brokers. This is reminiscent of fiduciary duties in common law. It also entered the area of excuses when, for example, force majeure or especially hardship because of changed circumstances were invoked or where demanding punctual performance would become unconscionable or an abuse of right, although arguably again of lesser significance in business, although it was also said that per contract type this quickly spilled over into professional dealings in the civil law unitary approach which still makes insufficient distinction for lack of relationship thinking. Good faith may also play a role in the avoidance of the contract for reasons of misrepresentation or mistake, although even in these cases a large dose of risk acceptance should increasingly be deemed implied for professionals as was shown before, again a consequence of greater relationship thinking and credibility in the operation of the good faith concept in civil law. In the newer approach, to start with the formation of contract, (detrimental) reliance rather than intent suggests itself here as a new departure. Good faith is then to support a more objective approach and may also lead to pre-contractual disclosure and negotiation duties, contractual co-operation duties, and post-contractual renegotiation duties as we have seen.163 In many civil law countries, the good faith notion was borrowed to this effect from interpretation where, as just mentioned, it more traditionally operates. In other countries, the negligence concept may here still be preferred, especially in France, although it may be less clear after the 2016 amendments. This will be further discussed below, although these notions may again have lesser force in the professional sphere where, given proper relationship thinking, exactly the notion of good faith itself may require a more restrictive interpretation of these duties and even a literal interpretation of the parties’ contract text as their roadmap and risk allocation document as already mentioned several times before. It suggests that good faith should indeed be considered as a liberal interpretation technique rather than some higher normativity per se. At least in the professional sphere, it is then not truly a new independent source of law in its own right. This is still not reflected in the new (2002) sections of the BGB nor in the 2008–09 DCFR as an academic model for an EU codification in the traditional sense, nor is it in the French CC as amended in 2016. The essence is that the good faith notion in professional dealing, if properly understood, means protection under the various sources of law it reintroduces only and then merely against manifestly unreasonable consequences measured by the standards of these professionals themselves. This touches on the major societal (changes in) values in the (international) marketplace. Public order or public policy whether or not expressed in regulation may support this further but may also impose more severe standards, especially in situations of market abuse, including anti-competitive behaviour, fraud, money laundering, tax evasion and corruption. Here we leave mere considerations of private law or the balance of interests between the parties to the contract behind. It may no longer be a good faith issue proper, which is a private law concept, although there may be overlap. This is only to repeat that although particularly in Germany, but no less so in Switzerland, Austria, and the Netherlands, all seem to accept the better protection of weaker or less-informed parties and may make, in this connection, even some distinction on the basis of the nature of the relationship between the parties, relationship thinking is not yet fully developed in these 163 In fact, Article 1337 of the 1943 Italian CC already referred to pre-contractual good faith. In Germany since 2002, concepts of pre-contractual (s 311(2) and (3) BGB) and other accessory duties extending to the postcontractual phase (ss 241(2) and 280 BGB) as well as the adjustment of contractual terms (s 313 BGB) have been put on a statutory basis through extensive amendment of the contract law in the BGB.

Volume 3: General 77 countries, which bears the considerable and demonstrable risk that newer consumer protection notions spill over into the commercial sphere. In non-Germanic civil law countries, in the area of contract, it may on the other hand remain less clear how far the concept of good faith goes. Indeed, French law is here traditionally more reserved than German law and may remain so even after the 2016 revisions of contract law.164 It was pointed out before, in footnote 4 above, that the 2002 German amendments were partly inspired and necessitated by the 1999 EU Directive on Consumer Sales and Guarantees, which only served to further favour a consumer law ethos, supported by a CISG overhang with its anthropomorphic formation section. In France some of this ended up in its Code Consomation after the 2016 amendments, suggesting therefore a clearer distinction between consumer and professional dealings, also supported by the Code Monetaire and Financier of 2001 for professional financial services, but the ethos of the general part of contract in the French CC remains anthropomorphic, probably even more so after the 2016 amendments with their repeated references to the will of the parties, supported by a good faith notion that remained undefined but was perceived as mandatory, an expression of a protection policy in a consumer law sense. In the civil law of contract, there are, however, special reasons for the more modern good faith notion to stand for a liberal interpretation technique and the reintroduction in that manner of other sources of law than mere statute. Again, the main problem is that the old statutory contract framework, based largely on the anthropomorphic notion of a private deal between two individuals motivated by their psychological intent or will, no longer suffices,165 clear in particular in the corporate or governmental world of major contracts signed by senior people unaware of the details, and often negotiated in different parts by other people who may hardly be aware of each other, while the text may come from outside lawyers who are probably the only ones who understand it but are not a party. Perhaps even more importantly, in terms of legal texts and system thinking, situations or factual configurations more generally have become too different or incongruent still to be covered by the same preconceived contract types or models of the older codes as society moves ever faster and in more different directions. Thus, fact and norm are drifting ever further apart from each other all the time for good faith to fill that widening gap. A third issue may be that when contracts are concluded with larger groups of people or multiple legal entities, they start to have a much greater impact on their environment, so that there arise special needs for larger groups of parties, such as, from early on, workers and later consumers, and now also smaller investors under financial service contracts. That gets closer to the public interest. The binding force of standard contracts as an organisational tool of a company is a special feature, already referred to in the context of modern contract theory in sections 1.1.6 and 1.1.7 above. We now also have so-called smart contracts, see section 1.1.10 above.166 It may imply special duties of care and responsibility for the organising entity. Again, the introduction of this type of legal normativity 164 See for more recent Dutch case law, however, also nn 4 and 48 above. 165 The term ‘good faith’ (or Treu und Glauben) still suggests this personal subjective element and may therefore strictly speaking no longer be a good term. The key is the normative or more objective approach in which it is now increasingly subsumed. For this reason, the new Dutch Civil Code avoids the term and refers to ‘reasonableness and fairness’ instead. This terminology risks, however, a weakening of the concept in that it expresses to a lesser extent a sense of urgency or pressing need, although it does not need to reflect such concerns. 166 This should also be seen against the background of greater risk acceptance particularly by professionals to which, in the DCFR, a reference is made merely in connection with a change of circumstances in Article III-1:110(3)(c), mistake in Article II-7:201(2)(b), and, more indirectly, force majeure in Article III-3:104(2). Again, this demonstrates in particular a lack of relationship thinking, which the good faith notion as expressed in the DCFR was still not able to grasp.

78 Volume 3: General can be expressed through the good faith concept as a matter of fundamental principle in terms of values, but also in terms of the effective operation of the international marketplace and its evolving customs and practices. As it has proved impossible so far to provide for a newer coherent set of contract rules or indeed for an updated contract model altogether, at least in the professional sphere (see section 1.1.6 above), the pressures appear to be the same everywhere. For civil law, especially in Northern Europe, it may indeed be argued that the stress caused in the system of contract law in this manner has so far largely been absorbed by the notion of good faith in the formation and enforcement of contracts, even though often timidly and incompletely. Hence nevertheless the liberal interpretation technique in respect of ever older and incomplete statutory texts but it does not mean judicial discretion as is often believed, rather, as we have seen, the reintroduction of the other traditional sources of law that codification had meant to eliminate, in particular fundamental principle, customary law, general principle, and party autonomy as another independent source of law (although still subject to public policy and public order considerations but not to a public licence). It is clearly connected with the impact of modern contract theory and the normative approach, and the revival of many sources of law, suppressed by codification thinking. To repeat, this allows considerations to be taken into account that may go far beyond the parties’ intent and now even beyond the statutory texts, a development by no means completed in civil law, see again the discussion in section 1.1.4 above. Importantly it also means greater sensitivity to facts and needs assuming further proper relationship thinking.

1.3.4. Good Faith as a Multifaceted Notion The notion of good faith in its prime function, here identified first as better relating ever newer fact situations to the ever-older norm and even in tailoring that older norm to the newer facts (themselves being selected on the basis of their relevance in relation to the chosen or rephrased norm) may not have changed fundamentally over time, but as the distance between fact and norm may now often be greater, there may be more to bridge. At least in civil law, that is—it is submitted—what the good faith or normative approach in essence must do and achieve with sensitivity to the other traditional sources of law and in the process also to extra intentional or non-consensual duties in the various contract phases and to pressing ethical, social and economic considerations as well as to relationship thinking. To repeat, it is or has become in this regard the foremost (liberal) interpretation tool, at least in contract in professional dealings and in any other relationships where parties exercise or claim rights which allowed the reintroduction of all other traditional sources of law which codification had tried to expel. It was already said that it does not mean greater judicial discretion per se: any void is filled by these other sources of law which revive in this analysis behind the good faith notion, notably fundamental and general principle, custom and practices, and a more objectivated notion of party autonomy (and the contractual text), which codification had sought to eliminate in civil law as independent legal sources as we have seen. Good faith may thus supplement or even correct statutory contract law (as well as the contract itself when the other sources of law are higher than party autonomy). To this end, at least in practice, in the northern European civil law countries, the old good faith (interpretation) notion has been stretched to what is now also called the normative interpretation technique in order to provide the (statutory) cover,—see for the special importance in transnational law Volume 1, section 1.4.3 and further section 1.3.6 below. As noted, good faith has in the process become a much more dynamic concept, not merely the opposite of bad faith

Volume 3: General 79 and, if properly understood, has in contract evolved in fact into a modern facility of destruction, change, and regeneration of legal norms, especially statutory rules. It could potentially also discount globalisation and transnationalisation of the law in international business cases. On the factual side it then allows for a more selective and discriminating approach to differing fact situations and differing relationships or needs, while on the norm side it is comfortable with many sources of law. It then also serves as the basis for more judicial intervention (see, for the institutional consequences, section 1.3.5 below), but only under the norms the various sources of law suggest, and has (with those limitations), even in civil law, ultimately confirmed the courts in an (informal) rule-formulating function, although restraint is commonly pleaded and indeed hemmed in by the other sources of law and in arbitration by the pleadings of the parties. At least in the law of contract, good faith is as such at once a destructive and a regenerating or norm-renewing force, which also liberates us from intellectual prejudice or laziness while applying outdated or deficient models or rules which exclude from consideration newer situations and/or newer (value) contexts whilst declaring them legally irrelevant or ignoring them and newer needs altogether. It has been pointed out before that this is a well-identified danger in all legal system thinking, particularly relevant therefore in civil law codification countries,167 the reason perhaps why good faith is a particularly strong and very necessary concept there, even if its true role may still not be fully understood and remain contested. Earlier the irrelevance of precontractual behaviour was a potent example of system insufficiency, only remedied in case law by good faith notions, now often, as in Germany since 2002, incorporated in the prevailing codes through statutory amendment (although, surprisingly, not in the new Dutch Civil Code of 1992). Indeed, good faith has a multifaceted character. When properly considered, it is sometimes norm (derived from whatever legal source),168 sometimes fact.169 It is sometimes judicial discretion and sometimes judicial limitation. It may be legal principle, but often refers to a more precise legal rule once the particular fact situation is known. It is sometimes highest norm (if morally, socially or economically sufficiently pressing), sometimes practical norm (if promoting good sense, co-operation, reasonable care or efficiency). It may thus sometimes be mandatory, more often directory when at least professional contract parties can set the standard between them. It is sometimes legal refinement and differentiation, sometimes generalisation and system building. It may be rule formulation, at other times rule application, selecting and weighing the relevant facts and defining the legal consequences per situation (Konkretisierung). Taking into account proper relationship thinking, it may even be subjective, but is mostly objective. At one time it may set rules for judicial decision-making but provides at other times only judicial direction and guidance. It is sometimes structure, but mostly movement.

167 See Vol 1, s 1.2.12. However, abuse of the normative method is not excluded and intellectual prejudice may be as rampant as in the application of the legal model good faith is meant to correct or expand, eg, by referring to certain behaviour as ‘obviously’ contrary to good faith: see also Jarka T Onnti, ‘Law Tradition and Interpretation’ (1998) 11 International Journal for the Semiotoics of Law 26, 36. 168 It was already said that it is tempting to consider good faith itself as a source of law but this is not the preferred approach in this book, which views good faith as the facility to seek out the traditional sources of law to supplement and where appropriate correct the existing normative framework at least in commerce and finance. It suggests at the same time that good faith does not mean unlimited judicial discretion. 169 The traditional sharp Kantian distinction between fact and norm, although from a logical point of view perhaps more correct and sometimes still defended, see K Larenz, Methodenlehre der Rechtswissenschaft, 5th edn (Berlin, 1983) 128, has under Wittgensteinian influence lost its hold and it is clear that what ‘should be done’ legally may take the place of what is done when widely considered appropriate; see further also the discussion in Vol 1, s 1.2.13 relating to the meaning of legal texts. In common law countries, it may much earlier have been reflected in the maxim of equity: ‘equity considers done what should be done’.

80 Volume 3: General Good faith then also looks at the nature of legal relationships of the parties and their special interests and sometimes at the nature of their deal or its market environment and their particular features. Dependency and reliance notions may figure large. It may even bring in third parties involved in the same project or protect whole groups, such as consumers under standard agreements or even professionals when contracting is used as an organisation tool by one of them. In doing so, it may look for fairness, particularly in consumer and small company cases, and for what makes sense and is practical or efficient in business cases. In this connection, it may even introduce cost/benefit analysis. On the fact side, it is attention to the individual case and its own distinctive features and types of parties or their markets. On the norm side, it is a quest for modernisation, refinement, social and economic awareness, and practical needs which may lead to newer rules if they can be found in the other sources of law, especially fundamental principle, custom and general principle as we have seen throughout. Good faith of this nature is always inter-relational but probably still more important in human relationships than in business dealings, where, as pointed out before, it may still impose literal contract interpretation and thus restrict or confine relief. In business dealings, it also favours de-personification of contract law and limits the traditional anthropomorphic idea of contract.170 Altogether it is clear that the use of the good faith notions in contract law signals a quest for more objective criteria to determine professional parties’ rights and duties, and presents as such a further challenge to the nineteenth-century will theory and to the notion of each party’s psychological intent. It underpins at the same time a more objective notion of party autonomy, at least in professional dealings. So far, it must be said in this connection, that the formulation of particular new rules in this manner has not always had much priority in case law or in legal scholarship in the northern European countries of the civil law group that are most influenced by good faith notions. This is certainly the situation in Germany and the Netherlands, although in German doctrine there is an attempt not at defining the modern contract, especially in commerce and finance, but rather at classification of good faith functions (Funktionkreisen) such as interpretation, supplementation

170 Many definitions of good faith have been attempted but the multifaceted nature of good faith is seldom sufficiently recognised, the reason why most definitions fail. Zimmerman and Whittaker, Good Faith in Contract Law (Cambridge, 1999) 30–31 see good faith as: ‘a standard of conduct by which the behaviour of a party has to conform and by which it may be judged. It suggests a standard of honest, loyal and considerate behaviour, of acting with due regard to the interest of the other party and it implies and comprises the protection of reasonable reliance. Thus it is not a rule with specific requirements that have to be checked but may be called an “open norm”. Its content cannot be established in an abstract manner but takes shape only in the way in which it is applied.’ However, the key is that good faith is not necessarily addressed to conduct alone and does not float in a vacuum’. The DCFR also gives a definition in Art I-1:103 where it combines it with ‘fair dealing’. It is said to refer to a standard of conduct characterised by honesty, openness and consideration for the interests of the other party to the transaction in the relationship in question. It is considered particularly contrary to good faith and fair dealing for a party to act inconsistently with a prior statement or conduct when another party reasonably relied on them to his detriment. It is of interest that good faith is here still seen against the background of its opposite: bad faith, although the resulting high moral tone is combined with some more profane market criterion (fair dealing) to achieve a more objective standard. Social values are omitted, but in referring to the ‘relationship’ in question, there may be a beginning of relationship thinking, although it is more the respect for the relationship that is meant here, not its driving force and the DCFR did not break with the unitary approach either: the same rules of good faith apply in principle to consumers and professionals, see also text following n 3 above. The clear impression remains that the drafters had no real idea of what good faith truly was and how it operates; hence also the problems with its definition and the idea that the concept is always mandatory, a confusion between the moral or redistributive and the interpretational aspects. See for the UCC, s 1.3.7 below. See for its definition in the UCC, s 1-201(b)(20).

Volume 3: General 81 and correction of duties or adjustment in case of a profound change of circumstances, functions which are by no means new and are expressed in specific provisions of the BGB: sections 241(2), 280, 311(2), (3) and 313.Within these functions, there is a further effort to distinguish classes of cases (Fallgruppen), such as a) in the supplementation function, the development of pre-contractual and post-contractual rights and duties and of consumer or workers’ rights (not necessarily, however, along the lines of altogether clear rules or new contract types), and, b) in the correction function, the emphasis on estoppel, abuse of rights, individual co-operation duties, and on the manner in which the rights were acquired or are invoked as in the case of standard terms.171 German academics often talk in this connection of the inner system (Binnensystematik) of the good faith notion, referring in particular to reliance, pre-contractual duties, normative interpretation of the text, supplementation and correction techniques, the (continued) validity of the contract, the performance obligations and excuses of the parties, and, in appropriate cases, to their renegotiation duties, all originally developed on the basis of the good faith notion, moving at times well beyond mere interpretation. It is a function of the German preference for system building where academia tries to reintegrate disparate case law into the existing system, judges having become here often more inventive and less formal than German legal scholarship: see also Volume 1, section 1.2.13. For many, such an expansion of the system is then part of renewed system thinking in the sense that the existing system is in this manner deemed to continue to provide answers for all eventualities, earlier identified as a typical German intellectual ideal embodied in its codification ethos. The academic emphasis is here on application of the rule, not on its sufficiency or the policies and choices behind them and their continued validity. Rather, it is exactly the flexibility good faith brings, its dynamism, and its access to other sources of private law and relationship thinking, that should be treasured and, it was submitted, is its greater meaning and justification. Indeed, a vague rule (or as the Germans call it a Generalklausel) left to be implemented, resulting in some greater judicial flexibility in this regard, may often be better than a wrong rule or perhaps no rule at all. But again, it should be understood that any resulting discretion is not freedom or discretion per se and is in truth tied to the scrutiny of the other sources of law, which in the view here presented now often operate behind the modern good faith notion itself, see more particularly section 1.1.7 above. It must be stressed also, that so far there is here no question of a different legal framework, as equity, for example, once provided (and to a limited extent still does) in common law countries. The good faith notion presents foremost an elaboration and refinement (like the notion of estoppel or abuse of rights) or an amplification (and sometimes) curtailment of formally existing contractual or other legal rules or concepts and their application. But even in this more modest

171 See the major commentary of Palandt, Bürgerliches Gesetzbuch (Munich, 2018), at s 242, nos 2 and 13. The functions of good faith are commonly the ones identified as interpretation, supplementation or correction of the contract, in the formulation of co-operation duties in the performance and of special disclosure and negotiation duties in the pre- and post-contractual phases. In the normative approach all are rolled into one continuum, see also the discussion in s 1.1.7 above. The first three functions appeared in the Digests, there in connection with the definition of the powers of the Roman praetor in contract law (D.1.1.7 Papinianus): see also F Wieacker, Zur rechtstheoretischen Präzisierung des sec 242, Recht und Staat in Geschichte und Gegenwart (Tübingen, 1956) 20. The Fallgruppen are created by following or distinguishing precedent. They identify as such more a method of judicial activity than clear rules. Only a few clear notions developed such as the abuse of rights (exceptio doli) and the concept of clean hands, contributory misbehaviour and of lack of co-operation. Also the loss of a right to performance became accepted if there were contrary conduct or declarations on which the other party could rely as an excuse. Another development was the loss of rights when not invoked in a timely manner (Verwirkung). All are of limited application. It is altogether not a large or even novel crop.

82 Volume 3: General sense, it has still led to greater emphasis on the facts of each case, sometimes to more relationship thinking and, in appropriate cases, to a review of the moral, social, or economic consequences of the enforcement of the contract, although, again, this development is in no way complete in civil law and has further to go for professional as distinguished from consumer dealings—especially the issue of proper relationship thinking. As we have seen, in civil law countries, modern contract theory, as explained in section 1.1.6 above, and a dynamic notion of contract law are as yet not accepted in all their aspects and a psychological approach to parties’ intent is notably not abandoned. In case of doubt, the cry still goes up: ‘What did the parties mean?’, but it is at that stage seldom clear. Formal notions of offer and acceptance and a fixed moment of contract formation remain then also vivid. Will theories are much alive; blame or fault play an important role, and there are serious problems with the introduction of greater relationship thinking. It was already pointed out that in civil law not all domestic legal systems react here the same way. Again, French law, notwithstanding the generality of the formula of Articles 1134 and 1135 (old) CC, remains more hesitant as to the concept of good faith. It is true that Article 1134 CC required contracts to be performed in good faith, but already in 1808 it was made clear by the Cour de Cassation that the original intent of the parties could not be disregarded on the basis of good faith and that has been constantly confirmed.172 Equity (équité) is not seen here as an independent source of law either, although in other contexts it may be.173 In any event, in their approach to good faith, even in the performance of the contract, French courts tend to limit the use of the concept as a corrective of the contractual terms to particular areas such as abuse of rights (abus de droit) by neighbours, by employers, by parties benefiting from rescission rights, or by parties insisting on performance upon a change of circumstances. Usually it concerns instances of unequal bargaining power or the need to protect weaker parties, create special co-operation and loyalty duties, or distil sub-duties. These are all more recent developments. Increasingly, information duties are now accepted under the heading of good faith more generally even in France and this is now better expressed in Articles 1104 and 1112 Cc, which make it clear, however, that no expectation damages may be claimed in the case of breach of pre-contractual duties under the good faith heading, so that a negligence approach would appear to continue to prevail.174 It may be fair to say that French law on the whole still prefers to rely on other more specific concepts to define or redefine the parties’ rights and duties, like abus de droit or bonnes moeurs, fraude, erreur, or enrichissement sans cause, even the notion of causa, or impossibilité économique, all rejected at the time, however, to redress the impact of changed circumstances, but often used instead of a broader good faith notion in other contexts.175 Until the changes of 2016, good faith was therefore hardly an overarching contract notion in France.176 Particularly the abuse notion had been progressively developed 172 See Conclusion Merlin (1808), s 1.183 and in more modern times Cour de Cass, 2 December 1947 [1948] Gaz Pal I.36, although especially Geny and Demogue argued otherwise, see R Demogue, 6 Traité des obligations en général (Paris, 1931) 9, who was in many respects more perceptive in these aspects than more recent French writers. 173 Thus the Cour de Cassation recognised the unjust enrichment action, which was not covered by the Code, on the basis of equity: see its decisions of 15 June 1892 [1892] DI 596 and particularly of 12 May 1914 [1918–19] s 1.41. 174 See M Fabre-Magnan, ‘Duties of Disclosure and French Contract Law: Contribution to an Economic Analysis’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, 1995) 99. It may be noted that the lack of expectation damages confirms the view held in this book that they are inappropriate in the case of breach of non-consensual duties. 175 See M Paniol and G Ripert, Traité pratique de droit civil français 6 (Paris, 1930) no 394; Demogue (n 172) no 632, and J Bonnecasse, Précis de droit civil (Paris, 1933) no 134. 176 The lower courts in France normally still opt for literal interpretation of what is considered the parties’ intent and there is here no relationship thinking.

Volume 3: General 83 instead, although it was becoming more embedded in the good faith notion, therefore as a matter of interpretation. Pre-contractual duties on the other hand were often still presented in terms of negligence, again until 2016 when it became a good faith matter but without recourse to expectation damages. The French attitude deserves attention because of its (on the surface) deviant attitude within the civil law tradition, the traditional French approach still tending to be followed in Latin civil law countries. As a consequence, even in Italy there is also uncertainty about the impact of good faith notions in contract, and much of this is reflected in Spain, Portugal and South America. Another important point in this connection and a contributing factor is that in France, good faith is still largely considered a subjective concept, even in contract law, aiming at honesty, co-operation and loyalty in a subjective sense, again therefore merely the opposite of bad faith.177 It remained undefined in 2016. On the face of it, there is therefore still little normative value in it of a more general nature, although a similar subjective approach in the UCC in the US (section 1-201(a)(20) UCC) has gradually found a more objective and therefore normative direction regardless.178 It has already been noted that the DCFR, following the PECL and UNIDROIT Contract Principles, refers to ‘good faith and fair dealing’ to underline the objectivity of the notion, although it remains unclear what the standard (which is always deemed to be absolutely mandatory and from which parties cannot therefore deviate) truly is. Unlike in the PECL and UNIDROIT Contract Principles, there is a definition but in the text of Article I.-1:103(2) the opposite of bad faith is still suggested. Finally, in the Netherlands in Article 3.12 of their new Code, there is a statutory indication of how the good faith notion is to be construed. Under it, it is necessary to take into account generally accepted legal principles, the legal views held in the Netherlands, and the social and personal interests concerned in the case in question. Note the nationalistic tenor, although as mentioned before other sources of law, conceivably even international ones, might revive behind the notion, certainly when relationship thinking becomes more dominant and the special status and needs of the international professional community are recognised.179 In Germany, sections 157 and 242 of the BGB refer in this connection only to commercial usage (Verkehrssitte) to which in Dutch case law reference is also often made (rechtsverkeer).

1.3.5. Institutional Aspects of the Operation of the Notion of Good Faith in Civil Law The multifaceted nature of good faith and its operation both on the fact and the norm side and its sometimes high tone, as well as the flexibility and judicial discretion it may suggest, have induced some sense of unease in many, also in civil law. There is a feeling that there is perhaps now too much judicial freedom to distinguish and declare cases atypical, too much attention to differing facts, too much consideration of the environment or setting of each case, too much concern for moral, social and economic considerations beyond what the positive law provides, and too much

177 See Y Loussouarn, ‘Rapport de synthèse’ in Travaux de l’Association Henri Capitant, xliii, année 1992 (1994). 178 It is of interest that in the Netherlands, with a formula in their old Code (Arts 1374 and 1375 CC until 1992) directly derived from the French Civil Code, case law nevertheless started largely to follow the more liberal German attitude. It consequently adopted a more objective meaning of good faith earlier, eventually even as a corrective, not only to the contractual stipulations (of which adjustment in the case of a change of circumstances under Art 6.258 CC is now a particular example), but (in the new Code since 1992) even to the applicable statutory law and the application of custom in contractual matters, as we have seen: see Arts 6.2 and 6.248(2) CC respectively. 179 See for more recent Dutch case law, n 4 above.

84 Volume 3: General judicial creativity as may be seen in pre-contractual, performance, and post-contractual duties, but perhaps also where pressing notions of justice, social peace and efficiency are introduced. The courts are sometimes believed to arrogate to themselves too much policy and too much directory or rule-making power as a result of which even party autonomy is considered to suffer further. There is also the idea that there may not be sufficient democratic legitimacy for such an approach. This latter issue has already been discussed more generally in Volume 1, sections 1.1.8 and 1.2.13. In France, the original attitude after the codification was that the judge was indeed no more than the mouthpiece of the law (bouche de la loi), the person therefore who applied the texts of the Code from which the solution would derive automatically. Judges were thus considered civil servants who exercised a technical function: law as technique.180 Any other attitude was considered at variance with the codification idea in which the legislature (hardly democratic in a modern sense) made the law. Any greater power of the judiciary was thought to go in particular against the idea of the separation of powers rather than being in violation of democratic legitimacy.181 Yet in practice, the courts always had power. This was never found exceptional or fundamentally objectionable in common law, which was largely formed or expressed by judges. In civil law, it necessarily followed from its own interpretation techniques and requirements, which meant to fill in the gaps in its codes which at least in the French approach to codification were meant to be concise and general, meaning only in this way to cover all eventualities (see Volume 1, section 1.2.13). Yet in many civil law countries, at the conceptual level, even a measure of discretion as long as judges at least stayed within the codified framework or what was then identified as its underlying system to allow for the necessary adaptations and to smooth out problems, which were still considered largely minor, did not always fit well. There is obvious tension here but practical needs made it unlikely that the tide of further adjustment by the judiciary could be turned and they explain why good faith as a dynamic, correcting, and renewing force in the formation and application of contract law in particular was tolerated and is not likely to go away. One can also see it as the other side of the codification (and system thinking) coin. Judges are in any event unlikely to restrict the room for manoeuvre that in modern times is necessary for them to come to credible solutions in ever more uncharacteristic and unusual fact situations (in terms of their system or indeed the original contract) and to maintain their responsiveness. When Parliament does not speak, they may by default also become the modern interpreters of moral, social and economic values. Certainly, much faith is put in the judiciary here, its strength and traditions but also its worldliness and, at least in private law, its ability to distinguish according to the parties’ relationship, their type of deal, and its context. This may put a considerable burden especially on younger judges in lower courts, particularly in countries where being a judge is a professional career with less exposure to real life as it mostly is in continental European countries. Yet further system building by the judiciary particularly in the appellate courts under the cover of good faith may well be feared and would not seem its remit; legal sophistry to this end may be mistrusted. On the other hand, lower courts with less confidence may still try mechanically to tick off the facts following appellate guidance, again law as technique, good faith in Germany even systematised to the effect as we have seen, which may also not convince. This may

180 In France, as a reaction against the broad powers of the old French Parlements, which acted as regional courts before the French Revolution (see Vol 1, s 1.2.5), Art 5 of the French Cc specifically abrogated any rule-making power of judges, while the law of 21 March 1804 introducing the new Code (Napoléon) in its Art 7 ruled out any other source of law, meaning especially regional custom but also equity or more fundamental legal principle. 181 See for the original function of the Cour de Cassation in this connection, Vol 1, n 273. Only in Switzerland, under the well-known Art 1 of its Civil Code, is there officially judicial rule-making power if the law is silent, but this facility is (correctly) used with great restraint.

Volume 3: General 85 further explain the modern preference in international commerce for arbitration; it was posited in Volume 2 that international arbitrators are not judges and remain in principle dependent on the representations of the parties also in the use of the good faith concept. There is for them no independent authority to apply whatever law. They are not the spokespersons for any law and must limit themselves to solve the disputes of fact and law that have arisen between the parties as they or their experts define them, and no others. They do not have any autonomous powers to explain and clarify the applicable law, nor the good faith concept either. For them, all must be pleaded as fact. The limitations in the judiciary in terms of experience especially on the fact side may indeed explain some of the continuing resistance to the good faith notion, at least at the theoretical level. It is also clad in the more modern argument that judges lack sufficient democratic legitimacy to be so empowered, but it was pointed out in Volume 1, section 1.2.13, that historically there was little democratic back-up for private law formation altogether, also in codification countries, while in common law, which was formed by the courts, the issue never arose or could be posed in this manner. On the other hand, it was pointed out that it is a misunderstanding to believe that social values can or should enter private law only through the legislature. That would be a long wait and a sad day indeed. But it was also suggested that good faith itself is better not considered a source of law in its own right; it finds its limit in the traditional sources of law, thus more in particular fundamental and general principle, custom and practices and party autonomy. As far as democracy goes, customary law and party autonomy could be seen in this connection as the ultimate in bottom-up participatory law formation, at least in the international marketplace and therefore superior in their legitimacy to formal legislation or even treaty law. As such, good faith in relying on these sources is not then an undemocratic and therefore illegitimate law-making facility per se. It does not mean to fill a void, but to apply and explain rules from many sources that already exist. More to the point is probably the lack of a proper definition of the role of the judiciary in modern society (except in the US), whose powers are in dispute resolution used constantly to expand private (and other) law on the basis of practical need in the absence of much help from often confused and insufficiently responsive legislatures. At the practical level, in civil law countries there appears no longer to be a great objection to this more modern role of judges. Although the French judiciary, in particular, still maintains the fiction of pure rule application in often fairly short and tightly argued decisions, this change in perception of the judge’s role persists and is likely to be tolerated in civil law as long as judges practise restraint, are seen to do so, and can reasonably explain their actions in terms of rules, precedent, or on the basis of different fact situations, while a measure of consistency is maintained, and justice is seen to be done at affordable cost, although its formality, pretence, duration, cost and credibility of the whole system, not in the least at the appellate level, and the need for it can be questioned as has been done in critical legal studies in the US. If in business dealings parties want more worldly experience and keep greater control over the arguments and procedure, and avoid appeals, they can choose arbitration instead as indeed they now often do, which is an indication at the same time that the critique of the court system is not confined to a small academic circle but comes from the professional community. To conclude, in terms of this book, one essential consideration is that the discretion good faith suggests in the mind of many is in truth not there. The other sources of law that codification eliminated return and judges operate under them while redefining their importance, be they fundamental principle, custom and practices, general principle, or the modern objectivated form of party autonomy, at least in professional dealings, and this is likely to be demonstrated in international dealings particularly at the level of the transnational lex mercatoria.

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1.3.6. Good Faith, Legal Positivism and System Thinking in the Codification Manner. The Bridge to the Common Law and the Connect with the Transnationalisation Process of Private Law in the Professional Sphere In Volume 1, section 1.4.17, the concept of (nationalistic) legal positivism and its attitude to private law formation and operation was more extensively discussed and its unsuitability in transnational law formation highlighted. In good faith terms, in contract, the more relevant perception is that the development towards a newer contract model (see also section 1.1.6 above) heralds a more fundamental shift from norm to fact in civil law, therefore from emphasis on rules to emphasis on the circumstances of each case and the nature of the relationship or dispute between the parties in terms of professional, small company, or consumer dealings. On the norm side, on the other hand, it reintroduces respect for other, non-statutory autonomous sources of law, which may conceivably be transnational, in commerce especially customary law. If this is correct, then there result some important areas of convergence with the traditional common law approach, more particularly in contract law, which in England was always more factual, developed (through case law) from situation to situation on the basis of practical need, and always respected other sources of private law beyond statute (even if it was not always clear what they were). In these terms, in civil law, the real issue in modern times becomes the failure of the codification approach and intellectual model itself and its exclusive system thinking, which had meant to cover alone, in a statist top-down and national manner, the whole field and pretended to have all answers for the present, past, and future. In international cases, private international law was then the conduit to the appropriate domestic legal system or rather each national system had its own conflict of laws rules in this regard to determine to what extent it would accept the application of foreign rules in international cases handled by its courts. The application of foreign law was thus subject to this type of licence and it needed to be pleaded as fact. It was always a domestic law and there was no true transnational law. The question then arises whether the good faith concept or normative interpretation technique with its sensitivity to facts and other sources of law can contribute to the law’s transnationalisation at the same time, at least in international business dealings, notably in reviving the other sources of law. As has been noted before and will be further discussed in the next section, common law has many other ways to achieve a flexibility and level of protection that good faith may now provide at least in the civil law of contract. In fact, it has already been posited that it may well go beyond it in certain areas, especially those of fiduciary duties, dependency and reliance. But the point that is made here is different and affects sources and methodology. The key is the abandonment in civil law of rigid system thinking, its intellectualisation and claim to exclusivity and completeness, and its traditional emphasis on the norm side. Facts and other sources of law are rediscovered. It means an end to legal positivism and formalism in that sense. Proper attention to changing values and to public order and public policy issues must also be considered. Law is then no longer merely a system of pre-existing static and statist rules, that are not questioned, but develops in its application pursuant to the continuous discourse in society or in the communities it serves about what it is. At least in professional dealings, this spells the end of the codification idea and shows the backwardness of projects like that of the DCFR, further epitomised by its failure of relationship thinking while (mostly) applying to consumer and professional dealings alike. This was also true for the European sales law in CESL. There can be little doubt that in the civil law of contract, under pressure of factual developments, the notion of good faith is potentially a modern source of creativity, flexibility and adjustment, even if, as in all cases

Volume 3: General 87 in which legal formalism and inflexibility ultimately yield under pressure of fundamental principle, economic and social realities, or simply practical need, the result may seem unstructured, and legal certainty in terms of law as technique, although not necessarily legal predictability (the two having been fundamentally distinguished in Volume 1, section 1.1.8), may suffer. It was pointed out that civil law often remains highly ambivalent in these matters. German and Dutch law retain their strong codification ethos and system thinking mentality, but see on the other hand all legal relationships as conditioned by good faith. It provides flexibility but it may be asked whether all activity of this nature is per definition encapsulated in a legal framework and rule based. It confirms that contracting is then likely to be a licensed activity, allowed only to the extent the objective law allows it, quite apart from public policy confines. It would follow that relationships of this nature acquire their specific legal meaning only in that context, often still perceived as ultimately statist and then also concerns our values. At least it means more respect for facts, potentially covered by competing rules from other autonomous sources of law, which reappear in the context of a liberal interpretation technique, at least in contract, it was already said several times, although neither German nor Dutch legal scholarship analyse this trend this way, of which the DCFR mainly for systemic reasons, is the latest demonstration. Again, it concerns here notably fundamental principle, now sometimes human rights or public order related,182 general legal principle, which may go beyond those underlying the 182 See n 12 above. The DCFR pays attention to (the horizontal effect of) human rights notions in Art I-1:102(b), see also Vol 1, s 1.4.5, but only to the extent appearing in official instruments and then merely as a matter of interpretation of the DCFR text and does not seem to be aware of other fundamental principles and of their status as autonomous source of law besides it. The text of the Introduction was rewritten between 2008 and 2009, which shows that not much serious thought had been given to these issues before and whatever thinking there now is, arrived after the text of the DCFR itself was already agreed. Coming from the positivist tradition, it is not surprising that human right principles required a special mention in the text for their horizontal application. These human rights only derive from Member State laws and were given a meaning in interpretation only. Beyond this, the drafters declare in Art II-7:301(a) the law of Member States prevailing if a contract infringes a fundamental principle recognised by them. There appears here to be a reference to general principle in terms of public order requirements. Again, this is done only with reference to national legislation in Member States. In the 2008 Introduction, the drafters seemed to think that these principles had largely to do with the model of society and its economic system (no 20). But there are many other values and in private law fundamental principle concerns foremost inter-relational issues, while the model of society is primarily a regulatory issue. Subsequently, the drafters confused fundamental principle with the law’s objectives (no 22), but it concerns here rather the fundamental ideas on which all private law is based. Clearly, this does not sit easily with the DCFR’s statist approach to law formation. In 2009, four basic underlying principles were detected—freedom, security, justice and efficiency—and three overriding principles—human rights, solidarity and social responsibility. There is now a long tract on fundamental principles before the main text but their status in law is still not clear. The underlying principles refer merely to the system. The overriding ones would be autonomous, but there is an explanation only as to how they have found (some) expression in the text. It is also said (in no 11) that ‘It is clear that the DCFR does not perceive private law, and in particular contract law, as merely the balancing of private law relations between equally strong natural and legal persons. But different readers may have different interpretations of, and views on, the extent to which the DCFR suggests correction of market failures or contains elements of “social justice” and “protection of weaker parties”’. It was left to others to decide but as far as the present text is concerned, the idea is that the DCFR decides these issues and that there are no principles or values beyond it. It may be recalled in this connection that the Hague Conference of 1951 dealing with the Hague Sales Conventions after an extensive discussion rejected the insertion of political desiderata of this nature and explicitly retained a broad sweep of party autonomy. That is correct in professional dealings where the concern is not normally lack of equal power or similar policy concerns. The DCFR drafters’ view is typical consumer thinking. The basic problem is then again lack of relationship thinking, but also confusion between fundamental and general principles while there is no clarity on what a modern system of private law is based, how it operates, how it relates to the public interest, and what transnationalisation means here.

88 Volume 3: General national systems,183 and then of course also custom and practices,184 and probably a more autonomous notion of party autonomy, which may at the same time be more objective185 and may even operate in the creation of newer movable property structures and interests subject to a better protection of the commercial flows.186 It was pointed out repeatedly that the revival of the traditional sources of private law in this manner has a particular importance in connection with the process of transnationalisation of private law in the professional sphere, which was identified in Volume 1 as the essence of the development of the modern law merchant or lex mercatoria in which connection further emphasis was put on their ranking or hierarchy. It means that even at the national level under the cloak of good faith a transnational normativity may revive in respect of international business dealings, therefore even in international agreements between professionals, see section 1.1.6 above. But the result is that each country would then have an own concept of transnational law and there would still be no unity transnationally. Good faith may nevertheless provide an important bridge, not only to the more factual approach of common law, which also remains more practical in the acceptance of various sources of law, but, most importantly, also to the transnationalisation of the private law of contract in civil law countries especially through the recognition of multiple sources of law and bottom-up law formation within the modern lex mercatoria.

1.3.7. Good Faith in Common Law. Alternatives. Equity Distinguished It has already been pointed out several times, initially in sections 1.1.4 and 1.1.6, that common law of contract developed in commerce, always maintained a more literal interpretation of the declarations of the parties, and was more fact based. It put in that context greater emphasis on the type of relationship and would notably allow for special duties but mainly in the case of dependency, although there could also be some fiduciary duties different in the pre-contractual,

Ultimately it is a failure of insight into the place and function of modern codification, into its competition with other sources of law, and its relationship to the public interest. Especially when there are extra-statutory fundamental principles or rules, either underlying or overriding, these issues can no longer be ignored. Or, to put it in another way, if the autonomous status of fundamental principle is to be recognised, the entire idea of codification in this manner is at an end. That is clearly not the idea of the drafters of the DCFR and explains their ambivalence. But it is at variance with the case law of the ECJ itself—see its Mangold and Audiolux cases—and there are many others in which the role of fundamental principle as overriding is fully established: see further again Vol 1, s 1.4.6. 183 See n 14 above. Although it was said that the DCFR is based on comparative studies of Member State and Community laws (no 21 of the Introduction in the 2008 version), general principles found in such laws are notably not considered an autonomous source of law. Only those found in the DCFR itself are allowed to be taken into account in its supplementation (here distinguished from interpretation where apparently they do not count): see Art I-1:102(4). This is the traditional codification approach. 184 See n 13 above. In the DCFR in Art II-1:104, custom is perceived as an implied contract term in language derived from the CISG (Art 9); the operation of custom outside contract is not considered, but it is clear that it is not perceived as an autonomous source of law. 185 See n 15 above. In the DCFR, in Art II-1:102, party autonomy is still cast as a concession (‘parties are free to make a contract’) and it is not an autonomous source of law. It is further made subject to the rules of good faith and fair dealing and any other applicable mandatory rule. It follows that good faith is here considered a standard of behaviour that is absolutely mandatory and even professionals cannot set standards among themselves, as they may under s 1-302(b) UCC in the US. Good faith even if connected with fair dealing is still not a clearly defined concept even though the DCFR makes an effort unlike the prior sets of Principles. What kind of standard is required is therefore unclear and is likely to give rise to very different interpretations. 186 See Vol 4.

Volume 3: General 89 contractual, and post contractual phase. From that perspective it needed the notion of good faith much less than civil law, but it could not avoid the process of better relating the facts to the existing norms either and also had to find a way for contract interpretation to become more reflective of social and economic needs. It may have helped that common law never committed to intellectualisation and system thinking and did not like generalities. Not pretending to any deeper thought, it also accepted multiple sources of law and their revival did not immediately depend on a liberal interpretation technique under the good faith label or any other. Common law could therefore afford to take a more cautious view of the good faith principle, which is clear particularly in England187 although it may now be somewhat different in the US, but it remains typical that the common law everywhere does not use good faith as an overarching concept in the same manner as civil law does in contract, not even in the US. In England in more recent case law the notion was recognised more openly but only incrementally to the way English law was developing.188 This is particularly clear for pre-contractual and post-contractual situations, as we shall see in section 1.3.12 below. Again, English law does not use the concept of good faith in any general manner but at best as an implied condition moderating intent (to the extent recognised as a supplementary source of contract law) and it is in such instances often wrapped in terms of reasonableness or in what a reasonable man would do,189 although it was 187 See R Goode, ‘The Concept of Good Faith in English Law’ in Centro di studi e ricerche di diritto comparato e straniero, Saggi, conferenze e seminariu, no 2 (Rome, 1992). See further also A Musy, ‘The Good Faith Principle in Contract Law and the Precontractual Duty to Disclose: Comparative Analysis of New Differences in Legal Cultures’ (2001) 1 Global Jurist Advances 1, and J Stapleton, ‘Good Faith in Private Law’ (1999) 52 Current Legal Problems 1. Others have observed that in common law there always has to be a clear economic or social welfare consideration, see J Thomson, ‘Good Faith in Contracting: A Sceptical View’ in ADM Forte (ed), Good Faith in Contract and Property Law (Oxford, 1999) 63–64. In the US, the intervention in contractual terms in this manner is sometimes seen as a constitutional issue in terms of the liberty of the parties to contract requiring a clear economic and/or social justification: see Robert Post, ‘The Challenge of Globalisation to American Public Law Scholarship’ (2001) 2 Theoretical Inquiries in Law, 323. 188 Interestingly, reference was made to comparative and European law, see Legatt J in Yam Seng Pte Ltd v International Trade Corporation Ltd, [2013] EWHC 111 (QB). 189 See for English case law on implied conditions also nn 30 and 122 above. The good faith concept has always been more independently acknowledged in insurance contracts (which are uberrimae fidei). In that case, it is principally used, however, to protect the insurer and, through it, the scales are often loaded against the insured, as under it the insurer may repudiate a policy, even on the basis of failure by the insured to disclose technically relevant but minor facts that would not have made any difference to the insurer’s underwriting decision: see Container Transport Inc v Oceanus Mutual Underwriting [1984] 1 Lloyd’s Rep 47. However, in Berkeley Community Villages Ltd and Another v Pullen and Others, [2007] EWHC 1330 (CH), the term ‘utmost good faith’ was used as an express term in a contract in a broader commercial setting, but was in such cases deemed to require no more than reasonable commercial standards of fair dealing and faithfulness to the agreed common purpose and consistency with justified expectations. A restrictive interpretation (of similar language) remains common, TSG Building Services Plc v South Anglia Housing Ltd, [2013] EWHC 1151 (TCC). For an earlier contribution to the discussion on the subject in England, see J Beatson and D Friedmann, ‘Introduction: From “Classical” to Modern Contract Law’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, 1995) 3. See for a general and fundamental rejection of the notion of good faith, at least in the commercial sphere, Lord Ackner in Walford v Miles, n 194 below. It has been more broadly repeated that there is no general doctrine of good faith in English contract law, see Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200, Greenclose Ltd v National Westminster Bank Plc [2014] EWHC 1156, cf also Interfoto n 1 above and context is greatly important. There is only incidental relief under different mechanisms as here explained; they tend to be more precise especially in commercial dealings. This is not changed in more recent case law, in fact the cases of Yam Seng Pte Ltd v International Trade Corporation Ltd, see n 188 above and MSC Mediterranean Shipping Co v Cottonex Anstalt [2015] EWHC (also Leggatt J) repeating no more than the general requirements of honesty and fidelity to the parties’ bargain as implied conditions, see further Bristol Groundschool Ltd v Intelligent Data Capture Ltd and Or [2014] EWHC 2145 (Ch).

90 Volume 3: General already mentioned also that the closer one comes to consumer law, the more room there may be for greater judicial intervention in terms of extra protection but that could also be equitable, sharpening the fiduciary duties and cutting out excess. The English attitude towards the good faith notion was criticised by Steyn LJ in his 1991 Royal Bank of Scotland law lecture at Oxford,190 but excepting cases of ‘fraud’, which often lead to redress in tort, it is not likely that good faith notions will soon be used as a general implementing, supplementing, or correcting force in respect of contractual terms in England in professional dealings and the rest only through specific legislation such as in the Unfair Contract Terms Act of 1977 or in implementing EU consumer law Directives. Upon a proper analysis, it is unlikely to be different in the US. Although the common law notion of equity is sometimes equated by outsiders with the civil law good faith notion and development, this is substantially incorrect. As noted, before,191 equity in this sense is not a general interpretative concept allowing for the influx of new ideas or even of general notions of fairness—see Volume 1, section 1.3.1—it guards mainly against excess, in the case of weaker parties often within the framework of fiduciary duties. Equity adjustment is used by judges only as a last resort, as correction in individual cases, except in areas entirely covered by it, such as trusts, agency, company, and bankruptcy law. Moreover, the notions of equity are often entirely fixed, certainly also when used in contract law (as, for example, in the concepts of rescission and specific performance). Equity in this sense could often do with some good faith or normative flexibility. However, the renewing forces identified in the previous section in civil law, notwithstanding their contradictions and ambivalences, may operate equally in common law but are not called ‘equity’ and also not ‘good faith’. As such, they often remain in essence unidentified. As we have seen, English law reflects more particularly on the nature of the relationship between the parties.192 It also accepts extra-contractual duties, especially in situations of dependency, when breach of fiduciary duty or tort liability rather than contractual liability results.193 Again, from these perspectives, there is in common law less need for the good faith notion or something equivalent to provide greater flexibility. It also uses the reliance notion, as we have seen, to determine the existence of the contract and the rights or duties of the parties thereunder,

False information is a case in point, although professionals will know how to deal with sales talk and similar presentations, again the issue of relationship thinking; it may be different in consumer dealings and situations of dependency pursuant to fiduciary duties. It is not different in Canada where the term ‘operational’ good faith has been used in this regard, see Bhasin v Hrynew, 2014 SCC 71. It is then the opposite of bad faith and not a general interpretational or other concept concerning the meaning and performance of a contract and not itself a source of law in terms of rights and obligations. Again other, often better directed, doctrines may be used in this connection in common law countries. 190 The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt Philosophy? 191 See text following n 129 above. 192 See Bingham LJ in Interfoto v Stiletto [1989] 1 QB 433, 439 and the comments at n 1 above. 193 Fiduciary duties are products of the law of equity, often closely related to trust-like structures, therefore to situations where people or entities operate for others, as is also the case in agency, partnership, or in directorships of companies. But they may also emerge more generally in situations of dependency or discretion affecting others. In all cases, there has to be some fiduciary relationship before the fiduciary duties can emerge and they apply therefore only in special circumstances, again especially clear in situations of dependency, and present a narrower concept than good faith does in civil law, but in areas where they operate, they may impose a much more formidable and elaborate regime of protection. Thus these fiduciary duties can go beyond mere fairness and honesty as is clearly shown in the relationship between the investment broker and its client where they acquire a protection function for the latter: see more particularly s 3.1.4 below.

Volume 3: General 91 again often leading to tort liability.194 Importantly, reliance also became a consideration substitute when detrimental. Also noted previously was the greater receptiveness in common law, at least in commerce, to other legal sources such as custom, and also the greater role of a more objective notion of party autonomy, at least in the professional sphere. Again, together this may well result in relief similar to what may be obtained under the civil law of contract through the notion of good faith but may sometimes give more, especially in situations of dependency. It also pushes the common law into the direction of a more normative interpretation technique but always in the context of relationship thinking with a bias in common law countries in favour of a literal interpretation of contractual terms in professional dealings as further demonstrated by the old parol evidence rule (see section 1.2.4 above), which avoids extraneous evidence in the determination of the content of written documents. It seems that professional parties are left more fundamentally to their own devices and less protected as the courts will not seek to interfere lightly in professional relationships, either in the formation or performance of the professional contract, especially when the contractual text is on its face clear. There is simply greater respect for party autonomy in business under the common law and the law will not easily redistribute risk if the professional parties have not done so in their contract. It has already been said that the common law may even carry here a creditor’s bias. Common law’s resort (sometimes) to implied terms, especially of reasonableness, has already been mentioned also.195 As far as these implied terms are concerned, the technique of gap filling is an old one also in England.196 In the common law of contract, it is then often but exceptionally based on some presumed intent of the parties (which itself is not enough to result in a contract as noted before but may still entail a risk management choice), although commonly construed in a more objective manner, as we have seen,197 and sometimes subjected to the requirement of reasonableness.198 These implied terms might in appropriate cases even concern the fairness of the transaction itself.199 Yet again, especially in the professional sphere, there will be caution and restraint, except in cases of excess.200 It is submitted that this is on the whole the better attitude. Also, in terms of pre-contractual duties and a duty to negotiate in good faith, English law exercises restraint in professional dealings where commonly no weaker party needs special protection.201 In the US, on the other hand, in the UCC, probably under German influence, a general reference to good faith was inserted in section 1-304. It imposes an obligation of good faith in the 194 See the probably too sweeping rejection of the notion of good faith by Lord Ackner in Walford v Miles [1992] 2 WLR 174 to avoid contractual liability for loss of profit. An action in negligence was allowed, however, to recover the direct costs of consultants hired in reliance on a deal. 195 In England, a distinction is commonly made between implying facts and implying law. The leading case as to the first is Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72. The idea is that the term is necessary to give the contract its meaning or is obvious, see also n 122 above. As such it cannot contradict an express term. Mere fairness is not enough nor the possibility that parties might have included it if they had thought of it, although these may be preconditions. Also, a party should not try to imply a term in this manner which it should have or failed to negotiate, Arnold v Britton [2015] UKSC 36. Implying law on the other hand usually refers to policy, cf Emmott v Michael Wilson & Partners Ltd [2008] Bus. LR 1361 and may as such serve as a check on implying fact. The search is then on for a rule of law in the particular branch or in similar situations, which may not be obvious and becomes an investigation into case law or statutory law. 196 See The Moorcock (1889) 14 PD 64. 197 Hirji Mulji v Cheong SS Co [1926] AC 497, 510. 198 Shell UK Ltd v Lostock Garages Ltd [1976] 1 WLR 1187. 199 Bankline v Arthur Capel [1918] AC 435 and Metropolitan Waterboard v Dick [1918] AC 119. 200 See also n 30 above about the wariness of the common law interfering in this manner in to contract with reference to Lord Bingham in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472. 201 See Walford v Miles (n 194).

92 Volume 3: General performance or enforcement of every contract or duty under the UCC, but strictly speaking not in the formation of the contract. Interestingly, section 1-201(b)(20) UCC defines the concept. It means ‘honesty in fact in the conduct or transactions concerned’. The ‘in fact’ language suggested a subjective approach (‘empty head, pure heart’), but, as already mentioned, the concept has gradually acquired a more normative or objective meaning (see section 1-201(19) (old)), while section 1-201(a)(20) (new) now adds after ‘honesty in fact’ a reference to ‘the observance of reasonable commercial standards of fair dealing’. Indeed, for sales, section 2-103(1)(b) UCC had done so earlier, and this is now repeated in its newer versions (section 2-103(1)(j)): see further also section 3-103(a)(6) UCC (for negotiable instruments), section 5-102(a)(7) UCC (for letters of credit), and section 9-102(a)(43) UCC (in the area of secured transactions: see for a more limited use of the concept in this area of proprietary rights, however, also Comment 10 to section 8-102 UCC for adverse claims in security entitlements). Section 1-302(b) UCC allows variation of the provisions of the UCC by contract, but not of the obligations of good faith, diligence, reasonableness and care prescribed by it, although, importantly, the parties may set the standards by which the performance of these obligations is to be measured if such standards are not manifestly unreasonable. This will not soon be the case in professional dealings and shows that the concept is not mandatory except in extreme circumstances. There are more references to good faith in the UCC, such as for the sale of goods in sections 2-603 and 2-615, but it remains exceptional in the common law of contract and is substantially statutory and even then, as in the UCC, incidental, as the many individual references to it testify. As just mentioned, at least in the UCC, good faith does not cover pre-contractual duties or, strictly speaking, even gap filling but only the performance or enforcement of the contract, here joined by a general provision on the unenforceability of unconscionable clauses in contracts for the sale of goods: see section 2-302 UCC, particularly (but not only) relevant in sales to consumers.202 On the other hand, in the US, the non-binding Restatement (Second) of Contracts of 1981, section 205, stated for the first time more generally that every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. This was then followed in the 1990 revision of section 3-103(a)(4) UCC (for negotiable instruments) which, as far as the UCC is concerned, was first in accepting the idea that good faith could also mean the observance of reasonable commercial standards of fair dealing, although good faith still remained a matter of performance and enforcement of the contract only. As we have just seen, this is now the more general UCC approach.203

202 See also EA Farnsworth, ‘Good Faith in Contract Performance’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, 1995) 153. For a case that could more readily be explained as covering a pre-contractual situation, see Teacher’s Ins & Annuity Assn v Butler 626 F Supp 1229 (SDNY 1986) in which a developer refused to close a loan deal while objecting to a pre-payment fee in the closing documents. The court recognised a duty of good faith and fair dealing in every commercial transaction and found a breach of this duty on the basis of commercial practice, which accepted pre-payment fees in loan agreements even if not normally included in a bank’s commitment letter. The court therefore rejected the borrower’s argument as a pretext for getting out of the deal, also taking into account that the draft loan agreement had included the fee and that the problem had never been raised until the eve of closing. The case can, however, also be seen in the context of performance pursuant to the commitment letter. 203 In this connection it may be noted, however, that in the US, for example, employees are not per se protected under employment contracts without a duration clause and courts have held them terminable at will, regardless of good faith notions, see Brehany v Nordsstrom Inc 812 P 2d 49 (Utah 1991) and earlier Murphy v American Home Products Corp 448 NE 2d 86 (NY 1983).

Volume 3: General 93 It follows that in the interpretation of the contract, the normative approach is increasingly followed in the US. It may make a difference even in professional dealings, rendering them subject more especially to notions of abuse of rights. This may even affect liquidated damages clauses when payments thereunder are used to excuse specific performance while prioritising other projects that are more lucrative, regardless of the adequacy of the damages. Australia and New Zealand have also abandoned the narrower common law approach in this area. More limited notions of foreseeability and reasonableness may, however, still be found in most legal systems as possible correctives to the defaulting party’s exposure in this connection when it comes to any assessment of damages, even where the requirements of good faith are deemed violated in a more objective sense. The more restrictive English attitude may not be as strange as it sometimes seems, particularly to German lawyers. As already suggested, the restrictive English attitude is largely limited to the commercial and professional sphere where parties are better capable of providing a clear direction in their dealings, may be less dependent on each other, often willing to take more risks, and can hire expert advice to look after their interests, while in that sphere, even in civil law, increasingly the good faith notions may be applied more restrictively, especially when the contract is a roadmap and risk management tool, which may also affect the interpretation of the wording of agreements and their adjustment, even in the case of hardship.204

1.3.8. EU Notion of Good Faith It is of interest in this connection that the notion of good faith has also appeared at EU level. In Council Directive (93/13/EEC of 5 April 1993) on Unfair Consumer Contract Terms (now amplified in this regard by Directive 2011/83/EU on consumer rights, especially covering the information duties of professional providers and the right of withdrawal of consumers), there is an important reference to it. Under Article 3(1), terms of contracts not individually negotiated are considered unfair if, in violation of the requirements of good faith, they cause a significant imbalance in the parties’ rights and obligations to the detriment of a consumer. The Preamble elaborates somewhat on the good faith notion, which importantly under this Directive requires an overall evaluation of the interests involved, while, in making an assessment of good faith, particular regard must be had to the strength of the bargaining position of the parties, whether the consumer had a special inducement to agree to the terms and whether the goods or services were sold or supplied to the special order of the consumer. There is another important aspect. EU Directives of this nature are motivated by, and the jurisdiction of the EU derives here mostly from the notion of the free movement of goods and services. This raises the issue whether concepts such as good faith are conditioned by this consideration, meaning that they play a role only to further the internal market and may be limited thereby. This is not obvious from writings on the subject but it is an institutional (jurisdiction) issue that must not be overlooked. While using terms like these, EU law considers them in essence separate from the meaning they may have in the domestic laws of the Member States. Comparative research may be done but is not decisive for finding the Community meaning.205 In any event, as good faith is in most

204 See for the Netherlands, the more recent case law cited in nn 4 and 43 above. 205 See W van Gerven, ‘The ECJ Case-law as a Means of Unification of Private Law?’ in Hartkamp et al (n 145) 91 and 102.

94 Volume 3: General Member States undefined and still varies widely in its impact, as we have seen, it remains of particular interest to see how the European Court interprets the concept. In the context of the Directive, it is likely that the emphasis is put foremost on any imbalance and is left at that. It means that, following a normative or teleological approach, maintaining a proper balance is here a substantive element of the good faith requirement itself and not an additional requirement for protection under the Directive. What this bears out is the relationshiporiented approach, giving the concept of good faith a special meaning in consumer transactions. Indeed ‘imbalance’ is of special concern and may have a special relevance mainly in contracts between professionals and consumers. Under EU law, the concept of good faith is also used in Articles 3(1) and 4(1) of the Directive on self-employed commercial agents (see also section 3.2.4 below). Under them, the principal and agent owe each other a duty of good faith, largely referring, one assumes, to the common law notion of fiduciary duties (although strictly speaking an agency relationship proper need not be implied). In this regard, comparative research would probably find in favour of the more extensive protection notions developed under the common law regarding fiduciary duties. The good faith notion also surfaced in the case law of the European Court of Justice in interpreting the original version of Article 17 of the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, which allowed agreements on jurisdiction to be effective, but there were problems in determining when there was such an agreement. In this context, the European Court relied in its early case law on good faith notions, later more generally formulated in terms of practices and usages. Article 17 was superseded with amended language to that effect by Article 23(1) of the EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, which replaced the Brussels Convention in 2002, unaffected in this regard by the further amended version effective since January 2015.

1.3.9. Good Faith and Sources of Contract Law in the CISG, UNIDROIT and European Contract Principles. The DCFR The term ‘good faith’ figures in Article 7(1) of the 1980 CISG in connection with the interpretation of the Convention, not, however, in connection with its supplementation or the interpretation and supplementation of any sales agreements concluded under it (which are not covered). It derives from Article 31 of the Vienna Convention on the Law of Treaties 1969. Here again, the notion remains undefined and it cannot be certain that it is now a transnationalised concept, not therefore referring back for its meaning to domestic law under the supplementation section of Article 7(2). It would undermine the Convention dramatically in its ambition to produce uniform law. See for a more extensive discussion of Article 7, section 2.3.5 below and also Volume 1, section 1.4.15. Other sources of law or at least other considerations are also mentioned, but in a haphazard and uncoordinated manner, such as the reference to the CISG’s international character and the need for uniformity in matters of interpretation and, in matters of supplementation, the general principles on which the Convention is based (which are entirely unclear as we shall see and suggest system thinking in the codification manner assuming intellectual unity which may not be there) and ultimately domestic law resulting under the applicable rules of private international law, see again Volume 1, section 1.4.15. To repeat, the reference to private international law in the supplementation of the CISG, followed by the PECL but not in the UNIDROIT Principles (which followed the Hague

Volume 3: General 95 Conventions in this respect) nor by the DCFR (which means to cover private law in full), although not objectionable in principle as the residual rule in the transnationalisation process of private law (see Volume 1, sections 1.4.14 and 3.1.2), is likely to destroy any usefulness of uniform rules as all these texts lack clear definitions, not only in the area of good faith and reasonableness, so that any dispute on general principles or even coverage may descend into a search for domestic laws. As interpretation can often hardly be distinguished from supplementation (recognised in the case of contracts where interpretation and supplementation are no longer separated under the PECL and DCFR), that would affect interpretation also. It was already said that this would destroy any ambition to a uniform regime even in the areas covered by these texts. As for custom, it does not figure in Article 7 CISG as a source of law. In Article 9 practices are mentioned but only as implied contract terms in the English manner. This approach remains clumsy because it does not capture the CISG in its relationship with other sources of law, borne out in Article 4, which leaves alone all custom proper, and is critiqued in section 2.3.6 below. In terms of party autonomy, the Convention in Article 6 is clear that it can be set aside in all of its provisions (except the one of Article 12 which goes into documentation). This even seems to apply to the good faith provision in Article 7 itself, which would therefore appear not to be mandatory either. The UNIDROIT Contract Principles and PECL also struggle with the various sources of law and present no clear view either, see again Volume 1, section 1.4.15. In this connection, the UNIDROIT Principles in Article 1.6 do not refer to good faith in its own interpretation, but the PECL do: see Article 1:106 (where there is also the combination with fair dealing, see further Article 1.7 UNIDROIT Principles). In contract interpretation, good faith and fair dealing are mentioned in both sets of Principles besides the traditional reference to the intention of the parties, the nature and purpose of the contract, and usages (which appear to remain here implied conditions in the CISG manner)—see respectively Article 4.8 (but only in matters of supplementation of the contract) and Article 5:102. The concept of good faith and the one of fair dealing are not defined in these Principles either, and the standard of conduct to which they refer is wholly unclear. Again, in typical unitary fashion, there is no reference to the nature of the relationship of the parties and therefore no distinction between professional and consumer dealings. The DCFR in Article I-1:102 refers to good faith and fair dealing whilst dealing with its own interpretation (apparently also in respect of non-contractual issues), and mentions also human rights (only by way of concession as we have seen), uniformity of application, and legal certainty, but no other fundamental principle, nor general principle or custom. For supplementation of its rules, reference is made to the general principles underlying the DCFR. It is typical codification thinking and it is clear that the DCFR does not mean to leave room here for other sources of law.206 Thus, as noted before, party autonomy operates by licence only (Article II-1:102 DCFR) and custom or practices are only recognised as implied contractual conditions (Article II-1:104). Neither are independent sources of law. The DCFR follows here the UNIDROIT Principles and PECL, again the typical codification approach, which ignores these sources of law unless specifically recognised and authorised by it. The DCFR also reverts to codification orthodoxy in matters of interpretation of the contracts concluded under it (Article II-8:102) in terms of nature and purpose of the contract (not nature of the relationship of the parties), good faith and fair dealing, and usages again as implied conditions only, see Article II-1:104.207 206 See for the DCFR references especially nn 183ff above. 207 In fact, contracts concluded under the DCFR are to be interpreted first on the basis of the common intention and the meaning a reasonable person would give them. This is the anthropomorphic approach, see Art II-8:101. Only subsequently may regard be had to the negotiations, conduct, nature and purpose of the contract (not the type of parties), and good faith and fair dealing. There is no longer a special paragraph for contract supplementation.

96 Volume 3: General The concept of ‘good faith and fair dealing’ figures in Article I-1:103 and in the definition annex (both in the 2009 version) as ‘a standard of conduct characterised by honesty, openness and consideration for the interest of the other party to the transaction or relationship in question’. Again, it is an issue of conduct only. Even then it does not imply relationship thinking but strictly speaking only suggests respect for the created relationship. The 2008 text had referred to an ‘objective standard of conduct’, no more.208 Whether in the latest version the standard is still objective is therefore uncertain but it must be assumed mostly to be so. In neither version was there any acknowledgement of the multifaceted nature of the good faith concept—see section 1.3.4 above. In fact, what the notion, its standards and its operational meaning truly are remains wholly unclear. There is the additional reference to fair dealing, but what that means in different markets is a matter of conjecture. To repeat, the problem is that it is still mostly perceived as the opposite of bad faith, but good faith is a term of art that covers many more things as we have seen. Any starting point in bad faith colours the definition and also suggests its mandatory nature but it has already been said before that this is not or no longer perceptive and probably a mistake, see also the next section. It was submitted that in professional dealings it stands mainly a liberal interpretation technique that reintroduces all traditional sources of law and the hierarchy between them.

1.3.10. When is Good Faith a Mandatory Concept? The UNIDROIT Contract Principles, which are limited to international commercial contracts, present in Article 1.7(2) a typical example of the use of consumer law or small companies’ protection in the professional sphere while rendering good faith generally a mandatory concept without explaining its role and meaning but making it compulsorily applicable even where it would not seem to appeal to higher overriding values, public order concepts, or special protections derived therefrom for professionals, to which these Principles were limited. This would be inexplicable to common law lawyers, and should also be to those of the civil law. Indeed, it is in its generality an inexplicable provision, which does not appreciate the multifaceted nature of the concept with its many diverse functions as explained in section 1.3.4 above. It is certainly not only a norm, let alone always a higher or mandatory one, but, as submitted all through, truly foremost a liberal interpretation technique in commerce and finance, reintroducing, it was submitted, the traditional sources of law which codification had sought to eliminate. Article 1.7(2) was uncritically followed in Article 1.201 of PECL, which also covered consumer transactions but did not make here proper distinctions either. As such, Article 1.7(2) can hardly be perceived as an established principle of commercial contract law as it pretends to be. It has no basis in, nor was it supported by a proper comparative analysis of domestic laws. Again, it shows an overriding consumer protection attitude and lack of relationship thinking. Interestingly the UNIDROIT Principles seek to distinguish (mandatory) good faith from reasonableness (Article 5.2) without, however, indicating the dividing line. The terminology is here quite unstable and what must in this connection be considered mandatory under these 208 The differences between the 2008 and 2009 text show that the drafters had little idea what this vital concept of good faith really meant and how it was to operate. The term ‘good faith’ on its own meant in the 2008 version a subjective mental attitude, often characterised by an absence of knowledge of something which, if known, would adversely affect the morality of what is done. It could be asked whether that could be a legal yardstick at all. In the 2009 version it is a mental attitude characterised by honesty and an absence of knowledge that an apparent situation is not the true one. That sounds more like bona fides in the law of property.

Volume 3: General 97 Principles or not is particularly unclear: see also the discussion in section 1.6.3 below.209 It begs the question whether all of these references to reasonableness also have a mandatory flavour, either in the nature of good faith and fair dealing of Article 1.7 or in the context of the mandatory validity provision of Article 3.19. It does not seem so210 as it would make the Principles useless. When more specific rules are formulated, their relation to or origin in the mandatory good faith principle might thus have to be ignored and most of these rules should therefore be considered directory,211 except in these Principles those on surprising (standard) terms that must be expressly accepted by the offeree (Article 2.19), and those that limit the parties’ freedom with respect to exemption clauses and agreements to pay fixed sums for non-performance (Articles 7.1.6 and 7.4.13). As already said, even this much is less understandable for dealings between professionals except in situations where the effect of standard terms and exemption clauses borders on the manifestly unreasonable (as between them), which may not so soon be the case between professionals.212 The European Principles (PECL) struggle similarly, and do not achieve clarity either. They define the term ‘reasonableness’ in Article 1:302, but here it becomes circular where they refer to what a person acting in good faith would consider reasonable. Nature and purpose of the contract, circumstances of the case and usages and practices of the traders or professions need also to be taken into account, but not, typically, the nature of the relationship between the parties. The DCFR moves on from here and declared in the 2008 version of its Article I-1:102 on party autonomy that concept subject to the notion of good faith and fair dealing suggesting 209 There are many other concepts in the UNIDROIT Principles said to be based on or derived from the principle of good faith, like those in Art 2.4(2)(b) (revocation of the offer), Art 2.16 (duty of confidentiality), Art 2.17 (written modifications clause), Art 4.2(2) (interpretation of statements and other conduct), Art 5.2 (implied obligations), Art 5.3 (co-operation between the parties), Art 5.8 (contract for an indefinite period), Art 7.1.2 (interference by the other party), and Art 7.1.7 (force majeure): see MJ Bonell, An International Restatement of Contract Law, 2nd ed (Irvington, NY, 1997) 136ff. There is also an abundance of references to reasonableness and similar requirements as well: see Art 1.8 (on usages), Art 2.20 (on surprising terms), Art 3.8 (on fraud), Art 3.9 (on threat), Art 3.10 (on gross disparity), Art 4.6 (adopting the contra preferentem rule), Art 4.8 (supplying an omitted term), Art 5.2 (adding an implied obligation), Art 7.1.6 (on exemption clauses) and Art 7.4.13 (on agreed sums for non-performance). In other Articles, a reference is made to a reasonable person (Art 5.4.2) while Arts 5.6 and 5.7 speak of a reasonable quality of performance and a reasonable price if neither are sufficiently determined by the contract. 210 See Bonell (n 209) 149. See also O Lando and H Beale (eds), The Principles of European Contract Law, prepared by the Commission on European Contract Law (1995). 211 It then remains a question of interpretation when these various provisions should still be considered mandatory: see also B Kozolchyk, ‘The Unidroit Principles as a Model for the Unification of the Best Contractual Practice in the Americas’ (1998) 46 American Journal of Comparative Law 151, 154, 173, who appears somewhat naïve in his references to objective standards of brotherly care amongst professionals. Art 5.3, setting forth the parties’ ‘duty to co-operate’, does not expressly refer to the duty of good faith and fair dealing, but here the Comment makes the connection and it is suggested that such a duty lurks behind the requirement of co-operation. It would make the duty mandatory in professional dealings. 212 More generally, the term ‘unreasonableness’ appears to have a meaning somewhat different from ‘lack of good faith’. It is sometimes seen as the more objective element of good faith but mostly appears to suggest a lower standard. As we have seen, such a lower standard may still affect the applicable usages and practices, see Art 1.8(2), but not apparently the impact of the contract itself, although insisting on performance could be against good faith under Art 1.7. Supplementation of the contract may be done on the basis of good faith notions (Art 4.8), but co-operation duties at the performance stage are expressed in terms of reasonableness (Art 5.3). These co-operation duties, as further detailed in Art 5.5, thus appear different from those to which Art 1.7 refers and to be of a lower nonmandatory nature, although they may conceivably rise to the level of Art 1.7 if sufficiently pressing. Only in the case of hardship is there the option of adjustment of the contract (Art 6.2.3) in which connection the doubtful concept of the contractual equilibrium and its re-establishment is used rather than good faith or reasonableness adjustments: see also s 1.3.12 below.

98 Volume 3: General that this notion is indeed overriding and absolutely mandatory. In the 2009 version, this language was deleted but party autonomy is still subject to any applicable mandatory rule while Article III-1:103(2) makes clear that the duty to act in good faith and fair dealing cannot be excluded or limited, at least when it comes to the performance of the contract. This includes professionals, who apparently cannot set standards among themselves either, which, again, the UCC allows in its section 1-302 unless that becomes manifestly unreasonable. In Article II-3:301(2) DCFR there is a similar mandatory provision in respect of negotiation duties. The special provision that the good faith standard cannot be limited in those two instances may suggest that it may be otherwise, for example, in the interpretation of the contract under Article II-8:102(1)(e) or in the determination of the contract, Article II-9:101(2)(a). On the other hand, it may be noted that for pre-contractual disclosure duties and post-contractual negotiation duties, the good faith language is not used any longer, which would suggest that this was done to allow for the variation of these duties by contract. For the DCFR, this also begs the question whether notions of reasonableness can be excluded or standards can be set for it. Article I-1:104 defines ‘reasonableness’ as a standard that is objectively to be ascertained, having regard to the nature and purpose of what is being done, to the circumstances of the case and to any relevant usages or practices. Again, through the reference to usages and practices, which themselves must be reasonable (see section II-1:104), the notion becomes circular under the definition of reasonableness in section I-1:104, whilst the nature of the relationship of the parties does not appear to play any role here either. As a consequence, no clarity can be obtained. To repeat, where good faith (even in combination with fair dealings) does not appeal to fundamental principle or public order (especially in the nature of redistribution), it is not mandatory and is then perfectly capable of being overruled by custom or contractually curtailed, at least in its consequences, especially by professional parties among themselves. It would appear that for professionals, good faith notions are mandatory only in exceptional circumstances and must even then be assumed with restraint. In any event, it has already been suggested that good faith is not itself truly a source of law but only reactivates those sources such as fundamental and general principle, custom and practices, which were excluded as autonomous legal sources in codification thinking. Indeed, the accent should rather be on liberal interpretation and the reintroduction of these other sources of law and their hierarchy in that context. It has already been noted also that the UNIDROIT Principles and PECL, as well as the DCFR (although perhaps less so), in extolling the mandatory force of the good faith notion, seem to suffer from a profound misconception, notably leading to an extension of consumer protection into all contracts of the same type, regardless, therefore, of the nature of the relationship of the parties, and a generally censorious attitude. In this vein, in the Netherlands, the concept of good faith has been elevated to a rank above custom and statutory law and it may affect and correct the application of both, at least in contract law (Article 6(2) CC), also if they are themselves mandatory, it would seem. Again, if the notion appealed to a higher principle, that would be understandable, but often it does not or at least may not do so sufficiently. It is in any event curious for a concept that in the mind of many remains inherently vague. It would then appear also to transfer extraordinary powers to the judiciary (see also the discussion in section 1.3.5 above) and leaves great scope for supervision of contractual content then also for consumer protection notions entering professional dealings as we have seen. In this book the multifaceted nature of the notion of good faith is continuously being stressed; see section 1.3.4 above. Again, at least in professional dealings, good faith is here considered foremost an interpretation tool that relates the norm to the facts and may reformulate both in that context. That was identified as its most fundamental objective in modern contract law.

Volume 3: General 99 In doing so, it does not operate in a void but reintroduces the other more traditional sources of law in interpretation and relationship thinking. As such, it was submitted, it is better not considered an independent source of law but rather as an institutional or structural tool that may indeed not itself be subject to party autonomy and as such modifiable but the foreseeable results may be. The ultimate effect of a contract thus always remains a matter of normative or good faith assessment and interpretation. But again, that is not to say that parties are not able to have an influence on how their contract is interpreted barring fundamental principle and mandatory custom or relevant public policy or public order considerations. Beyond these mandatory features, professional parties are perfectly capable of agreeing that their contract shall be interpreted literally or narrowly, even though the effect will still depend on the circumstances of the dispute when it arises while the limit may be in what becomes manifestly unreasonable for them in their circumstances. Proper relationship thinking and the concept of substantial risk acceptance (unless the contract states otherwise) complete the picture.

1.3.11. Practical Effects of Good Faith or Normative Thinking: The Nature of Pre-contractual Information and Disclosure Duties, Meaning of Consensus, Mistake, Misrepresentation and Gross Disparity Although it would seem that the normative or good faith approach to contract interpretation normally leads to more refinement in the protection of the various types of parties, be they professionals or consumers, workers or private investors, it follows from the foregoing that it may in fact also lead to less refinement, especially in professional dealings. That derives equally from the notion of good faith used in this connection and denotes proper relationship thinking, respect for risk acceptance in the way as expressed in the text, and the operation of the traditional sources of law in the professional sphere. In other words, if text, context, history, nature of the parties, their capacity and their expertise, nature of contract, or even their custom or good faith and (statutory or other) rules of (black letter) law are together taken into account, it need not lead to more protection. This may explain also the normally lesser impact of pre-contractual information duties among professionals. This has also already been mentioned several times, and it is of considerable significance. In the common law, there is first the consideration requirement, which does not easily allow for rights or duties to arise before the conclusion of the contract. It follows that pre-contractual obligations do not readily arise and when they do so, they result primarily under tort law, fraud being an obvious case. They may also result from situations of dependency, therefore as fiduciary duties. In this connection, to distinguish between the type of parties was always more likely in common law, as we have seen, and it is also sensitive to the notion of risk acceptance. This makes a difference especially in professional dealings, where at least in England professional parties are expected to look after themselves and make the appropriate enquiries and subsequent arrangements. The law will not help them out if they do not do so. A similar attitude obtains in the US where the UCC, being concerned with commerce, does not therefore entertain in the precontractual phase a general good faith duty in terms of disclosure either. For pre-contractual disclosure, even the DCFR exceptionally refers here in business dealings to commercial practice as a reference point (Article II-3:101(2)), although this does not apply to pre-contractual negotiation duties—see the next section. In Germany, where, following von Jhering, reference is now commonly made to culpa in contrahendo, sections 311(2), 241 and 280(1) BGB (since 2002) deal with pre-contractual duties but do not make a distinction between professional and other

100 Volume 3: General dealings. Earlier it had been much more difficult to construe them. It required an aggressive use of the good faith notion, then used outside the area of interpretation proper.213 When the professionalism (or absence thereof) of the parties is properly taken into account, as well as their interests and the nature of their deal, it may also be that technical defects in the consensus or lack of clarity of the parties’ intent carry less weight under the good faith notion, even, it is posited, in civil law. It means that, upon a proper analysis, the application of fundamental structural principle, like the binding force of the consensus or the effect of detrimental reliance on someone else’s action, is not insensitive to commercial needs in civil law either, and in any event may function differently in different relationships and transactions. Nevertheless, Article 5.101 PECL and Article II-8:101 DCFR still stress the common intention of the parties as the point of departure for all interpretation ‘even if it differs from the literal meaning of the words’. Again, in professional dealings this may be less than perceptive and consensus thinking of this nature may not be conclusive. It still confirms a strong anthropomorphic streak in civil law; commercial needs and perceptions may require otherwise. Indeed, another attitude may follow from the division of tasks and risks envisaged in the contract as a matter of risk acceptance. There are references to this concept even in the DCFR in Article III-1:110(3)(c) (change of circumstances), Article II-7:201(2)(b) (mistake), and more indirectly in Article III-3:104(2) (force majeure). That is progress, but it is limited. More importantly, it has already been said that, in professional dealings, especially in the context of multiple contracting, a serious impact on the overall position of the professional debtor may also be needed for it to claim relief beyond the contractual text. This is also the case in the areas of mistake, force majeure or change of circumstances, and is sometimes considered in EU thinking, see section 1.3.8 above, and may be another manifestation of risk acceptance, here in a multiple contract environment, where a problem under one contract may make no difference to the debtor overall, but it may to the contract counterparty. That contract may not then be considered in isolation but rather in the context of the business the professional is in. Again, this does not find any general expression in the DCFR and related texts, but it is submitted that the special (commercial) nature of business relationships may also curtail the legal notion of mistake, negligent misrepresentation or error, and the possibility of avoiding the contract on that basis: see for these notions also section 1.4.2 below. Although parties may be deceived in their expectations, that is hardly a ground for rescission among professionals, and clearly if no expectation was raised or representation made by the counterparty beyond mere sales talk. Professionals normally have the ability and means to accept some of these risks and in any event to investigate and this will be an important factor. Thus, to invoke mistake or error in order to avoid contractual liability in such cases is for them often less convincing and likely to be limited to the obvious, that is extreme situations, therefore to prima facie cases, often connected to fraud. As mentioned, the DCFR in Article II-7:201(2)(b) introduces here at least some measure of risk acceptance in the case of mistake, which may conceivably leave room for some distinction on the basis of the nature of the parties. In other words, the risk is normally for the professional party making the mistake or having misjudged the situation, why should it be for the other except (perhaps) if both parties were mistaken or (more likely) the other party realised or should have realised that the first party was mistaken. Again, the impact may also have to be considered and relief would only be given if performance under the circumstances would create great harm overall. In a similar vein, claiming that an unacceptable gross imbalance or unconscionability existed in the terms at the time of the conclusion of the contract (whether understood or not) is less 213 See also nn 163 and 171 above and text.

Volume 3: General 101 credible between professionals. Rebalancing is a notion that makes sense mainly in the relationship between consumer and professional, assuming always the original balance can be established. By seeing it as a major issue in change of circumstances situations, the UNIDROIT Principles, which require renegotiations in such circumstances without even requiring considerable harm, seem mistaken (Article 6.2.2). Again, rebalancing the contract suggests that the incident should be isolated and seen from the perspective of the relevant contract only but the effect on the overall position of the harmed parties is the more crucial issue. The professional nature of the (business) relationship may then also limit protest periods, affect the remedies, and in this regard discourage transactions from being undone even upon default, especially in their proprietary aspects (for example, when a sales agreement fails but the goods are already delivered), although claims for damages may still be valid. Only in extreme cases, such as fraud, would title revert, giving rise to a proprietary remedy or replevin, but again probably only if it is truly material to the deceived party. Even in such cases, the more normal remedy is damages, not repossession. Only in a bankruptcy it is likely to be different, damages are a competing claim, replevin is proprietary and creates a preference. In commerce, reliance on special skills of the other party will normally be no excuse either, as it may be for consumers or weaker parties, who may depend on the advice of their professional counterparties.214 Thus for professionals, as we shall see, the law may want to cut down endless minor arguments concerning misbehaviour, negligent performance, and even force majeure exceptions to the more obvious cases, and also limit the rebalancing of the contract when situations change, as these parties are used to risk taking and often make it their business, whilst they have the contract to allocate the foreseeable risks between them, short of which the chips fall where they fall, again excepting perhaps extreme circumstances which may also obtain in respect of the unforeseeable risks. In short, for the courts (or arbitrators) to intervene in the professional sphere, things must be pretty bad. Notably, as will be discussed below, that remains the attitude of the English courts, whose contract law derived from commercial dealings, and it may make better sense in that context. It disfavours litigation at the same time and limits it to the more obvious cases of major changes where relief may be justified. In business, a stricter attitude may also mean that in agency cases, an agency might be more readily assumed than would otherwise be the case and that apparent authority among professionals could even be assumed upon the mere declaration of the agent itself (for example employees), certainly if the principal has taken that risk. In civil law, the normative interpretation technique or good faith considerations should, if properly understood and handled, lead to the same conclusions, which again often come down to proper relationship thinking. The 1980 CISG does not go into questions of contractual validity in this sense and therefore also not into the notions of mistake and error, or into pre-contractual disclosure duties in the context of contract formation. These issues are left to local laws under the applicable conflict rules.

1.3.12. Practical Effects of Good Faith or Normative Thinking: Pre-contractual Negotiation Duties, Contractual Co-operation Duties, and Abuse of Contractual Rights Although no written documents indicating the state of the negotiations may exist, there may be duties to continue contract discussions in good faith once they have started thus giving rise to 214 See, eg, Lord Denning in Esso Petroleum v Mardon [1976] 2 All ER 5, 16.

102 Volume 3: General a legal action when these duties are broken especially in civil law thinking. These are therefore pre-contractual duties quite apart from information duties that may precede the conclusion of a contract, which were discussed in the previous section. Again, in common law, they should be expected to be narrower, and are tort or fiduciary duty related because of the concept of consideration, which makes it difficult to make such duties contractual unless there was detrimental reliance. Mere expectation of a favourable conclusion of contract negotiations does not give legal rights: see again the generally more restrictive attitude confirmed by Lord Ackner in England in Walford v Miles,215 in which at least in business a duty to negotiate in good faith was thought to be unworkable and deemed to be inherently inconsistent with the position of a negotiating party, always, it would seem, subject to there being no detrimental reliance justified in the circumstances of the case. Even if this reliance does not result in some contractual rights, it could still allow, however, for some reclaiming of costs made in the pursuance of the contract as a matter of tort or restitution law, for example in respect of the cost of legal advice. But these would never be expectation damages. That, indeed, remains the English position. Again, the key is that the justification for protection may be less obvious in commercial or professional cases, and reliance may not then so readily be justified either. It was already said repeatedly that even in civil law the normative interpretation technique or good faith considerations, if properly understood, should also make the proper distinctions, here again in terms of relationship thinking. Professionals know the ups and downs in their trade, and, short of being utterly misled (fraud), may not be able to complain when negotiations abort. Again, they are often engaged in many of them, some of which may go better than others. It was submitted that the overall position or effect on their business also counts here, and complaints in respect of a single contract where negotiations failed may, from an overall point of view, be less justified. It is part of the business. If (detrimental) reliance issues arise, however, in common law too, the other party may be forced to negotiate the full contract, short of which there may be room for claiming damages against the party wrongfully terminating the negotiations, including a claim for lost profits (expectation damages). If one takes the element of professionalism into the equation, common and civil law may thus be less different than might be believed. The better view would always appear to be that between professionals such negotiation duties depend much on the circumstances and cannot simply be assumed,216 although even the requirement of consideration can be eased in this connection in special situations.217 For others, the issue of dependency may arise suggesting a breach of fiduciary duties. Alternatively, the tort of negligence may lie, for example, to achieve reimbursement of immediate expenses made during abortive negotiations in terms of fees for advisors,218 or to compensate for collateral contracts for example an undertaking to 215 [1992] 2 WLR 174: see also n 194 above. 216 See on this subject also S van Erp, ‘The Pre-contractual Stage’ in Hartkamp et al (eds) (n 145) 201, who signals here a diverging rather than converging tendency between civil and common law. 217 Importantly, in Pitt v PHH Asset Management Ltd [1994] 1 WLR 327, the consideration requirement was relaxed so as to accept the binding force of a promise inducing reliance during negotiations. 218 If there is a tort, it may lead to damages for misrepresentation, which indeed were granted in the Walford case and need be clearly distinguished from a contractual damages claim based on detrimental reliance leading to the formation of a contract. Again, the difference between contract remedies and the incidental tort remedies available is notably that in the latter cases the lost benefit of future performance (lost opportunity) cannot be claimed as expectation damages. There is also Dutch case law making the distinction between the various phases of negotiation and the remedies for terminating them. In a first phase both parties may withdraw, in a second phase they may not, but there will be no more than the reimbursement of actual costs. Only in a third phase could there also be a claim for loss

Volume 3: General 103 negotiate for supplies or not to negotiate with others in anticipation of the conclusion of the main agreement,219 and may also be based on the assumption of some pre-contractual negotiation duty in English law, but again it depends on the circumstances and these solutions are incidental. Indeed, there is no general concept of pre-contractual negotiation duties in English law and under English law the process of negotiation itself is apparently not thought to be capable of creating its own legal relationship. German and Dutch law, on the other hand, are increasingly categorical in the imposition of pre-contractual negotiation duties (even though not expressed in the new Dutch Civil Code) and hold that late withdrawal from negotiations may impose heavy contractual liability, including damages for lost profits under the contract, therefore expectation damages.220 That is also borne out by the DCFR, which is strict in its unitary approach (for professionals and consumers alike) expressed in Article II-3:301(2), where it is made clear that the duty to negotiate in good faith cannot be excluded or limited by contract (by anyone, including professionals, unlike the situation in Article II-3:101(2) for pre-contractual disclosure duties). Since there is no contract yet, this might not be an issue in practice as there is not enough evidence (although an initial Memorandum of Understanding could contain specific language to the effect) but the more pertinent question is whether in the case of professional dealings, there should be such a duty at all. In any event, the notion of risk acceptance is important here too, but not in the DCFR. Negotiation in good faith always poses questions as to when the duty is exhausted, therefore even if it results from a contractual renegotiation duty. Nobody can be required to negotiate for ever. If there is no good chance of a prompt conclusion with an agreement on all major points, each party should be able to abandon the effort, and professional parties probably sooner. The alternative is that objective market conditions would fill the voids. They may not exist or be readily and indisputably available or could lead to a loss under the putative contract to start with. To allow for a claim for expectation rather than mere restitutional damages if a party did not want to continue under these circumstances would appear irrational. In France, the duty to negotiate in good faith leads in essence to a negligence (tort) action until such time that the negotiations have entered a phase where there may be said to be a contract.221 The consequence appeared to be a tort action requiring fault or bad faith with a limitation of damages to those actually suffered, therefore excluding the loss of the deal.222 Since 2016 Article 1112 CC (new) brings the issue under the good faith standard but expectation damages are notably (and correctly) excluded. In the professional sphere, it was always believed that there was less reason for this liability.223 In the US, as we have seen, there is still no general duty to

of the deal, HR, 18 June 1982 [1983] NJ 723 (Plas/Valburg, which concerned a case of local government and planning (mis)behaviour). The liability in the second phase is sometimes based in tort. There is as yet no case awarding damages for lost opportunity in the Netherlands. In Germany, there is one in a labour case, BAG, 7 June 1963 [1963] NJW 1843, which was probably a case of special labour protection and not one concerning a more general principle. 219 Relying on collateral agreements in this manner may present special problems and they may not be enforceable for (a) lack of certainty, (b) lack of consideration, or (c) failure to specify a time limit, while even express or implied agreements to negotiate may fail on similar grounds: cf also Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297. 220 HR 15 November 1957 [1958] NJ 67 and 15 February 1991 [1991] NJ 493, and ss 311(2), (3) and 241(2) BGB (new). 221 See Cour de Cass, 20 March 1972 [1973] JCP 2.17542. 222 The Court of Appeal in Riom, 10 June 1992, PTD Civ 343 (1993) came to the much-criticised conclusion that an action for missed opportunity was possible. 223 J Ghestin, La Formation du contrat (Paris, 1993) n 330.

104 Volume 3: General negotiate in good faith or to continue negotiations in that manner once they have seriously started—cf also Restatement (Second) of Contract, section 205. Section 1-304 UCC does not extend to pre-contractual situations either. The courts are, however, divided, and it appears to depend much on the circumstances.224 Also, in the implementation of the contract, the duties of professionals among themselves may be less obvious than their duties in respect of non-professional parties. This may also affect the invocation of any abuse of rights. In civil law terms, the requirements of good faith implementation should then be fewer and may be less onerous for professionals, as submitted all along. Closer adherence to the wording of the contract may be appropriate, clearer under the good faith reference in section 1-304 (1-203 old) UCC in the US. But this is not to deny that there are co-operation duties that may even extend to all involved in the same project, even if they have no direct contractual ties (but each only with the originator of the project), although again the remedy may be in tort rather than in contract. A potent example is a construction project in which all must have some space to unload and deposit their materials, when efficiency considerations demand that there is a minimum of willingness on the part of all to be constructive and to help rather than be in each other’s way. What is customary, normal and practical and makes good sense in the circumstances will thus figure in the proper performance of each party, in which there may be implied duties of co-operation, even though in principle the contractual frameworks under which each person works may be formally unconnected. The factual circumstances dictate what is required of everyone in this respect and how the rules under which everyone is engaged will be tailored to match the situation in a reasonable or good faith manner, and will determine what in this connection is considered acceptable conduct from everyone, in which supplementary duties may figure. In Germany, that is now at least to some extent reflected in section 241(2) BGB. It could be seen as another instance of risk acceptance or as an efficiency issue.

1.3.13. Practical Effects of Good Faith or Normative Thinking: The Status of Commercial Letters of Intent. ‘Best and Reasonable Endeavour’ Clauses The binding force of letters of intent is an area of the law closely related to negotiation duties in pre-contractual situations. The general attitude of rougher justice which may flow from the normative approach in the professional sphere, even against the more traditional rules of contract law in the interest of (a) the flow of commerce or (b) the greater clarity in the division of risks and distribution of tasks if desired by the parties, may also be relevant for the status of letters of intent, which are often preludes to a professional contract. As intent or the lack of it is not the sole determining factor in establishing a legal relationship and detrimental reliance may in any event be another fundamental principle, it is clear that these letters may increasingly acquire some binding force between the parties if acted upon in good faith or even reasonably, which may imply some lesser burden of proof. Again, in the professional sphere, parties are left to their own devices to a greater extent and should not so readily rely on others. One could also say that they know what a letter of intent is and should expect no more.

224 See EA Farnsworth, ‘Precontractual Liability and Preliminary Agreements: Fair Dealings and Failed Negotiations’ (1987) 87 Columbia Law Review 217.

Volume 3: General 105 Thus, until there is a form of detrimental reliance justified in the circumstances, often resulting in a commencing of performance of which the other party knew, it may not be bound. ‘Best and reasonable endeavour’ clauses are different but not uncommon in contracts. Their meaning is often also obscure. It is one thing to say that it depends on the circumstances, therefore on the facts, but in civil law countries, good faith is likely to be invoked to further fill in the meaning. Elsewhere, especially in common law, the clause may otherwise fail for lack of clarity. That is certainly a risk in England where the clause may be differently explained and more narrowly interpreted in professional dealings, although it is mostly not held to be a priori so uncertain as to be incapable of giving rise to any legally binding obligation even though it might be difficult to determine whether there was a breach and what the remedy is.225

1.3.14. The Practical Effects of Good Faith or Normative Thinking: Force Majeure and Change of Circumstances in Professional Dealings The matter of excuses or relief against performance might also need to be considered from the good faith or normative point of view. In civil law, we commonly see here more specific statutory texts, which might still be varied in their interpretation, however, depending especially on the nature of the parties. Good faith could fulfil that role, so could the notion of risk acceptance. As we have seen, in civil law, the underlying idea is then one of fault or lack thereof in determining liability and distribution of risk. In the 1980 CISG, the force majeure exemption in Article 79 is part of the positive law (if not excluded or amended by contractual provision), is thus a statutory risk redistribution mechanism, follows in this respect the civil law tradition, and is widely drawn, fairly subjective and therefore generous, one reason why the Convention is usually excluded by professional parties. It notably does not require serious consequences if relief were not granted. The language could even be used to excuse performance in the case of a change of circumstances—regardless, therefore, of excessive burdens226—although in such cases Article 79 leaves wholly open what must be

225 In 2012, the Court of Appeal in London decided a case in this area, stating that such a clause was not so uncertain as to be incapable of giving rise to a legally binding obligation, even though it might be difficult to determine whether there had been a breach of it, as long as the object of the endeavour could be ascertained with sufficient certainty. The best endeavour might even require some cost to be incurred and the mere fact that there are or will be costs does not discharge the duty, see Jet2.com Ltd v Blackpool Airport Ltd [2012] EWCA Civ 417. In Emirates Trading Agency v Prime Mineral Exports Private Ltd [2014] EWHC 2104, a clause calling for ‘friendly discussions’ was also deemed enforceable in principle and required fair, honest, and genuine discussions to resolve the dispute, although no more. Where discretion is given to one party eg to close out certain transactions, there may also be an implied duty of honesty, good faith, and genuineness and the need to avoid arbitrariness, capriciousness, perversity and irrationality, Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116, Euroption Strategic Fund Ltd v Skandinaviska Ensdkilda Banken AG [2012] EWHC 584 (Comm). 226 Alternatively, unforeseeability may lead to claims of mistake with its rescission remedies, which are likely to be quite different. This could be relevant especially in respect of past and present circumstances not considered discounted in the contract if the affected party did not know of them. Again, as discussed in s 1.3.11 above, mistake or even negligent misrepresentation in common law terms potentially leading to the avoidance of the contract should not quickly be assumed in the commercial sphere and neither should the emergence of an unforeseen gross imbalance. Professional parties carry and must cater for substantial risks, which they may attempt to reallocate between themselves at the time of the conclusion of the contract. It assumes some foreseeability but the lack of it is not necessarily in the nature of voiding the contract, except in extreme cases. That is what risk acceptance means among professionals.

106 Volume 3: General done next; there is no special facility for adjustment or renegotiation of the contractual terms. In Article 79, there is, on the other hand, a reference to the impediment not having been taken into account at the time of the conclusion of the agreement. As has been said before, this could be seen as a reference to risk acceptance (the impediment thus having been discounted), which for the professional dealings that the Convention covers would seem key, but it is not at the heart of the Convention language and a matter of interpretation. Again, the clause derives from anthropomorphic civil law codification thinking and is consumer law. The UNIDROIT Principles, the PECL and the DCFR have very similar language for force majeure taken from Article 79 of the CISG, which unquestioningly became some kind of gold standard in the minds of many. Emphasis on the impediment having been taken into account is split out in Article II-3:104(2) DCFR and may therefore have more meaning. More important may be that in all three sets there are special provisions for a change of circumstances. The UNIDROIT Principles tie this relief to the equilibrium of the contract and do not require an excessive burden, again difficult to explain for professional dealings for which these rules were written. What is the equilibrium and in how far must accepted risk management provisions or the agreed lack therefore be taken into account? The PECL appear here less generous even though also applicable to consumers: see Article 6.1.1.1, which requires an excessively onerous effect while there is also a reference to risk acceptance. The DCFR operates similarly (see its Article III-1:110) but uses abuse of rights language while tying the relief to an exceptional change of circumstances making performance so onerous that it would be manifestly unreasonable to require it.227 It is more difficult to operate without proper relationship thinking. If in the case of a change of circumstances, a duty to renegotiate is to be assumed, the situation is probably not much different from one where parties may be required to continue to negotiate in a pre-contractual situation or to continue an agreement after its expiry if there is a clause to that effect without clear instructions. The true issue then is when such a duty comes to an end, in other words what could (reasonably) be expected to happen. It may be noted in this connection that the DCFR in its post-contractual renegotiation language in Article III-1:110 does not track the pre-contractual language of Article II-3:301, which is cast in a much more peremptory manner, as we have seen, and does not refer to good faith either. Again, in the professional sphere, such a duty to renegotiate or a duty to continue agreements beyond their termination date should not quickly be assumed. There must therefore be some form of justified reliance or more likely serious hardship, however defined,228 while here again emphasis should be on the overall effect on the finances of the professional debtor: see the discussion in the context of modern contract theory in section 1.1.6 above. Some misery under one contract of which there may be thousands is no excuse and any adjustment might be very detrimental to the other party who may have only one such contract and depends on it.

227 It is curious in that it introduced new language while requiring the obligation to be recast to make it ‘reasonable and equitable’, which is undefined. One would have expected here ‘good faith and fair dealing’ language. The PECL referred to ‘just and equitable’. In the DCFR, there is only good faith language (without fair dealing) in requiring (only the debtor) to seek relief through renegotiations. 228 Factors likely to be taken into account to determine whether serious hardship exists, so that there is some duty for the other party to renegotiate or a right to terminate, are likely to be: (a) the relationship between the parties in terms of their professionalism, with a lesser need for protection against outside risks in transactions between professionals; (b) their special interests and reasonable expectations, taking into account any risk acceptance or the division of risks agreed between them, but also the frequency of their transactions, the incidents that have arisen in them such as, eg, poor performance generally or lack of co-operation, of credibility, and of creditworthiness so that there may be a cumulative effect; and (c) the nature of the deal as outside risks are likely to have a different effect and lead to different types of hardship and adjustments, eg, in loan as distinguished from supply agreements.

Volume 3: General 107 Other problems may emerge in renegotiations: for example, in the sale of goods, market movements in the required quality or style of merchandise, like in the fashion industry, may make a great difference. This may then also lead to upgrading demands, which a supplier may not be able to meet. In other situations, a buyer may not have the capability to market more sophisticated replacement lines of production so that continuation of the contract makes little sense as demand for old-fashioned products fades and older product lines must be discontinued by the supplier. These are considerations that could prove decisive and determine whether hardship is a valid consideration and adjustment of a contract can still reasonably be required or whether, if discussions lead nowhere, continuation of the contract or termination must follow. These discussions need not be long for them still to be considered in good faith or reasonable. In this connection it is conceivable that the newly negotiated terms are not fully market related as far as price and quality are concerned and there could still be a discount or a phase-out or phase-in for more gradual adjustment. The issues of force majeure, hardship, and renegotiation will be discussed more extensively in section 1.4.5 below. Here the more particular issue is that in the normative interpretation or good faith approaches, relief is limited in professional dealings. Renegotiations may sometimes be demanded if a situation of hardship arises but even this is less likely between professionals, short of a hardship clause in the contract. It also means that renegotiations may be discontinued sooner and enforcement of the existing agreement demanded. Again, this can be explained as the limiting role of good faith in terms of relief in the professional sphere and then becomes another example of relationship thinking.229

1.4. Performance of the Contract, Defences, Default, Excuses, Termination 1.4.1. Performance in Kind/Specific Performance A contract is made with a view to performance of its terms, even if it may be subject to and supplemented by extra-intentional conditions. When one of the parties is not performing, the question arises as to what can or must be done. Court action or other forms of adjudication are the natural response in all modern societies if attempts at a settlement fail but what may or could courts, in particular, be asked to do when accessed in such situations? Even if the plaintiff ’s default argument is accepted, what should the relief be and how could the judgment be enforced if there is no voluntary compliance with the decision? It is simplest in money judgments: normally there will be a possibility of attaching the defendant’s goods and obtaining a sales order or execution sale allowing the successful plaintiff to set off its monetary claim against the proceeds of this sale. This is on the whole efficient, at least in countries where courts and public authorities are well

229 It may be recalled in this connection that under German case law, notions of good faith (or Treu und Glauben) began to be applied to rebalancing the contract in the case of a change of circumstances that was so severe that it led to a collapse of the basis of the agreement (Wegfall der Geschäftsgrundlage). The concept dates from the extreme situation obtaining in Germany after World War I but the relief is now codified in s 313 BGB, see further s 1.4.6 below. Also in the Netherlands, this is now statutory law, see Art 6.258 CC but seems to be seldom successfully invoked. Neither refers now to good faith directly nor reflects relationship thinking expressly (although in the German text there is a reference to risk acceptance) and may therefore represent a step back from the good faith or normative approach.

108 Volume 3: General equipped to deal with enforcement and collection, but even in more developed countries there may still be problems and money is not always the issue. A money judgment is the obvious answer when the claim is for payment of goods delivered or services rendered. However, if the claim is for the delivery of the goods or services themselves, there may not be a request for a money judgment (covering damages), but rather for a demand for performance in kind instead. This is referred to as specific performance in common law. When is there a right to it and how is it to be enforced against the defendant? Of course, it should be noted that, in this sense, money judgments always allow performance in kind in whatever legal system. In civil law, that is also mostly the case with proprietary claims. In common law, it is equally possible to claim specific assets but this facility strictly speaking only applies in land law, notably pursuant to a contract for the purchase of real estate. A variation is the foreclosure of a mortgage. In the law of chattels, the right to reclaim is, in common law, much more incidental (even though, unlike in land, we have here a true concept of ownership) and often limited to situations (a) where assets are obtained by fraud (in a common law sense), (b) where there is a specific right of immediate repossession (for example, on the termination of a user’s right or finance lease), (c) in the case of conditional ownership rights leading to a right to reclaim the asset upon the maturing of the condition, or (d) in the case of a so-called repossession of secured assets upon a default under (non-possessory) secured lending, sometimes (as under Article 9 UCC in the US) backed by statute: see more particularly Volume 4, sections 1.2.4 and 1.3.4 below, and (e) in situations of bankruptcy where the alternative would be a competing claim for damages. This is property law, but in common law, the term ‘specific performance’ is mostly used in connection with the performance of contractual obligations (to give or to do). Here, common law and civil law especially differ on the right to performance in kind or specific performance of these obligations. In common law, it has remained in principle exceptional; in civil law it is in principle the norm.230 In civil law, the facility of specific performance in such cases developed gradually. Pothier231 allowed specific performance very clearly, yet the French Code Civil was generally silent on the possibility and its implementation notwithstanding the text of Article 1142 CC (old, as against the former Articles 1184(2) and 1610 Cc). French legal practice has always been in favour of it,232 230 The situation in common law was explained by Lord Hoffmann in Cooperative Insurance Society v Argyll Stores, WLR 898 (1997): ‘It is true that the defendant has, by his own breach of contract, put himself in such an unfortunate position. But the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance. A remedy which enables him to secure, in money terms, more than the performance due to him is unjust. From a wider perspective, it cannot be in the public interest for the courts to require someone to carry on business at a loss if there is any plausible alternative by which the other party can be given compensation. It is not only a waste of resources but yokes the parties together in a continuing hostile relationship. The order for specific performance prolongs the battle. If the defendant is ordered to run a business, its conduct becomes the subject of a flow of complaints, solicitors’ letters and affidavits. This is wasteful for both parties and the legal system. An award of damages, on the other hand, brings the litigation to an end. The defendant pays damages, the forensic link between them is severed, they go their separate ways and the wounds of conflict can heal’. In the US it was Holmes who much earlier signalled the general approach in The Common Law, 301 (1881): ‘The remedy of specific performance is an exceptional one. 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 from interference until the time for fulfilment has gone by, and therefore free to break his contract if he chooses’. It follows that penalty clauses are considered with suspicion in common law; liquidated damages clauses must be proportionate. 231 Traité des obligations, No 156. 232 See earlier, especially, R Demogue, Traité des obligations en général 6 (Paris, 1931) No 139.

Volume 3: General 109 and it was confirmed in the 2016 amendments, see Articles 1217 and 1221 Cc (new), except when the costs are disproportionate. In the Netherlands, the Civil Code of 1838, largely based on the French Civil Code, which had been in force in the Netherlands until that time, abandoned the idea of specific performance in its generality against its own Roman-Dutch roots and Germanic principle, although in line with the older Roman law. The general facility of specific performance was, however, reintroduced in the Netherlands by statute in 1932.233 When a judicial order for specific performance is used, penalties of some sort are the only possibility for making it work. They may be physical, like imprisonment and appropriation of an asset through a bailiff, or monetary in the sense of fines enforced like money judgments. These fines may be of an administrative nature and then accrue to the state, or they may accrue to the successful plaintiff as an extra form of compensation. Treble or punitive or exemplary damages for the plaintiff are sometimes possible in the US but not in pure contract cases. Rather they are connected with contracts in restraint of trade or with malice in tort. In common law, the remedy is contempt of court, under which courts will only subsequently set administrative fines or may then even order imprisonment for an unwilling judgment debtor. The superior courts have broad discretion here as the request is in equity. In France, courts have developed the astreinte, which allows them to impose a monetary penalty on unwilling defendants. It also leaves them broad discretion as to the circumstances in which this sanction will be imposed and as to the appropriate amount. The money will accrue to the plaintiff. That is also the situation in the Netherlands. In Germany, on the other hand, the penalty so imposed will be administrative and collected by the state. Whatever the approach, specific performance is often a messy remedy, an additional and important reason for courts not to get deeply involved. It is the reason why the possibility of obtaining a court order for performance in kind remains exceptional in common law countries.234 As just mentioned, it is only possible in equity and restrictively granted, particularly in England, and then mainly in situations where there is no reasonable alternative. Mostly there is, and granting monetary damages can often adequately, more quickly and efficiently deal with the situation. In any event, in practice, parties often prefer it to forcing an unwilling counterparty still to perform. Thus, a monetary judgment for damages normally follows a default with its much easier execution possibilities. Because of the difficulties involved in executing performance orders, even in civil law, performance in kind, although the rule, is in practice also fairly exceptional for these reasons and indeed normally equally restricted to situations where it is the best and most efficient answer. In fact, when a sales contract is for the delivery of some commodity at a certain price, the purchasers under the contract will often be happy to be released from their contract while claiming damages for the delay by the non-performing seller and for any higher price they may have to pay elsewhere. For them, it will normally be the cleanest and most efficient solution. Often, they will have to purchase the goods elsewhere anyway because of the immediate needs of their production facilities to operate or to cover their trading commitments. On the other hand, if they want a unique object, for example a manufacturing tool, their remedy may be performance in kind and if the defendant upon judgment still does not perform, a (stiff) penalty may be the answer.

233 See for the history also HFWD Fisher, De Geschiedenis van de Reele Executie bij Koop [History of Specific Performance in Sales] (Haarlem, 1934). 234 See also MA Eisenberg, ‘Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law’ (2005) 93 California Law Review 977.

110 Volume 3: General Equally, in the case of services, if they are commonly provided and can be easily substituted, albeit potentially at a higher price, immediate substitution is the answer and only damages for delay and higher costs will be claimed from the defaulter. If the service is more specific, for example the completion of an architectural design, performance in kind may still be necessary. But if this service is highly personal or depends on other factors such as good spirit or proper inspiration, as in the case of the services of a barman, singer, or portrait painter, there is a limit to what can be asked in kind and such an order may not work, whatever the penalty. Damages again appear the better remedy, however unsatisfactory in the circumstances, although a stiff penalty may still regenerate the right spirit and some form of inspiration may return. It must also be realised that if the period of performance has lapsed, performance may no longer be valuable, and damages will again become more appropriate. In fact, depending on how long it may take to obtain a judgment for performance in kind, performance may have lost its urgency or significance and conversion of such a judgment into a monetary equivalent may then also be called for. If performance requires the help of others over whom the defendant has insufficient power, such as subcontractors, again damages are the likely answer. If performance is no longer possible at all, because the portrait painter is dead, naturally there can only be a claim for monetary damages against the estate, which will probably claim force majeure. German law is clear in always allowing performance in kind (section 241(1) BGB). That confirms the civil law’s basic approach, but, in the elaboration, the German Code of Civil Procedure (CCP) sets out a number of scenarios and indeed differentiates between a number of basic cases for claims other than monetary claims (sections 883ff CCP). Appropriation by a bailiff of a specific chattel owed under a judgment or execution title is dealt with in section 883 CCP. If an act or service owed by the unwilling defendant may be performed by a third party, this defendant will have to pay the cost of such a third party, see section 887 CCP. Sections 888 and 890 CCP allow for penalties if the defendant does not perform a specific act or service which cannot be performed by any third party or if he remains obstructive while being ordered to refrain from doing something or to allow others to take some action. These penalties may be imprisonment or fines which, again, in Germany, go to the state. The result may also be the conversion of a judgment in kind into a monetary judgment. In France, the Civil Code is older and the regime less precise. Moreover, there were contradictions. As already noted, Article 1184(2) Cc allowed an order for performance in all bilateral contracts, but Article 1142 suggested that all contracts to do or not to do resolve upon default in damage claims apparently in order not to infringe anyone’s freedom of action so that only contracts to give appeared capable of a performance order in kind. As already mentioned also, case law much refined this system. Under Articles 1143 and 1144 Cc, the courts could give preliminary restraining orders or order others to do the act on which the first party defaulted if the performance is sufficiently impersonal. The new law after 2016 is more specific. The alreadymentioned astreinte backs up the system235 as a penalty developed in case law serving both as an inducement to comply and a reward for the patient but exasperated plaintiff. In common law, the combination of the contempt of court remedy and specific performance, both in equity, results in a system which in practice is not far away from the German one. Damages are always the more normal rule, but if harm to the plaintiff cannot be adequately expressed in monetary terms, specific performance may be the answer unless it is too inconvenient or does not hold out a realistic prospect of success,236 especially if it would require long

235 See in modern times, Cour de Cass Civ, 20 October 1959 [1959] D 537. 236 Ryan v Mutual Tontine Westminster Chambers Association [1983] 1 Ch 116.

Volume 3: General 111 judicial involvement. Traditionally, specific performance was thus reserved for situations where the performance was unique or for land contracts. As an equitable remedy there is in any event discretion and it depends on the circumstances whether it will be granted with categories of cases developed much in line with the more precise German categorisation. As already mentioned, the remedy can in particular not be used to enforce a personal work commitment. In the sale of goods, modern statutory law both in England and the US allows more generally specific performance in favour of the buyer, in England under section 52 of the Sale of Goods Act, provided the goods are specific and ascertained. As regards the seller’s right to recover the price or force the buyer to take delivery, the English Act provides in section 27 that the seller must deliver the goods and the buyer must accept and pay for them. Yet according to sections 51 and 52, the buyer’s normal remedies remain damages, although the court still has discretion to order specific performance. For the delivery of commodity goods, specific performance is normally not granted. In the US, in the sale of goods, specific performance is more liberally allowed, therefore no longer only when damages are inadequate but rather when there are no clear circumstances that dictate otherwise. For specific performance, section 2-716(1) UCC requires the goods to be unique but also allows for ‘other proper circumstances’ in which specific performance may be obtained. It provides for the seizure of the goods by the sheriff. This remedy remains, however, in the common law (equity) tradition at the discretion of the judge, who may provide other relief as s/he may deem just. For the seller, recovery of the sales price will normally be allowed except where the seller never managed to deliver the goods, in which case he must minimise the damage and make a reasonable effort to sell the goods to others. Although under commercial pressure, common and civil law have thus greatly converged in the matter of performance remedies in kind, in civil law at the theoretical level the discretionary element is lacking while contempt proceedings proper do not exist and are replaced by forced executions (against a seller in a sale through the removal of the goods if in his possession) or by the setting of a penalty for each day of further delay. Foreign parties choosing English law as the law applicable to their contract and its performance should be well aware of these differences, especially where they must make them fit into different enforcement mechanics altogether. The 1980 CISG has a curious provision in this respect in Article 28. It refers back to the lex fori in these matters (see for the details section 2.3.4 below), therefore well beyond the enforcement mechanics themselves.

1.4.2. Lack of Consensus in Civil Law and Defences to Performance in Common Law: Invalidity and Rescission In common law writing of the American variety, the subject of defences against the enforcement of contracts is usually dealt with immediately after the formation of the contract. In this connection, lack of formality, especially in terms of documentation (Statute of Frauds), lack of capacity, illegality, fraudulent or innocent misrepresentation, mistake, duress or undue influence, and unconscionability (in the US) are usually mentioned as defences against any demand for performance. In civil law, fraud, duress or undue influence, misrepresentation (although here mostly not considered a special category), and mistake are on the other hand commonly connected with a lack of consensus and therefore result strictly speaking not in some valid defence to a claim for performance, but rather in voidness or more likely in voidability of the contract as a whole at the option of the affected party as a natural consequence of this failure of consent. Thus, it may be

112 Volume 3: General said that in civil law, these are matters of validity or formation issues, rather than defences, as in common law, which are performance issues.237 In common law, it follows from the fact that the consensus notion is not at the heart of the contract, as we have seen. There is no great conceptual clarity in these matters and the courts (in equity) developed a patchwork of remedies centring on rescission. This is a technical term geared precisely to defences against a demand for performance. Whatever the term may suggest, it does not necessarily mean the end of the contract, which, like most equitable relief, depends on the circumstances of the case. Thus, in common law, the nature and consequences of these defences are likely to be more complex and varied, although in principle all of them may potentially discharge the party concerned from its contractual obligations. Specific performance—in any event never a right as just noted—is not then granted, but there may still be some damages payable. The contract itself may even have come to an end but the different situations in which this may happen and the manner in which it does, as well as the consequences, must traditionally be much more clearly distinguished than in civil law. In this connection it is also of interest that in civil law, invalidity and illegality are commonly distinguished. Invalidity is normally connected with the lack of consent and goes therefore to the heart of the existence of the contract. Illegality on the other hand is normally connected with a statutory prohibition or public order constraint. In common law, invalidity and illegality are often interchangeable notions and usually result from moral or public order consideration and may then also result from impediments such as anti-competitive behaviour. Again, they result in defences against a demand for performance. In civil law, the notion of an improper causa (where still existing, see section 1.2.6 above) may sometimes also be used to avoid these illicit contracts. There is another particular common law aspect not found in civil law in the same manner. Common law adheres in the case of invalidity or illegality to the old rule ex dolo malo or ex turpi causa non oritur actio, meaning that no one can derive an action from their own misbehaviour. Under an invalid or illegal contract in the common law sense, it is therefore in principle impossible for the offending party to reclaim anything done or given under the challenged contract. In particular, money advanced to achieve illegal ends or to finance crime will not be returned on the basis of the contract’s invalidity although even then proprietary rights might still be reclaimed between the parties if they abandoned their illegal objective. If the invalidity is based on less urgent social or policy considerations, the rule may also be relaxed. In any event, if only one party benefits, for example in a contract that was unduly restrictive of trade and hence invalid in principle, the party suffering the disadvantage may be able to reclaim its outlay from the other. In civil law, any reclaiming rights in these situations may be handled under the concept of unjust enrichment or restitution, cf in Germany section 817 BGB and in the Netherlands (the more flexible) Article 6.211 CC (referring to reasonableness), and is not, as in common law, a matter of contract law. As regards misrepresentation, this is perhaps a better known common law defence. It can be fraudulent, innocent or (in England) negligent. To repeat, the situation is here different from the one in civil law where misrepresentation (at least if fraudulent) goes to the heart of the consensus in terms of fraud as defined, is a formation issue, makes the contract voidable at the behest of the affected party, and is not merely a performance issue or defence against a performance request, but the situation is also otherwise different. Foremost, ‘representation’ in this sense assumes in common law that certain declarations were made which are not technically part of the contract 237 In the civil law system, fraud and duress may invalidate all voluntary legal acts while mistake is then more particularly believed a contractual issue.

Volume 3: General 113 but on which there has been reliance at the time of formation. The difference is that where contractual terms are agreed, for example about quality and its specifications, any shortcomings, including misrepresentations, would give rise to a breach of contract or a default on the part of the seller (the watch was not gold as stated but only golden, etc) and be pursued in that context. The remedy for misrepresentation in the above sense (unless fraudulent) is, on the other hand, rather ‘rescission’ of the contract. To repeat: this is a technical term developed in equity and is a defence against a demand for performance, not technically a breach of contract. Unlike what it suggests, it is not avoidance of the contract per se either. In appropriate cases, it may lead to it at the option of the harmed party and then results in sales in voidable title, but it still depends on the circumstances. Thus, if this defence is invoked, the consequences must still be considered further and it cannot simply be assumed that the contract is at an end. For example, a watch is being sold according to the contract. It says nothing about the type. The seller said, however, that it was a Cartier watch. He genuinely believed so. Subsequently, after the sale, it transpires that it was a fake Cartier, of which there are many. There is no breach of contract proper; the contract said nothing, but there was probably reliance on the seller’s representations. If so, rescission may be in order and the judge will decide in the light of the circumstances what the proper remedy is, which could be a price reduction or damages. It should be clear, however, that much of innocent misrepresentation may be in the realm of sales talk and should be recognised as such so that no remedial action may be justified at all. It was pointed out above in section 1.3.11 above that this goes especially for professional buyers and proper relationship thinking would produce that result, although there may still be duties of care and disclosure implied depending on the type of counterparty. Again, that is relationship thinking. If misrepresentation is fraudulent, however, the matter is more serious and there may also be a tort (deceit) for which there must have been intent. If there was no such intent, there may still be no more than innocent misrepresentation. In England negligent misrepresentation holds some middle ground (since the Misrepresentation Act 1976) in that it puts the burden of innocent misrepresentation on the person having made the (mis)representation. Until such time, in prima facie cases, intention to deceive is assumed. In common law, in all cases, the point of departure is the position of the person who makes a representation (about quality or otherwise), not of the victim, unlike in civil law where this is mostly only so in the case of clear fraud. As already mentioned, the differences are mainly in the consequences. Especially in the case of innocent misrepresentation, the possibility of rescission leading to a setting aside of the contract is in practice limited. Even in the case of fraudulent misrepresentation, a setting aside of the contract is not automatically available either but still depends on the circumstances. In any event, a judicial order restoring the old situation will only be given if that is still possible or meaningful. In typical equity fashion, the factual situation is decisive for the type and meaning of the remedy. For example, if the delivered asset is consumed or a service already rendered on the basis of false premises, the rescission order will not be given at all. Damages may then be the only available alternative, again as an equitable remedy. It has already been said that in equity, there is always a measure of judicial discretion and no absolute right of the harmed party. Most importantly, in the sale of goods, movable property will never be restored to the damaged party if a bona fide third-party buys from a person with voidable title. This party is specifically protected: see section 23 of the Sale of Goods Act in the UK and section 2-403 of the UCC in the US. In civil law, on the other hand, if the misrepresentation resulted in a lack of consensus, avoidance of the contract becomes an option for the harmed party and is then likely to be fully effective. Even property returns in principle if the damaged party so wants, still subject, however, to the

114 Volume 3: General protection of bona fide third-party purchasers of chattels but not of other assets, assuming (in most systems) that these purchasers acquired physical possession or at least a sufficient measure of control. In abstract systems of title transfer such as the German one (see Volume 4, section 1.5.7), any automatic return of the assets is unlikely, however, even from the purchaser except in the case of fraud. In other legal systems, such a return possibility upon a failed sales agreement (for whatever reason) is also becoming less favoured, especially in the case of commoditised products, an issue that will be discussed in greater detail in section 2.1.7 below in connection with the notion of finality. In common law, it was always exceptional, much as in Germany, and given as a matter of right only in the case of pure fraud when an automatic return of the assets at least by the buyer may be ordered through a specific performance remedy assuming the asset still exists or has not been resold: see also Volume 4, section 1.4.6. As just mentioned, in common law the possibility of rescission is limited especially if the misrepresentation is innocent, a situation in civil law more likely to amount to ‘error’, which, however, again goes there to the consensus requirement and voidability of the contract, not to the duty to perform. It may therefore not be automatically equated with innocent misrepresentation in common law, quite apart from the fact that if such a representation is made in the formal contract itself, it is in common law treated differently; breach of contract would result—it was already mentioned. As will be shown, the comparison between ‘error’ in civil law and ‘mistake’ in common law (rather than misrepresentation) presents also problems. They are not the same either. Even in common law, the English term ‘mistake’ must be clearly distinguished from innocent misrepresentation, although there are borderline cases. In essence, mistake is a different concept and concerns some defect in the declarations by one of the parties at the time of the offer and acceptance rather than the making (fraudulently or innocently) of a misleading representation on which the other relied and not reflected in the contract itself. The difference is subtle but important. A mistake in a declaration may follow when it is not properly understood, for example if a service is offered at a certain price, but VAT is not mentioned. Was it included or excluded? Especially in oral contracts, a mistake in this sense is easily made: for example, both parties talk about ‘60’, but one party means $60 per unit, while the other meant ‘60k’ for the lot and a misunderstanding may result which is nobody’s fault. This would be (mutual) mistake in common law. That then concerns more properly contract formation and the contract could be void. If, on the other hand, a statement is made separately from the contractual text, for example, that a gold watch is offered that proves to be only imitation gold, then this is not part of the contract formation proper, there is (extra-contractual) misrepresentation which may be fraudulent, negligent or innocent as discussed above. The key in mistake is that upon an objective reading of the situation, the parties are not in agreement: the declarations do not sufficiently overlap. It should, upon an objective evaluation of the facts, be clear that parties were talking about different things (whatever their intent which, in the traditional common law view, is not essential in matters of formation of contract as we have seen). There is no sufficient overlap and no contract. For mistake in this common law sense, which therefore is not a matter of intent proper, civil law seems not to have a true equivalent. It is usually distinguished from error or seen as only a special instance of it. Moreover, while in civil law misrepresentation, if it can be characterised as fraud and error, normally leads to forms of voidability at the affected party’s request for lack of consensus, in common law, mistake leads in principle to a void contract at law. Only then any property transferred reverts. The risk of appreciation or depreciation is in the meantime with the seller. Another aspect is that even if the contract stands at law because the mistake is not believed sufficiently relevant, equity may still give a rescission remedy depending on the circumstances and may in any event refuse specific performance of the contract. Thus, certain forms of mistake

Volume 3: General 115 are considered less fundamental and then lead only to voidability in equity. It is often difficult to draw precise lines. Unilateral mistake, a mistake not involving the other party, on the other hand, will seldom give rise to a remedy at law (or even in equity); it is the mistaken party’s own risk. The latter thought to offer a gold-plated watch, but in the event, it was pure gold.238 Bad luck! US law is often simpler than English law. So is civil law at least in those cases where there may be a lack of consensus, more clearly if there is fraud, although it may still ask which party should reasonably bear the risk in the case of a mistake (in a common law sense). Importantly, in this connection blame is likely to play a role in the assessment in civil law, potentially relevant if the non-complaining party could not help it. It is not his/her fault that the complaining party made a mistake. Thus, the normative interpretation technique may still find a valid contract if the mistake was unilateral and not attributable to the other party. As already suggested in section 1.3.11 above, professionals in particular may not then have much protection. In other words, even in civil law their mistakes should normally be their own problem and risk, as the other party certainly cannot help it either and it is hard to see why it should have to bear the burden. In any event, the fact that mere expectations were disappointed is not enough. At least in sales, caveat emptor remains the basic rule. On the other hand, if parties have been clearly talking about different things, there may not be a contract. A mutual mistake of this kind could also be seen as tantamount to a rejection of an offer and would result in voidness of the contract or rather in no contract at all. Here common and civil law may come together. Some forms of mistake in this sense (especially those as to the subject matter) may in civil law lead to the contract not having a proper object with avoidance on that basis, as in the case of a reference to the ship Peerless of which there were two at the time, with the one party meaning the one and the other party the other.239 But the legal consequence may still be different: there is mistake and voidness in common law if there is a misunderstanding about the contracting counterparty; in civil law this is more likely to be error, leading only to voidability, unless indeed there was no object. In common law, mistake may also concern the possibility of performing the contract, which may be characterised as impossibility or force majeure in civil law. Yet a contract that may objectively be incapable of being performed from the beginning may also be absolutely void in civil law, or may only be considered valid as a basis for a claim for damages, cf section 311a BGB in Germany. This does notably not obtain in cases where an estimate of cost is given which is subsequently overrun. Impossibility to perform for the agreed price does not discharge the debtor, even if it was foreseeable from the beginning and the creditor must have known about it. Duress and undue influence may provide further defences in common law. In a common law sense, duress is often thought of as physical. Civil law, on the other hand, sees the term ‘force’ chiefly as psychological coercion or economic pressure preventing the conclusion of a valid agreement for lack of consensus. In common law (equity), this is primarily covered by economic duress240 238 Solle v Butcher [1950] 1 KB 671, 693. 239 Raffles v Wichelhaus (1864) 2 HC 906. See for a discussion of mistake under common law also HG Beale, Chitty on Contracts (London, 2012) 5.001 in England, and Restatement (Second) of Contracts (1980), s 379 in the US. 240 See Mocatta J in Northern Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1978] 3 All ER 1170. In the US, the concept is more readily used than in England, see Comment to s 176 of the Restatement (Second) of Contracts (1979): see also Centric v Morrison-Knudsen Co 731 P 2d 411 (1986). In the US, there appears to be a preference for expanding the economic duress notion at the expense of the notion of undue influence. Economic duress, on the other hand, should be distinguished from unconscionability, which lies in the performance of the contract, although economic duress is normally also presented as a(nother) defence to performance and not as a formation issue.

116 Volume 3: General or possibly undue influence. It is not necessarily limited to abuse of a position of trust or of the circumstances as it often is in civil law. But whether there was unacceptable pressure exerted in the circumstances or resulting from the circumstances depends on the facts. Avoidance is the normal remedy in common law (equity), supported by the rescission possibility in appropriate cases. In modern civil law, avoidance upon the petition of the affected party is also the rule rather than voidness: see Article 3.44 CC in the Netherlands and section 123(1) BGB in Germany. It has already been mentioned that the 1980 CISG excludes matters of validity in this sense from its scope (Article 4). That concerns, in the context of that Convention, all matters relating to consensus and its failures; the impact of illegality, misrepresentation, mistake and duress or undue influence is not covered. On the other hand, they receive broad attention in the UNIDROIT Contract Principles, PECL and DCFR, as we shall see in section 1.6.8 below, which substantially follow civil law thinking in this area.

1.4.3. Excuses of Performance and the Meaning of Conditions and Warranties, Covenants and Representations As we have seen, in common law, the contract is in essence based on an exchange of (formal) promises under the consideration requirement of exchange and bargain. They must be sufficiently congruous to lead to a contract in which context declarations are of prime significance; detrimental reliance on conduct may complete this picture. Normally, the mutual undertakings of the parties form the terms of the contract (at least if it is bilateral). The essential terms are in England called conditions, the non-essential one’s warranties. The idea behind conditions is that their nonperformance automatically discharges or excuses the other party (notably from payment) who may, however, may still have a claim for restitution and expectation damages. As we shall see, at least in professional dealings, this is in truth the only real excuse available in respect of nonperformance in common law unless the contract itself specifically provides otherwise. As we have seen, the parties in their contract can do so notably by introducing a force majeure clause or other excuses, for example, in a change of circumstances or hardship clause. Defences against a demand for performance should be well distinguished here and were discussed in the previous section. It follows that in common law, in respect of conditions, notably force majeure cannot normally be pleaded as an excuse by one party under pressure, certainly not while requiring the other party still to perform, unless again it was a contractual term. It was said earlier that the objective law does not take care of contracting parties and their risk management or in more banal terms does not allow the party in distress to put its problem on the plate of the counterparty. It is not a question of blame or fault and even if it was, it should not affect the other party whose fault it certainly was not either. Warranties are different and non-compliance with them does not excuse the other party, but compliance may of course still be demanded and damages asked in the case of default. The distinction between conditions and warranties is thus important. Whether a promise is a condition in the above sense remains, however, a matter of interpretation and there may be justifiable doubt. Short of other dispositions in the contract, performance of the major contractual terms by the one party is in this manner in common law always a constructive or implied pre-condition of performance by the other. Again, especially lack of payment discharges the other party from any further performance. Americans do not distinguish between conditions and warranties in precisely the same way but look here also at the conditionality of the contract or at what may condition it. So, the difference is more one of expression. Indeed, in the American sense, failure of a basic term or promise also discharges the other party and is a pre-condition for the latter’s (further) performance duty. In the US, contractual conditions may in this sense be precedent, concurrent, or subsequent. They can be express or constructive. The effect of promises, which

Volume 3: General 117 are duties to give, to do, or not to do, may thus be varied by implied conditions of this nature being attached to them. Again, whether there is a failure of condition in this sense is a matter of interpretation. Notably payment is conditional on the other party’s performance, which, in this reasoning, is a condition precedent to the payor’s own performance. An interesting example may clarify the point and can be found in the delivery of a certain quantity of goods before a certain date. Is the time element a mere promise to the buyer or promissee or did it condition the contract? If it is the former, the promisor may be discharged if s/he cannot deliver by the appointed date but could do so later. The promisor operated on a best effort basis only as to the date of delivery although s/he must still deliver as soon as possible thereafter while the other party must still pay upon the later delivery, although not now. Normally, however, failure of the promisor to deliver leads to a charge of late delivery, especially relevant in the case of perishable goods, and thus to a situation of breach of an essential contract term. The other party is excused from payment, as the main term of the contract is not performed in a timely manner. That party may also have a claim for damages. While in common law all substantial terms are or give rise to conditions, in civil law, this translates rather into a guarantee of performance. In that case, also in civil law, there is commonly no force majeure excuse leading to the repudiation of the contract and to a discharge of the other party upon breach, whatever the reason. Payment obligations are usually considered in that category. It means that in a common law sense, all terms in a civil law contract are warranties and not conditions unless reinforced by a guarantee or being payment.241 In this approach, breaches are normally only followed by a sanction if the promisor can be blamed for non-performance.242 A situation of force majeure (or possibly of changed circumstances) is then usually sufficient excuse except again when there is a guarantee or when it concerns payment.243 This redistribution of risk is statutory and quite a difference in approach as we have already seen. Again, it may be explained by the English contract having been developed first in commerce where it is seen primarily as 241 In civil law, default if considered sufficiently serious is, however, often also construed as a rescinding condition of the contract at the same time, cf Art 1184 of the French CC and Cour de Cass, 24 January 1939, Gaz Pal 1.5866, also referred to as the lex commissoria, but the issue is more fundamental in the structure of the traditional common law of contract and there is here a difference in emphasis clear especially as to the impact of force majeure on the obligation of the defaulting party. 242 A more objective or subjective view of force majeure may be noted here. In the objective or absolute view, force majeure equates with personal impossibility and it is then irrelevant whether a performance becomes more difficult or disadvantageous than originally thought. Only absolutely unforeseeable impossibility to perform would discharge the debtor. Monetary and guaranteed obligations are never discharged. In the more subjective view, on the other hand, the debtor need only foresee or do what may reasonably be expected in the circumstances. It could then even excuse non-payment (of a temporary nature, but not upon a debtor’s insolvency), illness of the party that must perform, or non-performance for other personal reasons. That would appear to be the chosen approach in civil law and is as we shall see also the approach of the Vienna Convention (Art 79). It has already been said that such an approach is less feasible in business dealings. Art 79 does contain a reference to risk acceptance, which at least in professional dealings might put the excuse on a more objective footing, although nothing is clear. 243 Thus, blame becomes the key in situations of non-performance. It means that if the debtor is to be blamed more, he will be liable for damages while the creditor may terminate the contract (ss 280 and 323 BGB). If it was the creditor himself, for example for lack of co-operation, he bears the burden and may still have to perform. In such a case, the debtor may consider himself liberated (at least if not claiming performance by the other party) while still being able to claim avoidance of the contract and damages (ss 275, 323(6) and (2) BGB). If neither party is to blame, both are free in principle (ss 275 and 326(1) BGB) and both suffer whatever is their loss on the deal and the expenses. That may come about eg, in the case of mutual mistake. It is so also when one of the parties is in a recognised force majeure situation and cannot perform for that reason, unless the risk was apportioned otherwise, but it may still leave some room for more objective risk allocation in which the party in force majeure may have to share, especially if it invokes personal (and not external) reasons, eg illness. Although it is true that liability in civil law must be seen foremost in the context of who is to blame, there still remains the risk allocation question, that is to say the question who bears the burden even if neither party is at fault and is an important issue that cannot be ignored.

118 Volume 3: General roadmap and risk management tool which is left to the parties. Beyond their arrangements, which the law will enforce, the risks fall where they fall and the law is not going to help and redistribute except in extreme cases. Fault is irrelevant. In civil law terms, in respect of the main contractual provisions, a guarantee is implied. In common law, all main terms of the contract (conditions) are thus guaranteed in a civil law sense unless weakened by a force majeure clause or other excuses which need in that case to be specially included in the contract. It shows that both systems come from opposite directions, the reason again being that the common law of contract was always more geared to professional dealings where there is less room for excuses and blame is less of a consideration. It asks itself more readily why the other party should be stuck with the detrimental consequences. Somebody has to bear the consequences, never mind the blame, and it is at least among professionals more logical that it is the party that cannot perform for whatever reason. In other words, it is not natural that the counterparty, who is also not to blame, should be detrimentally affected. It follows that the law will not redistribute the risk if the parties have not been able to do so in their contract except perhaps in extreme circumstances. It is true that, if in civil law the promisor is not to blame for non-performance, the other party will not need to pay, but this party defends with an exception (not therefore an excuse in the common law sense) against any claim to perform on its part, notably payment; there is then no need to ask for avoidance of the contract proper. If this party suffers harm, there may even be a need for the defaulting party still to contribute, which is more likely when the force majeure was due to personal or internal rather than external factors. But only when the party that must deliver has given special undertakings, such as a guarantee of quality or of conform delivery in sales, is the situation similar to that in common law. It is in this connection also of interest that in the law of the sale of goods, there is usually a special provision to cover the risk of faulty or late delivery for no fault of any of the parties. That is the concept of transfer or passing of risk embodied in Articles 66ff of the Vienna Convention; see more particularly section 2.1.9 below. It means normally that the seller who has not yet (physically) delivered remains liable at least for all that happens to the asset even if it could not be helped (for example, the deterioration of perishable goods). In countries such as England, it is in principle the buyer (caveat emptor). It is a special arrangement for the sale of goods only, not common in any other type of contract, but such contracts pose no less the question as to who bears the risk if a contract cannot be performed for no one’s fault. This always remains an important issue even when there are valid excuses such as force majeure: who picks up the bill? That may be a different issue even in civil law. Again, it may mean that even if force majeure may be an excuse for non-performance, in civil law it still does not automatically discharge the nonperforming party in full. But damages may be more restitutionary or direct, rather than covering the loss of future profits. As a point of departure, the CISG in Article 25 uses here first the notion of fundamental breach. It is defined as any breach that results in such detriment as substantially to deprive a party of what it was entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.244 It does not, strictly speaking, entail a conditionality in the above sense; see also 244 The concept of fundamental breach was earlier used in a different context in England: exoneration or exemption clauses, especially in respect of contractual liability towards consumers, were not considered effective if there was a fundamental breach by the party seeking to discharge itself through such clauses. Scepticism of the House of Lords in Suisse Atlantique v NV Rotterdamse Kolen Centrale [1967] 1 AC 361 required intervention of the legislator to protect notably consumers against standard terms and led to the Supply of Goods (Implied Terms) Act 1973 and later to the Unfair Contract Terms Act 1977.

Volume 3: General 119 Articles 45ff and 60ff. A more precise set of remedies against default is defined here, which may ultimately result in avoidance of the contract by the aggrieved party (Articles 49 and 64), who would then also be discharged (but may still have a claim for damages (Articles 45(2) and 61(2)). That is like the common law approach except that it is more subjective. Subjectivity is also borne out by the force majeure clause of Article 79 never mind its reference to risk acceptance. It is the subjectivity in the concept of performance or lack thereof, much as in the formation tied to intent, and in the excuses that is one of the principal reasons why the CISG is commonly rejected by the trading community as we shall see and has not been ratified in the UK. Especially in view of where English law comes from, and for a professional commercial setting, that is not surprising. However, even in civil law, subjectivity in the excuse may still raise the issue of who bears the financial consequences, as we have just seen. The UNIDROIT Principles, PECL and DCFR follow the CISG approach (see section 1.6.8 below) and in the matter of excuses they largely accept civil law thinking too (see section 1.3.14 above). This is more surprising for the UNIDROIT Principles, which were meant for professional dealings only, and shows a lack of background understanding and knowledge or proper relationship thinking. Finally, to avoid misunderstandings and clarify terminology, it may be useful briefly to discuss the relationship between conditions precedent, representations and warranties, and covenants, particularly common in financial documentation governed by English or US (State) law. There is here an important difference in the use of the terms. Conditions precedent in that context normally require that certain documents are produced by a prospective borrower, such as incorporation documents, board resolutions approving the deal, the consent of the competent authorities, legal opinions on the validity of the contract, etc. Other conditions may be that, on the closing date, there is no evidence of default and that the representation and warranties made are all correct. In banking facilities, the impact of these conditions as essential terms has not always been clear: do they inhibit the contract or the drawing down of any loan facility thereunder? Mostly the contract is held valid, so that at least the fees payable under it can be claimed. Representations and warranties in this context concern the creditworthiness of the prospective borrower. There may here be some overlap with conditions precedent, as was noted in the case of default, while the representations and warranties themselves may be declared conditions precedent. Examples may be the truthfulness of financial statements, absence of major events affecting the borrower’s credit, such as major lawsuits or other contingent liabilities, or the absence of any material default up to and including the closing date. Parent and subsidiary companies may be included. Representations and warranties are in finance concerned with the past; covenants with the future. Under covenants, prospective borrowers promise to refrain from certain actions, maintain certain financial ratios and provide financial or other information on a regular basis. They may not be able to take on other debt (the pari passu or negative pledge clause), nor dispose of certain assets or engage in a merger. Breach of any of the representations and warranties or covenants will allow the lender to refuse any (further) draw-down and to call any outstanding loan principal plus accrued interest immediately (at its option). This is acceleration. Any further loan commitment may then equally be withdrawn. The default clause will usually spell this out in detail.

1.4.4. Default or Breach and Damages In section 1.4.1 above, the question of performance was black or white. Either one does or one does not perform, and in the latter case, unless there is a defence or excuse, the question of a

120 Volume 3: General performance order in kind or payment of damages presents itself where substantial differences between the common and civil law emerge in theory, although less in practice, as we have seen. In section 1.4.2 above, a number of common defences were identified in this connection, which could protect against a claim for performance, such as invalidity or illegality, misrepresentation and mistake. They concern the nature and binding force of the contract or its performance. It suggests that there is something wrong with it or with the rights and obligations that are flowing from it. There are here also substantial differences in the details of common and civil law as we have also seen. In section 1.4.3 above, the conditions of performance were discussed and also the excuses. Under common law, in bilateral contracts, not meeting the basic terms or conditions of the contract may excuse the promisee from performing and even allow the latter to terminate the contract and still claim damages. Traditionally force majeure is here not an excuse for non-performance of a contractual condition unless such an excuse is specifically entered into the contract. The same may go for a change in circumstances unless there was a hardship clause in the contract itself. Again, the common law of contract, at least in commerce, is first concerned with risk. Its allocation and management go to the heart of the common law commercial contract, its formation, operation, interpretation and performance, as we have seen. Civil law, on the other hand, first asks in all these matters what was intended and who is most to blame if things go wrong. That is a different point of departure and more subjective, although civil law cannot avoid the question of who pays for the consequences either and may still have to allocate it to the promisor even if claiming force majeure, especially if it results from internal factors, such as illness or other personal circumstances, but there may be no damages or (extra) cash payments, as also noted. Breach as a term of art concerns itself with the determination of damages or termination or avoidance of the agreement (or both) if there were no valid defences or excuses, or alternatively with any performance in kind or specific performance, which may be accompanied by penalties ordered by the courts, although, technically, in common law, breach is not only concerned with indefensible or inexcusable part performance or non-performance or with defective performance but also covers changed circumstances and their consequences. Again, the structure is different in civil law. In Germany, the BGB originally considered in this connection only the situation of (a) any late performance, in which case a specific time limit (Nachfrist) had to be set by the creditor for performance (if not considered implied) before default could give rise to breach proper and a claim for damages or termination of the agreement; or (b) the impossibility to perform altogether. Case law, however, recognised the limitations in this approach and accepted certain implied guarantees allowing for an immediate claim for breach. It was also available as an excuse if the innocent party could not reasonably be expected to continue performance itself. German law has now adopted a more universal notion of breach of contract (section 280 (new) BGB). Primarily, it covers total or partial failure to perform and late performance. In the context of typified contracts, such as a sale, the breach of specific duties may give rights to avoidance and/or a claim for damages. But also, the breach of quasi-contractual duties in the precontractual stage, as well as the amendment of the contractual terms in changed circumstances, are now covered in the BGB and may also result in damages. This is in essence also the French approach for bilateral contracts (Article 1184 (old) CC), where, however, court action is always necessary to set the contract aside. That used to be the situation in the Netherlands also, but it is no longer so under its new Code of 1992. On the matter of guarantees or conditions, modern civil law increasingly converges with common law as already explained in the previous section, at least in commercial dealings, although not borne out so far in texts such as the CISG, DCFR and CESL. In any event, German law and that of France and the common law all allow for the combination of repudiation or rescission and damages.

Volume 3: General 121 The matter of expectation damages, here considered to be a claim to loss of future profits, presents yet another issue. In contract, they are normally allowed upon non-excusable breach, but when the breach concerns pre-contractual duties, special contractual co-operation duties, or post-contractual renegotiation duties, none of which are promise based, one might ask whether damages in tort are not the better remedy. They are likely to be limited and are only for (extra) cost and hassle, thus being restored in the status quo. In this connection it may also be useful to distinguish between expectation damages and reliance damages in and outside a bargaining context.245 The question is whether we look at the past or the future. If only at the past, we want the claimant to be restored in the position he or she was in before invoking a broken promise or other contractual right. Expectation damages look forward to a hypothetical state in which the contract is fully performed.246 In sales, the situation is often simplified: the seller does not deliver a commodity product, say tyres, used by the buyer in its production of cars. The buyer will buy elsewhere and claim the difference in the cost of the tyres, if any, plus the cost of the hassle, maybe compensation for a difference in quality, and that is the end of it. The nature of the contract, and its aims or purpose, may thus have an impact on the remedies for breach. Even within one contract type, the set of remedies can be very different and detailed. That was traditionally indeed so, especially for the sale of goods under common law. The Hague Sales Conventions of 1964, which preceded the CISG, showed this. In the US, the UCC for the sale of goods simplified the structure of remedies considerably. Yet there remain the distinctions between the remedies of the buyer and the seller, although either may first ask for assurances, which, if not adequate, may give the party concerned a right to repudiate within a limited number (30) of days. In the UCC, in sales, remedies are further subdivided, especially for the buyer, who may in the case of non-conformity with the quality requirements reject and send the goods back after notice with reasons, in which connection the seller may send specific instructions on how the goods are to be returned. The buyer may also retain the goods but claim damages for non-conformity. After the goods are accepted, under the UCC, they may still be returned or damages claimed in respect of them by a revocation of the acceptance of the goods if defects that were difficult to discover emerge and/or a seller’s promised repairs are not executed in a timely manner. A buyer may also organise cover and thus replace the goods with others and claim his extra cost after a reasonable delay. If there is no cover, the buyer may claim the difference between the agreed price and the market price at the time he learnt of the breach. If the goods are unique, specific performance is possible. Reasonably foreseeable consequential damages and the incidental damages attached to enforcement of the contract may be claimed subject to appropriate mitigation. The seller under a failed agreement for the sale of goods may stop manufacturing and shipment, retake or replevy the goods as a proprietary remedy (but only if the buyer becomes bankrupt within 10 days of delivery) or resell the goods if not yet delivered upon notice to the

245 See MA Eisenberg, Foundational Principles of Contract Law (Oxford, 2019), 182. 246 In the US, the situation is often explained with reference to Hawkins v McGee, 146 A 641 (NH 11929). Hawkins’ bad hand was much worse after an operation. Could he claim the difference in future earnings between the situation of the bad hand and now the worse or devalued one? There would then also have to be paid the cost of the operation and an amount for the misery to put claimant back in the position he would have been without the operation. Expectation damages would on the other hand compensate also for the advantages promised in respect of a better hand, in which case, however, no amount for suffering and cost of the operation could be claimed, that would have been an investment in greater future profit. In cases like this it may be asked whether the basis of the claim was the bargain promise, if indeed made, or rather any wrongdoing. If the latter case, it was submitted that expectation damages would not be a proper measure of damages.

122 Volume 3: General buyer, who will be liable for any difference in price if lower; alternatively, he may claim the difference between the contract and the market price at the time and place of delivery if lower. If there is a loss of volume, although the price is the same, there may still be a claim for loss of profit. Specific performance will be granted to the seller only if the goods cannot readily be resold to anyone else, especially relevant if they were uniquely made for the buyer. The CISG was influenced by the newer UCC approach. It also maintains an elaborate system of remedies for the international sale of goods, although simplified from those of the Hague Conventions. It deals with performance and default only in its in personam consequences, that is to say it deals neither with the transfer of title nor its return upon default. The remedies under the Convention are basically specific performance if the lex fori allows it, as we have already seen, or avoidance of the contract, but only if the breach is fundamental (Article 25), with the possibility always of claiming damages depending on the circumstances. It is a situation often hard to establish, and the reason for much uncertainty and criticism as has already been mentioned. It is a key notion, however, as short of it the remedies are much weaker. Technically speaking, the CISG abandons in this connection the English notion of (express or constructive) ‘conditions’, traditionally distinguished from ‘warranties’ as a matter of interpretation. Fundamental breach allows for the possibility of avoiding or rescinding the contract (see Articles 49 and 64) but it is only loosely defined (Articles 25 and 26). It remains, like negligence elsewhere, a matter of determination per case in light of all the circumstances,247 and remains substantially subjective: see also the previous section and section 2.3.6 below. So is the related concept of force majeure in Article 79 as we have seen, based on the concept of fault, risk re-distribution and the whole notion of the will in contract formation and performance. Again, together they form the major criticisms of the Convention and the basic reason why professionals usually exclude its application (another is the buyer’s unilateral right to reduce the price under Article 50). This is consumer law. See for the approach of the UNIDROIT Principles, PECL and DCFR, section 1.6.8 below.

1.4.5. The Excuses of Force Majeure and Change of Circumstances The subject of excuses such as force majeure and change of circumstances has already been introduced in section 1.3.14 in the context of the normative interpretation of contracts and the renegotiation duties that may be implied or imposed in such cases—less likely, it was suggested there, in professional dealings as a matter of relationship thinking. It was further mentioned in the context of excuses under common law and the differences with civil law in sections 1.4.3 and 1.4.4 above. This is a difficult subject because of its case specificity even in civil law, which allows little room for a more systematic rule-based approach. It concerns principally the definition and applicability of these excuses but also the consequences in terms of a temporary or permanent release of the party required to perform and the liability for the consequences even if no one is to blame. In other words, who bears the consequences? In appropriate cases, it may even concern the adaptation of the contract or the reallocation of the risk, especially in the case of a significant change of circumstances imposing excessive burdens, often referred to as impracticability in the US or frustration in England. This may go well beyond force majeure, but the terminology is not stable and there may also be references to change of circumstances, contractual imbalance, loss of the purpose of the agreement, or hardship, which then also need definition as do their consequences, in which connection causality and foreseeability may remain an important issue as well. 247 See, for the concept of fundamental breach in England, n 244 above.

Volume 3: General 123 It was noted before that as regards the applicability of the concept of force majeure, it is the impossibility of performing due to internal or external circumstances, the latter also referred to as acts of nature or god. They may now include governmental action or actes du prince. That will often be regulation; competition law may play here a special role. Internal excuses remain more problematic because of their subjectivity. In any event, as we have seen, in common law of the English variety, neither excuse the performance of contractual conditions which are considered the essential terms of the agreement unless the contract itself says so (in a force majeure clause). It means that as a minimum, the other party is then also excused from performing but in appropriate cases may still have a claim for performance or damages as a matter of risk allocation as we have also seen. In civil law, the concept of force majeure operates much more broadly and particularly alleviates the imputation of blame, which, as noted before, is at the heart of a claim for performance or damages (or both) in civil law, unless the contract either explicitly or implicitly introduces a guarantee of performance. In civil law, a guarantee of performance is now sometimes deemed implied, especially for the performance of payment obligations as we have seen and could also affect other fundamental terms of the contract, especially in professional dealings, but this is a matter of interpretation and remains then more exceptional. Again, upon a proper analysis, common law protects foremost the wording and objective of the contract in the way it is being expressed and therefore more objectively the risk allocation that was so achieved. The parol evidence rule is another expression of this, as is the common law’s formal approach to contract formation in which intent and consensus play more modest roles and history is less important, it is an example of abstraction, the contract stands alone. A more literal interpretation approach follows, at least for professional dealings as we have seen also. Thus force majeure affecting a party’s ability to perform is here exceptional and a narrow excuse and not traditionally deemed implied in the case of a condition or major obligation under the contract. This was earlier explained as a more satisfactory approach in professional dealings where, to repeat, the question of who bears the risk rather than who is to blame is more prominent and relevant. Even force majeure thinking in the manner of the civil law cannot avoid the question of who bears the consequences either, as was also noted especially when personal circumstances are involved. It is true, nevertheless, that through implied conditions, notions of reliance and co-operation, and through distinctions on the basis of the nature and experiences of the parties, greater flexibility is now often also achieved in this area in common law, perhaps not unlike the flexibility obtaining in many civil law countries under the broader notion of good faith. This may concern especially external circumstances that make performance impossible or very difficult, but still the situation is not the same, even in the US where the notion of good faith has acquired more substance (see section 1.3.7 above). Especially, in professional dealings common law is even less inclined to excuse performance (of conditions) on the basis of internal or personal circumstances, however much unforeseen, and lets the defaulting party continue to carry the risk under the circumstances. Again, the idea remains that the risks fall where they fall unless the contract itself has redistributed them. In England, except for acts of God and later governmental intervention often through regulation, it therefore took longer for a force majeure concept to develop as an independent legal excuse beyond special contractual provisions and definitions, at least in the case of the contractual conditions,248 and the strict rule was watered down only by creating exceptions through 248 In England, the courts rejected the notion of force majeure for all contractual conditions in Paradine v Jane (1647) 82 ER 897 in the absence of a contractual clause to that effect. This case also stressed the literal meaning of the terms (conditions) and disallowed any adverse testimony if the text of the contract was clear. This was the parol

124 Volume 3: General implying (sometimes) terms of reasonableness, which are still subject to relationship thinking as we have seen, therefore likely to be less prevalent among professionals.249 Nevertheless, force majeure became to some extent a question of contractual interpretation and therefore of the parties’ implied intent not to demand performance under the circumstances, but references to the (implied) intent of the parties in this manner remain controversial and are still limited largely to what are now considered consumer cases.250 In the absence of a force majeure excuse, a theory of frustration developed in England in this connection for non-performing debtors. They may sometimes be discharged when a (usually outside) event (beyond acts of God) supervenes, for which the contract makes no sufficient provision. It must, however, so significantly change the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations that it would be unjust to hold the disadvantaged party to the literal sense of the contractual stipulations in the new circumstances. In these situations, there is no adaptation facility and the contract is likely to be ended.251 In the common law tradition, even section 2-615 UCC in the US continues to style the force majeure exception as an implied (here statutory) condition or basic assumption (of practicability) on which the contract was made and therefore as an excuse only in appropriate circumstances. Good faith compliance with governmental regulation may lead to a valid excuse under the UCC. Again, being only excuses, neither results in an adjustment of the agreement without a particular clause to the effect in the agreement itself. Even in France, force majeure still primarily concerns the old acts of God or casus fortuitus or vis extraria, as explicitly referred to in Articles 1147 and 1148 of the French CC, including also governmental interference (acte du prince). Thus, in France, the excuse of force majeure still required an unforeseeable and irresistible event unconnected with the party that must perform, therefore absolute impossibility. This is the objective approach, even in France now mostly thought too severe, however, and restricted to so-called result contracts. These are contracts where a certain result is the objective, such as sales agreements for the timely delivery of conform goods, contracts of affreightment, rental agreements and building contracts. Clearly in modern terms there is here some guarantee deemed implied, which makes a stricter approach to force majeure better understandable. On the other hand, after 2016, the amended Cc in Article 1195 now contains a provision for unforeseen circumstances (imprevision). As already mentioned, the CISG did not follow the system of implied guarantees or contractual conditions in the English sense. Article 79 states directly that a party is not liable for a failure to perform any of its obligations if it can prove that the failure was due to an impediment beyond its control, provided that it could not reasonably have taken the impediment into account at the time of the conclusion of the contract or could have avoided or overcome it or its consequences. This is quite a flexible and generous provision, only tempered by some risk acceptance language if the reference to the impediment may be so construed. Internal and external circumstances are not distinguished. Article 79(5) provides that nothing in Article 79 prevents either party from evidence rule: see s 1.2.4 above. It required the tenant of a house to make the agreed repairs, including to a house that had been ‘burnt by lightning or thrown down by enemies’, so that not even absolute impossibility or acts of God were considered a sufficient excuse (always short of a contractual force majeure clause). 249 See Taylor v Caldwell (1863) 3 B& S 826, LJ 32 QB 164. 250 See Lord Reid in Davis Contractors v Fareham [1956] 2 All ER 145 and for the role of intent in common law generally, s 1.2.4 above. 251 Except where there is a contractual clause or statutory law to the contrary. It was not the perspective of the 1943 Law Reform (Frustrated Contracts) Act either, which envisaged a discharge and only reallocated the risk in respect of payments already made or benefits already obtained which may have to be returned (unless there is a contractual clause dealing with the matter).

Volume 3: General 125 exercising any rights under the Convention other than claiming damages. Rights to avoid the contract upon a fundamental breach or to ask for repairs are thus not impaired in principle. The Convention does not contain any special provisions allowing for an adaptation of the contractual terms in the case of changed circumstances, but relief could still follow under Article 79 even though no procedure has been laid down. Again, the flaws in this approach have led to professional parties usually excluding the Convention. The language of Article 79 is too subjective and imprecise, as is the notion of fundamental breach of Article 25, even the formation based on intent. It has already been said that the DCFR, the UNIDROIT Principles and the PECL essentially follow the CISG in this approach uncritically. So did the CESL. All these newer texts now introduce a different regime for change of circumstances and split it out of force majeure.

1.4.6. Change of Circumstances, Frustration and Economic Impossibility. Development in Civil and Common Law Modern legal facilities or requirements of contract adaptation can best be seen as risk allocation and may then also cover situations where there are unforeseen circumstances other than force majeure. Again, it may be useful to distinguish here in terms of external or internal impediments (more apparent in common than in civil law as we have seen). The latter are often of a personal nature, like illness, and are likely to play a lesser role in the professional or business sphere where the exposure is more to natural, technical, economic and political risk or miscalculation and lack of perception. In terms of a change of circumstances, the condition is often that the readjustment relief will be granted only if without it an excessive burden would result for the party seeking the relief, in which connection it may again be useful to distinguish between professional and other parties, also in terms of what may be deemed excessive. We are here entering the area of hardship but also of refloating the contract. What changed circumstances would qualify for the law to intervene, what is excessive in this respect, what the balance of the contract is (if ascertainable) or its true purpose was, and whether the events or the consequences needed to be unforeseeable are then matters of further consideration and definition.252 It has already been said that even in traditional civil law, the force majeure excuse is more generally irrelevant in respect of payment and guaranteed obligations and often even in highly personal circumstances preventing performance. Thus (apart from Article 79 of the Vienna Convention), illness or lack of money may not then excuse anyone from delivering goods under a sales agreement or paying for them. At least the risk remains with the defaulting party even if force majeure is accepted to exist. The personal aspects or impediments are in that case considered the risk of the directly affected party or may be considered discounted in the contract. Particularly in the case of services depending on the debtor, personal elements such as incapacity may, however, still count as objective or absolute force majeure, like the portrait painter whose hand is damaged. Yet the portrait painter claiming lack of inspiration may have a harder time escaping liability. In other situations, personal circumstances may be totally irrelevant. In sales contracts, pure acts of god or theft may create excusable barriers to delivery for a seller in terms of absolute impossibility. Even so, they may still not always be relevant as a complete excuse, for example, if it concerns a manufacturer finding its manufacturing facility substantially intact after fire or if there is ready access to a market of replacement goods, so that the seller can 252 It is possible that in this respect there is also a difference between public international law and transnational private law. This may be clear, eg, in international investment disputes in the extracting industries.

126 Volume 3: General still limit the consequences. However, if, under these circumstances, performance becomes much more difficult, the excuse of force majeure may be allowed, at least in civil law. It could be seen as a more subjective (or economic) rather than a more absolute use of the concept of impossibility.253 That would seem to be accepted also in the CISG, although not necessarily in common law. The concept of passing of risk in sales agreements is a special feature here, see section 1.4.3 above and more in particular section 2.1.9 below, typical for sales agreements and connected with the handling of goods in transit to the buyer. Importantly, it suggests that regardless of force majeure, the party who must perform but is not able to do so properly might still retain the risk. This is no less an issue in all other types of contracts where there is usually no such special provision for the passing of risk. It has already been noted before that most legal systems now accept some form of the more subjective view of force majeure and for external events also less than complete impossibility—in common law the modern use of the term ‘frustration’ in England,254 see section 1.4.5 above, and ‘impracticability’ in the US (normally of an economic nature instead of absolute ‘impossibility’ in section 2-615 UCC) reflect this—but there is disagreement on how far this goes and what risks, especially in terms of personal circumstances or even economic hardship as a result of changed circumstances (including force majeure) remain with the debtor. No system adheres here fully to the subjective approach or allows any change of circumstances as excuse, which would make contractual performance entirely uncertain. As we have seen, in civil law, the notion of force majeure was further developed within the normative interpretation method,255 which tends to consider in more detail the circumstances and facts of each case and might be more lenient to the weaker than to the professional defaulter. Blame plays then an important role. The force majeure and good faith concepts thus become connected: see also section 1.3.14 above.256 But relationship thinking should also enter the picture as well as the idea that the overall economic effect on the professional debtor needs to be considered rather than merely the effect under the particular contract.

1.4.7. Unforeseen Circumstances and the Balance of the Contract: Hardship and Renegotiation Duties It is clear that not every unforeseen or unavoidable change of circumstances can give rise to a force majeure or hardship excuse, let alone to renegotiation duties. In the more subjective approach in civil law, this is so when force majeure concerns payment of money or becomes too personal, or

253 See also n 243 above. 254 See in England Lord Simons in National Carriers Ltd v Panalpina Northern Ltd [1981] AC 675: ‘Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and / or obligations from what the parties could reasonably have contemplated at the time of its execution that is would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such a case the law declares both parties to be discharged from further performances’. 255 It showed among other things that the same circumstances may create a force majeure situation in one contract but not in another even if they are closely related. The destruction of a mode of transport may not excuse the seller bound to deliver CIF and he may have to look for an alternative at his own cost. Yet under the contract of affreightment, the carrier is likely to be excused because of impossibility if the destruction of the ship was not due to his fault or negligence. 256 The sometimes close connection with mistake should also be noted, especially where it concerns circumstances already existing at the time of the conclusion of the agreement and which could have been known.

Volume 3: General 127 the type of commitment does not allow it or may limit it, for example where the debtor accepted the risk, where a guarantee of performance is given or implied or, in France, where there is a result contract as we have seen. Economic hardship itself is not normally an excuse either, especially if it is not external or could have been reasonably foreseen or taken into account at the time of the conclusion of the contract or was merely the result of misjudgement or lack of perception of market realities and risk. If it results from undiscounted, fundamentally changed circumstances, there may, however, be some relief in exceptional cases. The question then is first what kind of hardship is necessary to qualify and subsequently what is the type of relief. Under Article 79 CISG this is not clear and it is at best a matter of interpretation whether Article 79 stretches this far. As a matter in principle dealt with in the Convention (requiring an impediment beyond the control of the party and that could not reasonably be expected to have been taken into account), guidance may have to be sought from its general (underlying) principles and, as a last resort, from the domestic law most directly concerned under the applicable conflict of laws rule (see Article 7(2)). This may also apply to the consequences in terms of adjustment or termination of the contract, not directly addressed in the Vienna Convention itself either. As the Convention does not consider adaptation, termination may then be considered more normal. The question what should be done is also relevant when the interests of the parties unavoidably start to diverge in the course of the life span of (longer-term) contracts. Following a progressive change in circumstances, there may easily result a de facto discontinuation of the co-operation on which full performance often depends without there being a clear situation of default or force majeure or even great economic duress. Indeed, in such circumstances, the normal co-operation that may be expected to make contracts work might start to falter. In this connection, reference is often made to the contractual balance becoming disturbed, earlier identified mainly as a consumer notion. For professionals, it is a situation of disincentive for which the traditional excuses may not be the proper answer. There might not then be a discharge of either party but rather a need for renegotiation of the contract.257 Of course, renegotiation may also be desirable in cases of force majeure or economic 257 Renegotiation rights or rights to recast one’s obligation in the light of new circumstances or information may give rise to a distinction between ex ante and ex post issues in the determination of the rights and duties of contractual parties. The approach in this book is to see renegotiation or even termination rights in duration contracts in the context of contracts evolving in terms of partnership (therefore as relational contracts) in which the exercise of rights may be subject (objectively) to good faith interpretation and adjustment or there may be countervailing obligations in the nature of fiduciary duties. The key is to maintain an environment, legal and otherwise, in which co-operation between the parties can continue to operate under the contract and prosper. If they cannot, the contract may be deemed at an end although the bills still need to be settled and therefore the burdens of the termination allocated. As just mentioned, it is possible to make a more fundamental distinction here between the ex ante and ex post specification of contractual obligations: see in the US, eg, LA Kornhauser and WB Macleod, Contingency and Control: A Theory of Contract, Paper delivered at Boalt Hall, UC Berkeley on 28 February 2005. The ex ante approach is the normal one in which parties have or are supposed to have determined ex ante, therefore at the conclusion of the contract, how and in what manner they are going to be bound. It presumes a full roadmap and division of risks and therefore also complete information and no intervening occurrences or surprises. Parties may, however, realise from the beginning that this is not always possible and could lead to abuses by the promisee. They may thus include force majeure, change of circumstances, hardship, or renegotiation clauses in the contract itself, which give the promisor certain protections or excuses and perhaps even renegotiation or termination rights upon the occurrence of certain events. In this connection, a distinction can indeed be made between ex ante or contingency clauses or modules and ex post or control clauses or modules. These clauses may be more subtle and call for good faith implementation (if not already part of the objective law), or reduce performance obligations to best effort attempts. Here one could further distinguish between task and performance. In the first case, there may only be a need for a good faith effort, in the latter case a guarantee.

128 Volume 3: General hardship, but they are possibly more appropriate in the situation just mentioned and may have more success. But from a legal point of view, it raises the issue of the trigger and also what may be demanded by law in terms of renegotiation duty if the contract is not clear in this aspect. It has been said above that in modern contract theory, it is assumed that professional parties accept a lot of risk also in terms of changing circumstances (see section 1.1.4 above). This remains the underlying philosophy even if now more refined. In terms of a change of circumstances, in medieval law in this respect there developed early on the notion of the clausula rebus sic stantibus or the implied condition that circumstances would not change and the undertakings of the parties were considered conditioned thereby.258 In a general way, the clausula goes back to the writings of Baldus in the fourteenth century,259 and the doctrine remained popular until the nineteenth century, when the parties’ intent became more sacrosanct in civil law.260 Under it, at least one of the parties might strive for a solution through contractual renegotiations and amendment. The question then is whether or when there may be grounds (and which ones) to refloat the contract through forced renegotiations and judicial intervention or supervision, with or without some form of damages being awarded, either as In the first case, circumstances and knowledge may be all important, in the latter case they may not be and there is full risk acceptance by the promisor. Interpretation of these clauses may pose special problems and suggest greater judicial discretion in legal systems that on the whole adopt a strict or more literal interpretation approach. Indeed one question is here whether this new classification in terms of task or performance is useful, may present greater clarity in contractual interpretation, and may provide new insights into how these clauses should be handled. It is not unexpected in this connection to assume problems of asymmetric information concerning the (external) circumstances surrounding the project as it evolves and also how it can best continue to be handled (internally) from supply, engineering, management and similar points of view. The key is then to determine whether a more structured approach to unforeseen circumstances can be created either by contract or in the application of relevant default rules. It is certain that parties ex ante could never handle all eventualities and their effect on the contract, even if they could foresee them. Most of course would never occur and it would not be physically possible to elaborate on them all in contract negotiations but it will be a fact that a number of the more relevant eventualities will become clearer during the contract period. Yet this may not necessarily be the case for both parties or for both in equal measure or at the same time, especially prior to realisation. It may concern external events but different developments could also present themselves internally, in a long-term sales agreement, eg, on the cost of supplies of commodities for the seller of finished products or for the buyer on the value of the goods so acquired for the rest of his business. The asymmetric information could be in respect of very different aspects of the transaction and how the other party is dealing with it. In an ex ante module, parties often must act without full information (an actionfirst environment) and, in the absence of full disclosure about knowledge between them, might have asymmetric information. Even in ex post modules (usually in an action-last environment) their information may not be the same at all. Indeed one may expect control clauses (leading to a unilateral determination of one’s own duties or to renegotiation/termination) especially in asymmetric action-last situations. In such situations, under the contract, the party with the least information may be given control of certain decisions in respect of future action. This need not mean discretion and the clauses may differ widely in the control they grant. Also, the party given control in this manner will normally have its discretion curtailed. This theory may explain better the nature of hardship or renegotiation clauses, or indeed option clauses, termination clauses, and best effort or good faith clauses, why and when they are introduced in contracts and how they operate. A more important issue is whether the default rules of the objectively applicable contract law should adopt similar approaches, thus giving modification or renegotiation rights to the party with asymmetric information, when and how, and what each party’s duties are in renegotiation situations or in situations where unilateral control over the contract terms is exercised. 258 See also R Feenstra, ‘Impossibilitas and Clausula Rebus Sic Stantibus’ in A Watson (ed), Daube Noster: Essays in Legal History for David Daube (Edinburgh, 1974) 81. In the Netherlands, the clausula approach was never entirely accepted before 1806 and abandoned thereafter, but often provided some implied adjustment facility of the contractual terms. It then operated on the basis of what in modern law would probably be considered good faith principles. 259 Commentaria ad D.12.4.8. 260 See the Prussian Allgemeines Landrecht I, 5 s 378 (1794); O Fritze, ‘Clausula Rebus Sic Stantibus’ (1900) 17 Archiv für bürgerliches Recht 20.

Volume 3: General 129 (partial) indemnification or as penalty for lack of co-operation if the parties themselves cannot find a solution. Judges would probably also have the option of early termination with or without awarding (some) damages, but in purely professional contracts, the parties themselves must ultimately come to a solution themselves. A judge or arbitrators may give some guidance but it is not for them to rewrite the contract. That should only be done in extremis and even then, only when it is likely to work. The essence is always the readjustment of the risk of unforeseen events—not therefore to redress pure miscalculation, which is the risk of the party having made it. Redress is here meant to face the impossibility of quantifying the risk at the time the contract was concluded or the impact of the turn of events, for example excessive market movements in the price of the relevant base materials. Again, this may or may not result in a true force majeure situation at the same time. Distinct from traditional force majeure notions, this might even affect the payment duty after the other party has performed, but again in a normative approach much risk is considered discounted between professionals and their contract text cannot be ignored lightly. Although the trigger mechanism may be differently formulated, it is often geared to economic hardship, however defined (see for this definition also section 1.4.8 below), caused by a fundamental change in circumstances. In the common law operating with the implied condition of practicability, especially in the US, the concepts of force majeure and frustration in this sense may be less distinguishable, leading (in respect of contractual conditions) only to excuses of performance or in extreme cases to termination but less readily to the adaptation of the contract. In any event, judicial restraint is necessary in professional dealings everywhere. Indeed, the modern notions of hardship, economic impossibility, frustration or impracticability leading to a refloating of the contract are novel departures. They were not fully unknown in the ius commune, as we have seen, but they ultimately became unfashionable there. In modern times, the problem has particularly arisen in war and emergency, usually coupled with high inflation in Germany. It has not been uncommon in such situations for relief to be provided by special statute. These laws usually left the final decision to the judge and did not give criteria or guidance for adaptation or termination. Where no special statutory law came into being—and they were all limited in scope—the question was everywhere whether general legal principles could provide a basis for similar contract adaptation beyond extreme political or economic circumstances. Different legal systems reacted differently, often as a result of the depth of the economic distress, with German law having become more flexible but the law in other major countries remaining more rigid. The liberal German case-law approach, which emerged at the time of German hyperinflation in the 1920s, was first based on a disturbance of the contractual basis or purpose and relief seen as an implied condition; later on, it developed in a more objective manner under the German notion of good faith, but the new section 313 BGB (2002) reverts to the older terminology. Under the new Dutch Code, the idea of adjustment in the case of changed circumstances is now also statutory and embodied in Article 6.258 CC. In common law, there is still more restraint, as we have seen, although in principle the theory of implied conditions, sometimes also used in the case of force majeure, can be extended to allow contractual adaptation or termination in the case of a severe change of circumstances It is not commonly done, even though the force majeure concept itself was broadened into economic impossibility or frustration as we have seen in exceptional circumstances only such as in the Coronation cases, which did not concern business.261 In England, it was held in 261 Krell v Henry [1903] 2 KB 740. The sudden illness of the King which led to the postponement of his coronation, left many with unusable reserved seats and they asked for their money back. But for the King, the courts might not have relented and it proved hardly a precedent for commercial dealings.

130 Volume 3: General Chandler v Webster, however,262 that the risk of changed circumstances and any resulting termination of the contract lies where it falls. This was only reversed in Fibrosa v Fairburn in respect of moneys already paid and benefits received (taking into account also costs),263 but it is still said that the doctrine of frustration has the effect of declaring on which party some unanticipated risks lie, not of altering where they lie. It remains, however, a matter of interpretation, of implied terms therefore, with its limitations in common law. Proper relief under the law would often require an adjustment of that risk and may then not be forthcoming. There is also the worry that courts get overly involved in the further evolution of the contract and its performance. In England, the issue remains essentially unresolved with the English courts becoming less rather than more co-operative, at least in professional dealings.264 This is indeed the more rational approach where the contract is a roadmap and serves as a risk-distribution instrument between professionals. The lesser need for legal protection in the professional sector, except in exceptional cases, has already been mentioned several times and may contribute to this reluctance. Businesses seem on the whole to be able to live with this constraint, and might on balance prefer it to the uncertainty another attitude might bring unless hardship clauses are included in the contract itself and are then indicative of a more clear-cut attitude. It is likely to supersede any other statutory or treaty regime. In the US, the situation in fact seems little different. In continental Europe, on the other hand, a consumer protection mentality may well spill over into the professional sphere and confuse the issues although it is said that the new statutory regime in the Netherlands is not commonly used. Summing up and finalising, an example may help: if one European airline company buys airliners in the US for a dollar amount during a time when the dollar depreciates, it may obtain a great benefit, which could well result in a reduction of 30 per cent of the price in terms of its base currency (the Euro). The American supplier may not suffer greatly because its costs are in dollars and neither party may complain. It may be very different for another competing European airline company, which may have bought similar airliners in Europe in euros and may thus be incurring an enormous long-term competitive disadvantage compared to the first airline company, its European competitor. Yet it cannot complain or request a renegotiation of its European supplier on the basis of a change of circumstances and hardship as mandatory good faith concepts. There is therefore no point in this airline company complaining to its European supplier about the disadvantageous deal, even if the dollar depreciation was not foreseeable and the result might be its bankruptcy. Rebalancing and notions of fairness or of good faith hardly seem to have a place here, and could in any event not provide an objective standard for readjusting or valuing these deals. Any other attitude could easily entail the bankruptcy of the European supplier. It was said before that when contracts are cast foremost in terms of a roadmap and risk management tool, as is likely amongst professionals, there is in fact very little room for good faith adjustments and it may even mean a narrowing of concepts, requiring a more literal interpretation of the contract text. That is what risk, risk distribution and management is all about. If subsequently the risk shifts between parties, it normally means that they had a different perception of its future evolution, which is reflected in the price and structure of their deals. They will have to live with the consequences and cannot invoke notions of reasonableness, fairness or good faith to redress the outcome. The other party also has to live and arrange its affairs accordingly. The loss of the one party is not necessarily to the benefit of the other either.

262 Chandler v Webster [1904] 1 KB 493. 263 Fibrosa v Fairburn [1943] AC 32, borne out by the 1943 Law Reform (Frustrated Contracts Act). 264 See Treitel (n 98) 943.

Volume 3: General 131 In the above airliner case, there was a relative disadvantage resulting from two unrelated deals, but the situation is not fundamentally different when, within one deal, currency risk is transferred to the other party by, for example, choosing a different currency. If, for example, the European deal had been done in dollars, the second airline company would have retained its competitive position at the expense of the European supplier whose cost base would have been in Euros and who might as a consequence be facing bankruptcy. It does not make a difference. At least in the professional sphere, there is no good reason why concepts of reasonableness, fairness or good faith should redress the outcome. There is certainly nothing mandatory about it. It is submitted that there is also no identifiable social or cultural consensus that might dictate otherwise. In any event, if one party is relieved, another suffers and what is fair or reasonable in such situations and what good faith might require is often wholly unclear. Informed people are likely to differ to such an extent that no underlying norm can be identified unless the situation is truly excessive. Even then, the remedy may not be plain at all. In terms of social consensus, in international commerce and finance, the perspective between professionals has to be that of the international commercial and financial community as a whole and not that of a national or domestic consensus, which may be consumer oriented, self-serving, and might soon lead into nationalistic considerations, which can hardly be helpful as to how international commerce and finance develops and which may in any event only have a weak contact with the case in hand. A domestic redistributive urge and protection of local interests at the expense of others may be at the heart of such considerations and not seldom also a domestic regulatory mode in which the underlying thought is that national communities need to be protected first, even if in the particular country there is no informed opinion whatever on what might be needed to balance international forces nor any demonstrable expertise in the field. Although the great commercial benefits of globalisation may be accepted only too willingly, international market forces may in such cases still be fought by what are portrayed as high-minded domestic cultural, social, or economic particularities and needs which, however, too easily represent narrow provincialism based on greed, irrational fears, and ignorance or a mercantilist mentality. The proper consequence would be to close one’s borders and stay at home. One may be poorer, but it is a choice that can be made and is perfectly respectable. The UK did so after Brexit.

1.4.8. Modern Legislative Approaches to a Change in Circumstances Adaptation or termination because of changed circumstances beyond the narrow road of force majeure (or even economic duress) as contractual excuse, raise issues of judicial power and its basis in the light of party autonomy and the parties’ intent as expressed in the agreement but also their risk acceptance. The issue has already been raised in its generality in section 1.3.14 above. The authority to change this intent retroactively must be found either in the contract itself or in special provisions of the applicable law or in general legal or interpretative principle. The last solution was originally adopted in Germany through case law in the 1920s, as noted, first by relying on implied conditions, then more fundamentally through concepts of good faith, now (since 2002) resulting in section 313 BGB, which reverts to the terminology of the Wegfall (or Störung) der Geschäftsgrundlage and essentially refers to a disturbance in the balance of the contract with emphasis in particular on the originally foreseen distribution of risk (assuming this can be established). Termination is possible when adaptation in this manner is not feasible. The statutory solution was ultimately also chosen in the new Dutch Civil Code, Article 6.258, tying the relief for unforeseen changed circumstances to the unreasonableness of the counterparty

132 Volume 3: General in insisting on the unchanged continuation of the contract. This is in line with older case law that enunciated, however, more particularly the principle of unconscionability.265 The new Dutch Code allows the court to change the contract or to terminate it in whole or in part. It seems not to envisage renegotiation duties as such but rather a judicial decision of some sort. If the contract has lost all purpose, termination would seem to be appropriate. It was already said that Störung is not commonly used and accepted by the courts. In France, in the ‘Projet de reforme du droit des contrats’ of 2008, a statutory approach to the subject was also proposed and its Article 135 introduced a formula with emphasis on the enforcement of the contract being ‘excessivement onereuse pour un partie qui n’avait pas accepté d’en assumer le risque’. The issue is therefore one of an excessive burden of which the risk was not accepted. If renegotiations fail, the judge may either adapt the contract or terminate it on conditions the judge may determine. It suggests a fundamental change in attitude in France, where case law so far had not favoured the concept of change of circumstances. Note the limitation of the hardship to the performance of the contract and not to an overall disastrous effect on the contract debtor. There is also no distinction between professional and other dealings—again the unitary approach. The consultation period ended on 30 April 2015 without much business support, especially because of the perceived judicial discretion. Much was left to interpretation. An avant-projet was presented in the Autumn of 2015 and passed in 2016, for unforeseen circumstances reflected in a new Article 1195. The reason why the objective law often remains vague in this area is probably that academic writing has not been greatly productive in analysing what the proper adaptation technique should be and how any renegotiations should be conducted. Again, it is clear that in essence the parties’ original intent is sought to be reinstated on good faith grounds, however expressed, in the face of undiscounted intervening events. Yet what was intended, or what good faith or fairness require, is unavoidably geared to individual factual situations and to the type and level of risk that was accepted. It was submitted before that in professional dealings the level is likely to be high and that this is the true issue. It means that the original intent may be most relevant in this aspect. The original balance of the contract, even if it could be determined, is less important. Risk acceptance means that a change in that balance must be endured. This balance can never be stable and depends on the evolution of the factual situation, especially clear in duration contracts. If we look at the literature, Rabel saw the multiplicity of obligations as the major obstacle to formulating general principles of adjustment.266 Corbin267 stated: ‘We cannot lay down one simple and all controlling rule. The problem is that of allocating in the most generally satisfactory way the risks of harm and disappointment that result from supervening events’. Meijers268 formulated some general characteristics: the change in circumstances must have been unforeseeable, of an exceptional nature, beyond the ordinary risk incurred in a contract, must render performance excessively onerous, and the change should not be due to the fault of one of the parties. These characteristics do not go much beyond a subjective force majeure definition except for the emphasis on the excessive burden. More importantly they do not give an indication of how any adaptation of the contract should be conducted. This emphasis on excessiveness also figures in the European and UNIDROIT Principles, but now less so in the new Dutch and German Civil Code sections. None gives the judge any guidance on the authority to terminate or adapt the agreement. 265 HR 19 May 1967 [1967] NJ 261. 266 E Rabel, Das Recht des Warenkaufs (Berlin, 1936) i, 157. 267 Corbin on Contracts (New York, 1951) s 1322 at 256. 268 EM Meijers, ‘La force obligatoire des contrats et ses modifications dans les droits modernes’ Rapport, Actes du Congrès International de Droit Privé (Rome, 1950) I, 99 at 111, 112.

Volume 3: General 133 The DCFR approach in Article III-1:110 was already discussed in section 1.3.14 and may be somewhat more restrictive, with a reference also to risk acceptance, particularly relevant for professionals it would seem. On the other hand, it is equally weak in describing the renegotiation duties and talks in this connection about a reasonable and equitable adjustment. It is hard to see what the role of the judge here is precisely beyond having the power to terminate the agreement and allocate the burdens. It would appear to require a much more subtle approach in terms of interim relief and measures to guide the parties through the process if they are still serious; parties of necessity must be heavily involved in refloating their contract so as to provide a realistic future for it. The conclusion is that, especially in the professional sphere, the rebalancing effort remains exceptional and, failing this (upon a bona fide effort which in the commercial sphere may be limited) normal performance or, in appropriate cases, termination (with or without damages depending on the degree of force majeure or blame in a civil law sense or otherwise risk acceptance) must be the normal answer. Where emphasis is put on an excessive burden or unconscionability, which seems appropriate at least in the professional sphere, it has already been said before in sections 1.1.4 and 1.3.14 that regard must be had to the overall financial position of the party invoking the relief rather than to the contractual situation itself. Context must be considered. As such, there may be in descending order a need for (a) a dramatic economic disadvantage overall, for example a likely bankruptcy as a result of performance, (b) a loss situation for the business as a whole for some time or at least in the line of business concerned with the contract, or (c) a loss or lesser profit than expected under the particular contract. It was posited earlier that the latter may by itself hardly qualify as hardship, certainly not where there may be many contracts of the same type under which for some there is less profit than expected but for others perhaps more. Contractual balance or the loss of it in an individual case may in this context also not be greatly relevant and a normal risk situation. More importantly, the counterparty may be much more dependent on the contract than the one that claims distress in this individual case.

1.4.9. Contractual Hardship Clauses It is not uncommon to find a more specific trigger mechanism in the form of a proper hardship clause inserted in the contract itself and at least in business dealings that would appear the more sensible approach. Such a clause is likely to set some parameters for renegotiation and its objectives. In the process, it might limit the judge’s intervention to specific questions of discord, for example on the existence of the conditions triggering the renegotiations, on damages claims up to the moment the burden became intolerable if the performance was interrupted earlier, on disagreements on the new price. It could be resolved by a reference to normal market prices, or to new specifications, which again could depend on the normal standard to be expected for the price charged, which otherwise might have to change, while duration or place of work or delivery might be changed and the reasonable normal effects on costs be taken into account. Most significantly, however, the introduction of a hardship clause itself indicates that parties did not mean to be bound under all circumstances. Even the force majeure excuses themselves might be expanded thereby as the more important risks of a change of circumstances were clearly not discounted in the contract. Bona fide disagreement in the renegotiations may then be considered a sign of parties not wanting to continue, and may thus be a prima facie ground for discharge and termination, which could, however, still allow for payment of (some) damages. This appears to be the fundamental difference between reliance on a contractual clause and on a statutory provision (or established case law) in this area.

134 Volume 3: General As suggested earlier, short of a contractual clause, statutory law or specific case law, the situation in terms of renegotiation is probably not much different from the one where parties are required to continue to negotiate in a pre-contractual situation or (sometimes) on the continuation of an agreement after its expiry, although the DCFR takes a different attitude and is more demanding in pre-contractual situations as mentioned in section 1.3.14 above. Relevant considerations are nevertheless: (a) the relationship between the parties in terms of professionality, their special interests, reasonable expectations, the frequency of their transactions and the incidents that have occurred in them, for example poor past performance or lack of co-operation, credibility and creditworthiness; (b) the nature of the deal (in the sense that a rental agreement will require different adaptations from a sales agreement); and (c) outside circumstances such as the market price or the required quality or style. These considerations may determine when continuation of the negotiations can no longer be sensibly required and either termination or continuation of the old agreement must follow. In any event, negotiations cannot drag on for ever although under a contractual hardship clause more may be required than under statutory change of circumstances clauses. Finally, it is also possible, as has been noted before, that in the case of hardship adjustments, the prevailing market conditions are important but may not be fully determinative and adjustment could be spaced over a longer period. This may on the other hand not be necessary or different and less relevant in pre-contractual negotiations or in negotiations for a continuation of expiring agreements if the contract calls for them.

1.4.10. How to Secure Contractual Rights and Obligations in Common and Civil Law? As a summary, it may be useful finally to restate and compare how contractual rights and obligations may be secured in common and civil law and also what a contractual choice of law may achieve in this connection. In business, it was submitted that it is probably easiest to view a contract primarily as road map and risk management tool, clearer in duration contracts which may cover a contractual relationship that is planned to continue for some time. Multiple delivery of commodities, semifinished or finished products spring to mind but also construction contracts. There may be all kinds of other partnerships where parties mean to co-operate longer term in the projects they choose to do together. All may involve complex dealings and substantial risks. That is what a contract text attempts to sort out. Entering into relationship of this nature or any other always entails a lot of risk. Some may be foreseeable and others not. As for foreseeable risks, the other party may default (or not pay) and there may be other such risks in the project: it may cost more, subcontractors may be late, the economics may not work out as planned, there were misjudgements in the planning, etc. The contract can deal with these risks, meaning that one party may be able to move the burden to the other. That may well be discounted in the price. This is risk management. If such a contractual distribution of risk cannot be achieved, the chips will fall where they fall assuming that none of the parties is at fault or contributed otherwise to the debacle. It was the deal. The alternative would have been not to enter the contractual relationship at all. It was a matter of judgement. Distinct is the situation for unforeseeable risk, assuming that they can be properly distinguished and there may here obviously be an area of doubt. For such unforeseen risks there is commonly the concept of force majeure. Changes of circumstances, which cause serious hardship, may lead to relief also. This is often referred to as frustration in common law (or the clausula

Volume 3: General 135 rebus sic stantibus in civil law) or sometimes impracticability (in the US) as we have seen. This is in common law terminology the area of excuses of which non-performance of a main condition of the contract is the foremost or traditionally even the only true type unless the contract states otherwise. That is in civil law the exceptio non adimpleti contractus. There is here a considerable difference between civil law and common law. In the former, the excuses of force majeure or hardship and any redistribution of risk as a consequence covering unforeseen events derive from the law. In the common law, they only derive from a contractual clause to the effect. That means that in common law the chips also fall where they fall in the case of unforeseen risks unless otherwise provided for by the parties in their contract. That is to say that the other party will accept or share these risks only upon consent. That is different in civil law where the law helps the affected party and implicitly moves the consequence of non-performance or some of it to the other party, unless there is a guarantee of performance or indemnity express or implied. In civil law, payment can also not be excused in this manner as anyone would find some impediment. To translate this into common law perceptions: all conditions of a common law contract are considered guaranteed in civil law terms unless the contract states otherwise. If we may again take Article 79 of the CISG as a standard text for force majeure, it is notable for the use of the term ‘impediment’ beyond a party’s control that could not reasonably be expected to have been taken into account at the time of the conclusion of the contract and which the affected party could not have avoided or overcome. The idea is that contract performance is suspended during the period of force majeure whilst the other party has to live with this. This suspension might become permanent if the impediment endures. If on the other hand we take Article 6.111 of the European Principles of Contract Law (PECL) as a well-known text for change of circumstances, it refers to a situation in which performance of the contract may become excessively onerous because of a change of circumstances. In such cases the court may terminate the contract at a date and upon terms pot be determined by it, it may adapt the contract to redistribute the losses or gains resulting from the change of circumstances. A renegotiation duty may be implied and the court may award damages if such renegotiation is refused or broken off contrary to good faith. It is clear that force majeure and frustration may here overlap. Again, common law does not provide these excuses under the general law—the notion of frustration remained also underdeveloped short of a hardship clause in the contract as we have seen—in which connection it may be noted that the CISG adopted the civil law approach, therefore even for professional sales agreements which it covers. That is so at least for the force majeure concept that could, however, also cover changes of circumstances. In all legal systems, it is necessary to be precise and spell out in the contract what parties want or do not want. However, the contract text should not become unduly complicated, which creates risks in itself, but the situation is such that the common law contract will be longer and more detailed. This is so first because the objective law does not normally describe types of contract and leaves this to the contractual text. In addition, in business, it will be more of a roadmap and risk management tool, with which the law does not interfere to the same extent or provide protection as civil law does. The underlying notion in civil law is here foremost one of blame as we have seen even if not immediately so expressed. ‘It is not my fault, I could not help it’ becomes the real excuse and the law will accept and support it in principle, never mind the effect on the other party who could not help it either. It was posited throughout that this suggests an anthropomorphic notion of contract performance that may be associated in more modern times with a consumer law attitude. It underlines the history of contract law which emerged in civil law in dealings between individuals, but it is unsuitable for business dealings. The common law of contract on the other hand originated in commercial law, in those days also between individuals but they were merchants or professionals

136 Volume 3: General in more modern terminology. This highlights at the same time the nature of a contract as risk management tool in common law. Without it, the chips fall where they fall. There is no automatic redistribution of that party’s problem and, except with its consent, it should not become the other party’s problem, as that party could most certainly not help it either. That is understandable in commerce. So much for excuses. But in common law there are also defences against requests for performance. They are different from the civil law as we have seen and should be well distinguished. In civil law, they concern the basis of contract and its formation or validity. Was there a good contract in the first place? In civil law this goes mostly directly to intent and consensus and is then a formation issue rather than a defence. Here the civil law attitude is ‘I did not mean it’, again an anthropomorphic notion. Since the common law contract is not directly intent based, the defences are performance issues and much narrower and incidental, again understandable between merchants or in professional dealings. They are equitable and dependent on the situation, the facts of the case, and nature of the relationship, different between professionals. That is rescission, which does not mean avoidance or invalidation per se as the term may suggest. It all depends on the circumstances where the equity judge has great discretion, resulting rather in a patchwork of relief. The most importance instances are fraudulent or negligent misrepresentation which concerns declarations not in the contract text but on which there was reliance. If defined in the contract, not respecting the quality requirement results in breach of contract if the quality delivered is lower. Rather in the equitable defences, the issue is in how far one party has been bamboozled by the other into the contract itself, beyond mere and recognisable sales talk. Another defence may be mutual mistake, which is a situation where the mutual declarations of the parties do not appear sufficiently to overlap. Civil law does not seem to have a true equivalent. But there is more. The non-intent based nature of the contract that depends for its validity on exchange and bargain in the consideration mode in common law, or, in more modern terms, on conduct and detrimental reliance, underlines that there is no cause of action at all if the party seeking relief has not put its own money on the table or invested in the venture. That may be a peppercorn but there must be a beginning of implementation. Without it, expectation damages in particular cannot be obtained for breach of contract by the other party. Even price concessions are not enforceable unless there has been detrimental reliance by the beneficiaries. This touches on the role of party autonomy and its status in civil and common law. It is stronger in the latter. There is here first a fundamental issue: as we have seen, the civil law has only one official source which is legislation and a contract is only valid to the extent it is validated by the code, it is a licensed concept subject to conditions quite apart from the fact that it is further hemmed in by public order or public policy considerations. Although the latter is also true in common law, party autonomy is not itself licensed and is therefore stronger, it may even be used in equity to move into the formation of property rights as we shall see and will be further discussed in Volume 4. It is at the same time less subjective, again intent is less important in its operation except when it comes to clear choices made by the parties in terms of roadmap and risk management, but even then, in the interpretation the reasonable man approach will prevail. To repeat, the common law is more aware—especially in corporate dealing which in commerce and finance is now the norm—that the person signing an agreement has the authority but is often unaware of the precise terms; that the details may be negotiated by different departments which may hardly communicate; and the final text is produced by outside law firms who are really the only ones who know what was agreed but are not a party. These are realities which the civil law has greater difficulties to digest.

Volume 3: General 137 When it comes to securing performance, other complicating issues may arise: extra contractual duties may emerge in the pre-contractual, contractual and post-contractual phases which may supplement or even correct the contractual rights and duties. Pre-contractual disclosure and negotiation duties were mentioned as well as contractual duties of care and co-operation, and post-contractual renegotiation duties. Relationship thinking is here important and in professional dealings these duties may be less relevant, especially clear in common law, but if these duties are broken there is the further question what damage can be claimed, especially expectation damages. It may be less likely in common law; the situation is more akin to breach of fiduciary duty or negligence. In civil law, at least of the German type, it may be considered foremost a breach of contract which may open the way to claiming more. This may also touch on the contribution of good faith concept, relevant especially in civil law. It was submitted that it is largely a liberal interpretation technique through which in contract the other sources of law, discarded by the code as sole legal source, come back in interpretation. This may be fundamental principle, but needs not be, it could be custom or general principle, and good faith is by no means always a higher norm, as such absolutely mandatory. Parties could even set standards as they may do in the US under the UCC unless the result becomes manifestly unreasonable, less likely in professional dealings. Again, relationship thinking becomes fundamental. The civil law is here only at the beginning, contract types being traditionally more important than types of relationships which means that consumer protection per contract type often wafts over to professional dealings, in this book considered to be a great weakness in the civil law of contract again underlining its anthropomorphic nature. In the same way, it has introduced the pre-contractual, contractual and post-contractual extras duties normally in consumer law terms for all and does not appreciate that good faith in professional dealings may mean fewer extra rights or even a more literal interpretation of the contract text as road map and risk management tool. It was explained that the common law needs good faith much less because it has other means: relationship thinking, fiduciary duties, reliance notions, implied conditions, and sometime the notion of natural justice. But in one other important respect both the common and civil law face a similar challenge: all legal systems have difficulty relating established norms to ever changing incongruous fact situations. In civil law, good faith will help out at least in contract whilst reintroducing the traditional sources of law besides legislation which codification had attempted to eliminate. In common law this challenge is not different, but the solution is not similarly handled. What helps in common law is that it was always more fact related, it works more on the fact than norm side, civil law is the opposite especially in its systematic intellectual approach on the norm side and has therefore further to go. It was noted that greater sensitivity for fact may increasingly result in a good faith approach to contract law issues, but like in relationship thinking and renewed respect for different sources of law, civil law has further to go. Another difference between civil and common law when it comes to contract performance is the type of recourse when there is a breach and no proper defence or excuse. Is there performance in kind or only damages? The common law rule means damages unless inadequate or meaningless in the situation; the civil law means performance in kind, but in practice damages will often be claimed instead as easier and cleaner. In any event, if the other party does not supply spare parts in time, alternatives must rapidly be found and the claim will only be damages for higher cost and/or lower available quality. Finally, in view of the foregoing, it may be considered what the meaning is of a contractual choice of law in this area, for example, of Swiss or English law, between two contract parties from France and Italy. What law do parties move into, what are they moving out of? Is legal

138 Volume 3: General transnationalisation avoided in this manner altogether? The first aspect to remember is that parties can only choose another law in matters at their free disposition. That means they cannot change fundamental principle/mandatory rules, including property and regulatory or tax laws. Even in contract, they are not in charge of determining their own capacity or in control of the validity of their agreement. The area of law preserved for them is in fact limited to issues that are directory, meaning subject to default rules which limit the effectiveness of a choice of law quite considerably. In fact, it concerns issues which they could decide and cover in the contract itself It may even be asked whether in the area of defences and excuses there is freedom, hardly when it comes to contractual validity issues and peremptory law. There is then also the issue what parties truly meant in such a clause especially if they are coming from a civil law background. Did they mean to opt for all particularities of a law they hardly knew, for example, the English principle of consideration and way of contract formation with the limitation of defences and excuses, the emphasis on damages rather than performance in kind? In the case of price concessions, do they realise that they may not be enforceable without further consideration? They may still think of force majeure as an implied term. What about frustration or hardship? Is the good faith concept mandatory between them, and if so, could it really be superseded by another approach through a choice of a different law, like English law? Can parties in this way opt out of the mandatory parts of the modern lex mercatoria in their international transactions and ignore international minimum standards? Are there overriding issues of justice, social peace and efficiency in international dealings which cannot so be ignored or circumvented either? Rather, does participating in international dealings now mean acceptance of its ground rules which a choice of some domestic law can hardly change? Even party autonomy and such a choice of laws is embedded in a framework that for international transactions is now hardly domestic any longer, except perhaps in respect of domestic public policy in aspects of such transactions which in conduct and effect can still be demonstrably located on a national territory. Even then it was submitted that in a globalising environment they may be increasingly superseded by international minimum standards.

1.5. Privity of Contract 1.5.1. Privity of Contract or Third-Party Rights and Duties under a Contract The extent to which third parties may derive rights from a contract between other parties (for example, as third-party beneficiaries) or may even incur duties or a liability thereunder without themselves becoming formal parties to the contract, has greatly exercised legal minds, especially in common law, where the subject is normally referred to as ‘privity of contract’. As far as third parties deriving rights from a contract between others, the issue is often raised in the context of the notion of proper consideration or in modern times perhaps detrimental reliance. It left third-party beneficiaries unprotected if they had not given any or had not relied at all. Their benefit was then no more than a gift that could not be enforced by them. For third-party beneficiaries, only later was it perceived that the issue was not the gift, but foremost the proper performance between the two original parties to the contract out of which the third-party benefit arose, assuming proper consideration was given for that contract. Only if the beneficiary wanted to claim directly would the issue of consideration and its relevance arise as to him but it was conceivable that it would be deemed implicit, like in guarantees and letters of credit. In common

Volume 3: General 139 law countries, the notion of privity could also run into trouble in closely connected contracts or contract chains; a contract party may not be able to ignore the legal environment in which the contract arose and must operate and may derive rights but also incur obligations under the related contracts in such situations. In civil law, the issue is more commonly raised in the context of the discussion of in rem and in personam rights, therefore in the context of the more theoretical discussion on the nature of and distinction between proprietary and obligatory rights. The first ones by definition have thirdparty effect, even if, as is normally the case, they originate in contract, like in a sale followed by a transfer of title, in the sense that they must be respected by others, and the latter not. The issue is rather whether and when a contract can have an effect on third parties either under the law of obligations, like when rights are bilaterally bestowed on third party beneficiaries or even unilaterally in the case of assignees (when closely connected duties may even transfer with the rights), or when, under property law, covenants move with the assets, or when contractual transfer restrictions mean to prohibit their transfer, particularly relevant in the case of assignment restrictions and regards their effect when a transfer was made regardless. This concerns more in particular the liquidity of assets, see further Volume 4, section 1.1.3. Another example of asset liquidity is the survival of the rental agreement upon a sale of a property with full transfer to the buyer and a full discharge of the seller. One more aspect of this concern with liquidity is the limitation of the proprietary rights where bona fide purchasers are protected against an asset’s history in terms of lack of disposition rights and other contractual or formal defects in the ownership chain or any earlier agreed terms about the use of the asset. Here we see a notable push back in the notion of ownership and its third-party effect. That finds also an expression in the holder in due course of promissory notes, when the contractual claim transfers itself into an asset or piece of property altogether. Even if not so expressed, it will be argued in Volume 4, section 1.5.9, that all monetary claims tend towards such status in international finance connected with their dual status as obligation and asset at the same time. It may be said that neither the original common law approach nor the civil law attitude led to great elucidation in this area. Naturally, the basic contractual rule everywhere is that a contract cannot confer rights or impose duties on any person other than those that are party to it (unless leading to a proprietary disposition, which is then covered by the law of property and not by the contract). This has, however, become too simplistic a view and in practice there have arisen a number of situations in which a contract has an effect on outsiders, which may be on both the rights and obligation (or duty) sides, although it is more common to be only on the former. It is therefore more common that a contract gives something to third parties (who then become third-party beneficiaries) rather than taking something away from them. It depends on the circumstances, but they are all exceptional and can often not be usefully compared and there seems to be hardly any clarifying principle. Whatever the outcome, it does not mean that the relevant outsiders thereby automatically become parties to the contract in whole or even in part. Indeed, one of the major issues in this area is whether or when they become subject to the contract, even if this may concern only some aspects of that contract. It is usually situation specific. In the more obvious case of third-party beneficiaries under a contractual clause by which parties give a benefit to outsiders, they may become parties once they become aware of the benefit (assuming that consideration is given or can be construed to have been given by them in traditional common law). Parties can in this manner create rights for others, which the latter may enforce against them under the original contract in the manner discussed below. Again, it is more difficult to create duties for outsiders in this way unless these duties are very closely related to the benefit (as, for example, a duty to arbitrate under the original contract in the case of a dispute concerning the third-party benefit

140 Volume 3: General when claimed by the beneficiary). In the case of assignments, one contract party transfers its rights under the contract unilaterally, without any need for consent of the other party, in which connection even closely connected duties, like a duty to arbitrate disputes, may also transfer. Short of such a relationship under which outsiders become indirect or direct contract parties, it should be considered that there may be tort or even proprietary actions, direct contract parties might have against outsiders in connection with or flowing from their contract and its existence. Here we have therefore contract parties who may have obtained rights beyond the ones they have under the contract against each other. First, third parties owe them some duty of respect, thus regarding a contract that they have not concluded, but that is not then a matter under the contract itself. It is in fact similar to all people having to respect property rights; indeed, it was already said that contractual rights may be considered proprietary or an asset at the same time, and must as such be respected by all. It concerns here especially the right of contract parties not to have the contract interfered with by others and to have any transfer of assets or rendering of services pursuant to the contract respected. The defence is in tort (as are all proprietary defences in common law). On the other hand, if a third party is adversely affected by a contract, it may equally be able to defend itself in tort against the contract parties or invoke the illegality of the agreement and (sometimes) ask for punitive damages, notably in the case of contracts in restraint of trade. It is clear in this connection that generally the existence of all contracts must be accepted as fact and third parties are not free to meddle with them or undermine them at will in order to undo them to their own or somebody else’s advantage, although public policy may dictate otherwise in specific situations like in competition law. So, there is a negative duty on all third parties in respect of any contract as indeed there is in respect of any asset or property right. This also applies to adverse supply agreements with competitors, even if concluded in defiance of a contractual obligation of the supplier vis-à-vis the complaining party not to do so. But again, it is not a duty governed by the contract itself. In a similar manner, it is possible to argue that, if under a contract one of the parties (the reimbursing party) has agreed (or is forced) to reimburse any extra costs of the other party and any outsider increases these costs, for example while defaulting in its supply duties to the other party, the latter may be liable in tort to the reimbursing party while breaching his supply obligations to the other party. As default in one relationship may have serious consequences in another, this could more generally give rise to a direct action: if A does not deliver specialty goods to B, B may default under its resale contract with C. This does not give C a direct action under the contract against A. But a tort action of C against A is not inconceivable, for example, when B is bankrupt and cannot pay or will otherwise not do so. In any event, B may still be able to seek recourse against A for any damages B must pay C under the resale contract with the latter. As a consequence, A may at least indirectly derive a liability (in tort) from the contract between B and C as a consequence of A’s destabilising behaviour. This is of relevance especially in supply chains and it may well be that the law will develop here further. The key remains, however, that in these cases, the liability of third parties are not of a contractual nature, even though it is the existence of the contract between others that creates their duties, these being duties to respect these contracts, not to interfere with them, or to make the performance under them more difficult or more expensive. There are therefore no indirect contract parties created as in the case of third-party beneficiaries or direct ones as in the case of assignments. Reference was made already to proprietary rights in which connection it may be relevant how contracts may change them (for example in a transfer of title) although the change itself is unlikely to be a contractual matter. This may need further exploring. It is clear, for example, that

Volume 3: General 141 contracts which transfer proprietary rights, such as sales agreements, acquire third-party effect in their consequences, especially those under legal regimes such as the French and English, which do not require further acts, such as delivery, for the transfer of title in chattels. This also applies to situations in which intangible assets such as claims are transferred or rather assigned, when the assignee may defend his new right against all the world, often even before notification of the debtor. It means that everyone has to respect the new situation as to the ownership of the claim. This is no less a situation in which contractual outcomes must be respected by others, although, as already mentioned, it is not the contractual aspects that matter here but rather the proprietary consequences. Even in assignments, we now normally distinguish between the contractual and transfer or proprietary aspects. Therefore, the contract parties do not act or defend on the basis of the contractual terms, but rather on the basis of a proprietary action or expectation or in tort and the duties of the third parties vis-à-vis the new owner or assignee are again not contractual in nature. Another situation already mentioned also, but needing more discussion, is the one concerning restrictive covenants connected with the use of property, especially land. Particularly in common law, such covenants, if construed to run with the land, may affect any subsequent thirdparty transferee of the property, even though the latter was never a party to the original restrictive agreement and may not even have known of them. Here, the counterparty will act or defend against the new owner on the basis of the old contract or covenants. New owners thus become parties to the old covenants and take over the contractual duties in their capacity of new owners, therefore even without their specific acceptance. Again, in Volume 4, section 1.1.4, this will be explained as an issue of liquidity. In civil law terms, it could be said that these contracts acquire as a consequence (some) in rem or proprietary effect in the sense that the beneficiary may maintain his/her right under it against any succeeding owner in the property (any third party, therefore, in this particular capacity, even if not against all the world), the former owner being discharged at the same time. In civil law, this is likely to be more difficult if the covenants are not expressed as in rem servitudes, the civil law equivalents of the common law easements, see for the situation in common law Volume 4, sections 1.1.4 and 1.2.1. These are of a special type, the so-called iura in re aliena, limited by the relevant civil law codes, and are indeed proprietary rights as such to be enforceable against all. Although created by contract, again, the defence is not then in contract but is that of a proprietary right. In some civil law countries, mere contractual covenants might now be entered into land registers as well, thereby acquiring (some similar) in rem or at least third-party effect. It may be asked whether the defence would subsequently still be in contract, which then makes the new owners parties. Even without such registration, under modern civil law, a new owner may sometimes be considered to commit a tort while ignoring the contractual commitments made by his predecessor in respect of the property, at least if he knew of the covenant before he bought the property. But this would not then be an action based on contract either. The already-mentioned contractual assignment prohibitions are of the same nature in that they still void in most countries any assignments made in violation of the prohibition. It could be seen as a covenant that goes with the property, here the receivable, and affects any subsequent assignee, who would then be considered a succeeding party. Again, it is an example of a contractual right being exercised against third parties but in a proprietary manner. In respect of chattels such prohibitions no longer have any proprietary effect, at least not against bona fide purchasers (and is then a question of prior knowledge in the transferee) although it could be argued that it should never be so. Of course, there is still a breach of contract, conceivably requiring damages. At issue here is again the important question of liquidity of assets—see Volume 4, section 1.5.5. It will be noted later that in respect of trade receivables in the US, section 2-210 of the UCC no

142 Volume 3: General longer gives assignment restrictions in respect of trade receivables any proprietary effect either. This is an important development, particularly relevant in receivables financing. Better known in this connection in civil law is the already mentioned rule that new owners have to respect at least existing leases or tenancies in a property (cf section 566 BGB), therefore also if they were not original parties to the relevant contracts. This is by statutory exception. It should be remembered in this connection that in civil law a lease is normally not a proprietary right or estate in land but merely a contract or rental agreement, which does not therefore transfer with the property. Under the statutory exception, common everywhere in civil law, succeeding owners here acquire obligations under pre-existing contracts as third-party successors in the property, therefore in their capacity as (new) owners.269 Although the old contract thus has effect against third parties, it is only against this special class of them (succeeding owners in their capacity as owners). The effect is that beneficiaries or tenants are given a right to the status quo in their contractual arrangements concerning property in which the owner has changed. The French speak here of obligations propter rem; others call them qualitative obligations—but again it is better seen as an issue of liquidity of the underlying asset. As new owners voluntarily enter into the property, one could also argue that they take that risk and implicitly accept this state of affairs and therefore enter the prior lease contracts as willing parties in their quality or capacity as new owners. An important further aspect is that the previous owner is discharged and does not therefore even remain guarantor of the new owner’s obligations as lessor and this even without any consent of the lessee. Another aspect is that not only rights, but also duties under a pre-existing contract are transferred to someone who was never a party to it nor agreed to become one.270 To reemphasise, in these cases of restrictive covenants and rental agreements in real estate, one may explain the situation by the need to further promote liquidity (transferability). If the old owners of real estate were to be held to the existing covenants and rental agreements while the new owners could ignore them, it would be impossible for owners to sell their rented buildings or any property in respect of which they had given some covenant short of terminating all these leases and covenants as they would lose control over the proper performance of these contracts by the owner after a sale. Such termination would depend on co-operation of the beneficiaries, who would obtain a blocking vote in respect of the sale of all tenanted property. This would obviously be undesirable.271 269 New house owners must usually also respect certain implied duties concerning neighbours, even if they did not know of them at the time of the sale. Here there is no contractual relationship, however, and the enforcement action of neighbours will be in tort. So it is in respect of retention rights which succeeding owners of an asset may seek to ignore. If they do, there may be a special type of recourse for the retentor which may be proprietary or in tort. It should be noted that more generally legal successors such as heirs or shareholders upon dissolution of companies automatically succeed to the duties (and rights) of the heir or former company and thereby become party to all their contracts (as well as in their proprietary and other rights and duties). This is an aspect of thirdparty rights and duties that will not be further discussed here. 270 Rights transfer more easily with the property but one may still ask which rights they are. Rights of access spring to mind but are not necessarily included short of a servitude; at issue is the basic distinction in civil law between proprietary and obligatory rights. Better examples are previous agreements with neighbours not to build certain structures or not to increase their height. It is mostly assumed at issue here are rights that cannot independently exist apart from their object. It may still be possible that the acquirer of the property surrenders these rights but may remain liable for any connected obligations, cf in the Netherlands Art 6.251 CC and HR 6 April 2012, LJN BV 6727. The right that potentially transfers with the property cannot be highly personal. The underlying agreement itself may exclude the passing of the right. Other situations may be where there are rights to collect contributions for the common parts or where there are rights to reimbursement of damages caused earlier by neighbours in the property. 271 It may be noted in this connection that assignment restrictions limit the liquidity of receivables and are for exactly the same reason now increasingly becoming ignored in their proprietary effect. It is another solution, not

Volume 3: General 143 This class of successor-owners, where liquidity is an important issue, presents one important and clear first cluster of situations in which the contract itself may be extended to others (rather than tort actions being engendered by it), here primarily the obligation side of these contracts (although in the case of rental agreements also the benefits), a circumstance normally discounted in the purchase price of the asset, although a good existing rental agreement may also enhance an asset’s value. In a similar vein, it is now not uncommon to find under other statutory law the requirement of a business branch or division upon a sale to honour the employment contracts entered into by previous owners. Sometimes one may also acquire a direct benefit or right from a transaction between other parties. This presents a second cluster of situations where indirect contract parties emerge. A good example is a beneficiary under a trust arrangement in common law. There is a difference from an ordinary third-party beneficiary in so far as, in trust situations, there is no need for consideration on the part of the beneficiary or trustee for the benefit or right to pass and the situation is not purely contractual as far as the beneficiary is concerned, who receives an equitable proprietary right. Nevertheless, in a transfer between settlor and trustee, such third-party rights commonly arise, even in a proprietary sense, as the beneficiary may subsequently defend his rights against most classes of third parties in the nature of all equitable interests on the basis of the trust deed, to which he was unlikely to have been a party. At issue here are particularly the trustees, their creditors and even their successors in interest who knew of the beneficiary’s prior rights or acquired the interest for free. To this same cluster belong situations already mentioned by way of introduction above when, also in civil law, contract parties agree to give a benefit more directly to a third party. The term third-party beneficiary is then commonly used. Consent or acceptance by the third party is often not necessary for these rights to vest and to be invoked by the beneficiary, although there could be a rejection. Here, consideration may be required to benefit as was long the case in England. The donee beneficiary thus had a problem in directly enforcing his right. More normal is that one of the contract parties wants the other party to pay the beneficiary in lieu of himself because this party owes the beneficiary something on account of another arrangement. That is the normal situation of creditor beneficiaries and in that case becomes the justification and the consideration. Thus, economically there is likely to be a tripartite arrangement that is legally expressed in this manner (therefore two separate agreements under one of which there is a third-party beneficiary who is connected in another relationship with the creditor under the first agreement). One may note that in these cases a form of acceptance by the beneficiary of the substitute payment in this manner may become an issue. Hence also the facility to refuse third-party benefits. These situations of third-party benefit might thus still be distinguished into those under which the grantor owed the beneficiary something and those in which there was a question of a pure gift (the donee beneficiary), again under common law a distinction closely connected with the doctrine of consideration. Also, in civil law there may be certain formalities to make such a pure gift an enforceable benefit for the third party. These third-party rights may then also be distinguished according to whether they need acceptance by the third-party beneficiaries to bring them into the contract. It would not always seem to be necessary, for example in the case of child support. It is still possible to repudiate them, however.

feasible in the case of a rental agreement, but which still explains the hesitancy with regard to the acceptance of the effect of covenants that go with land (or other assets). The alternative would be to ignore these arrangements. Transfer or termination of the third party effect seem to be the two alternatives to protect the liquidity of the underlying assets.

144 Volume 3: General The rights so granted to third parties are likely to be contractual, which means that in one form or another they become maintainable against the original parties under the original contract even if it might require some further steps: in life insurance, for example, the existence of third-party beneficiaries has long been accepted and once their interest vests under the terms of the policy, they can maintain it against the insurance company and the original parties can no longer change that unless the policy itself says so. In this case, there is unlikely to be a consideration requirement in common law either; practice forbids it. Similarly, bank guarantees are often arranged for the benefit of third parties, as in letters of credit, and give them a direct right against the issuing bank under their terms. If they are issued in irrevocable form, they cannot be withdrawn. Here the consideration, if needed, will derive from the whole of the arrangement which, economically speaking, is likely to be tripartite. In the case of subordination clauses in loan or bond documentation, it is that new creditors in an agreement with their debtor allow older (often unidentified) creditors to take precedence over them in recovery. This is also best seen as a third-party benefit for the latter, but again the issue of consideration may play a role in common law countries. What was the benefit to the junior creditor making this concession to senior ones? It probably got a higher reward. But what is the consideration of the beneficiaries? The idea is that older creditors will not be worse off and diluted in their recovery. For them it is maintenance of the status quo. Again, the consideration is likely to be the whole arrangement: only with this benefit are the borrowers willing to arrange further funding or continue the present funding. Subordination of this nature is very common and highly important in finance and is often also an element in securitisation involving mezzanine financing in terms of credit enhancement; see also Volume 5, section 2.5.1. There are other instances. Child maintenance clauses are common in marriage contracts and divorce settlements. They may give children direct rights against the paying parent. Consideration here is the parental obligation. Exemption clauses exonerating parties vis-à-vis each other from any adverse consequences of their performance under a contract or from any tort liability might be invoked by servants or subcontractors to exonerate them as well. They thus also become third-party beneficiaries even without clear prior acceptance of that position and again without consideration as to them. These are all situations where the original parties are unlikely to be able to change the benefit because they impliedly agreed not to do so, even without the beneficiary knowing of it (at first), or otherwise after his/her having explicitly or indirectly accepted the benefit. If the third party did know from the outset (as in tripartite arrangements), it may be argued that it became a direct, rather than indirect, party to the agreement. In all cases, the rights of the beneficiary are pre-set and governed by the contract concluded by others; the terms directly relating to the benefit are applicable to him/her but s/he will not have had a say in them. S/he becomes a passive party (in whole or more likely in part). That could also include some closely related duties. In this connection, the duty to arbitrate in the case of conflict has already been mentioned if there is such a clause under the contract but there may also be some preconditions to the benefit arising. Otherwise, duties cannot be imposed on other persons in this manner. Only benefits can be so given. A third cluster of situations in which an outsider may become an indirect party to an agreement is presented in situations where there are closely related agreements. In modern finance leases it is normal, for example, to expect that the lessee has certain direct installation and repair rights against the supplier of the goods under the latter’s contract with the lessor who is often no more than the financier who ordered the goods upon the lessee’s instructions and specifications. In these situations, the lessee may also incur some direct duties under the supply agreement, for example the duty to give access to and co-operate with the supplier. This is now very much

Volume 3: General 145 the theme of Article 2A UCC in the US, an approach also adopted in the UNIDROIT (Ottawa) Convention on International Financial Leasing of 1988 (see Volume 5, section 2.3). In parallel loan agreements, where there is cross-lending, or in a similar grouping of contracts, default under the one loan agreement may also impact on the other, especially as parties are likely to know of the existence of both, often concluded between the same parties or their subsidiaries. The contract may of course especially provide for it, but if forgotten, it may still be so. In financial swaps, similarly, the two legs of the swap are now mostly considered irretrievably connected or integrated, particularly important for the acceleration and set-off possibilities and may thus impact on each other. Swap Master Agreements go further and also connect other swaps between the same parties in terms of close-out netting upon an event of default (or cross-default) under one of them (see also Volume 6, section 1.4.6). In repos, one may also find Repo Master Agreements, which similarly connect repos between the same parties (see Volume 5, section 2.2.5). But here the connections are contractually induced and may not be assumed. The situation in supply chains noted above may also fit in this cluster. The action may be in tort but a further special instance may be a subcontractor who has improved a property, is dismissed by the general contractor without payment and rather brings a restitution claim against the owner. In this cluster may also be found co-operation duties where people work together, for example on the same building site under different contracts. They are bound together by a joint objective, and their contracts may become indirectly related in that they concern the same project. In situations like these, the practicalities will often require them to help each other, at least in minor things. In these cases, one could ask whether lack of co-operation is a breach of a contractual duty (and under which contract) or still rather a tort. The difference may be in the damages claimable. In a normative contractual interpretation these claims may be sooner contractual. It could be argued that these co-operation duties were indirectly accepted in the original contracts or that sharing burdens in respect of the same project was implied. Thus, in Germany, third parties may acquire quasi-contractual rights under a contract to which they are neither party nor expressly a beneficiary if they are found to be sufficiently close to the contract from its pre- to post-contractual phases (cf section 311(3) (new) BGB). It would follow that there may also be quasi-contractual obligations. Yet in other situations already mentioned above for supply chains, default in one contract may seriously affect the performance under the next one in the chain, but a tort action rather than a contractual action might be the answer for the participant who was not a party to the first one but was hurt under the second agreement, although it could conceivably be different if the non performing party was well aware of the chain. Yet especially in common law countries, in private ordering one might still see the courts rely on the individual contracts and their terms to deal with situations like these and not easily accept transformation either though tort or restitution notions which remain secondary, limited to situations which the contract and its road map and risk allocation facilities could not properly reach or reasonably anticipate. It is not easy to leapfrog a contract,272 and indirect enrichment actions are not encouraged, again the expansion of rights in this way is limited to exceptional situations that are pressing and atypical. Undisclosed or indirect agency presents a fourth cluster, where someone (here the principal) becomes a party to a contract concluded between two others. The position is different from the one of the third-party beneficiary in that the agent may drop out as party altogether. Thus, in common law, upon disclosure, the principal becomes the direct party (see more particularly 272 Lincoln Land Company, LLC v LP Broadband, Inc, 163 Idaho 105 (2017).

146 Volume 3: General section 3.1.5 below) although the original agent is likely to remain the guarantor of any obligations accepted by him vis-à-vis the third party. It is for the third party a question of credit risk. A principal may in this way also have to accept the contracts concluded by his agent with others, even if the agent acted outside his authority. In this cluster may also be placed a carrier, who must accept that any succeeding holder of the bill of lading may require performance under the contract of carriage even though there was never express consent by the carrier to the transfer of the bill (quite apart from the proprietary consequences of the bill of lading as a document of title). Similarly, a drawee who has accepted a bill of exchange will have to pay any succeeding holder of the bill without a direct contractual relationship. In a similar vein, any debtor will normally have to pay the assignee of his debt upon notice (if not increasing his burdens). We are concerned here with situations in which the third party (respectively the principal, carrier, drawee and debtor) incurs (performance or co-operation) duties under a contract concluded between others. Again, the essential point is that the third-party duties so obtained or incurred are in each instance in principle governed by the contractual regime created by the parties to the particular contract to which the third party is not itself directly a party but has exposed itself to this risk. It is submitted that the situations in which third-party rights or duties may arise in connection with or under a contract (therefore the four clusters mentioned above) do not differ greatly between civil and common law countries. They are on the whole exceptional, and derive from obvious practical needs, although certain problems, like the one concerning proper consideration, are not likely to arise in civil law countries. On the other hand, in the protection of covenants in land against third parties (successors), the common law is less formal than the civil law and shows greater flexibility. This is also true in the protection of mere possessory rights such as bailment under which the bailee could be considered a beneficiary who may defend his physical possession against all the world, even against the bailor subject to the latter’s reclaiming rights. In common law this may allow proprietary effect to flow more readily from contractual stipulations concerning property. In purely contractual matters, the problems connected with third-party rights and duties are, however, hardly different in either system. There are no general rules in either. Both the normative or reliance approach to interpretation may more readily support the rights or even duties of third parties under a pre-existing contract between others but this has not produced greatly new insights or the identification of new or more precise clusters either. Needs and circumstances have so far dictated their emergence and operation. More recently an important attempt at greater clarification has been made in the US at UC Berkeley by Professor Mark Gergen.273 Legal partitioning and boundary drawing functions were identified in contract, property, tort and restitution law, in particular in connection with information or investigation costs of participants concerning possible rights or duties of or against other parties in other relationships and the containment of these costs.274 This concerns the need for isolation of contractual rights and obligations through the notion of privity and the limitation of property rights through the bona fide purchaser concept. It seeks to identify the boundaries of legal relationships and the limits to their alteration and in this connection also the limits of their expansion in particular through tort or restitution laws with emphasis on party autonomy and the dominance of private ordering in terms of risk allocation, tort and restitution remedies and

273 MP Gergen, ‘Privity’, in Oxford Handbook of the New Private Law (Oxford Handbook Series 2020). 274 This follows the analysis of Th W Merrill and HE Smith ‘The Property/Contract Interface’ (2001) 101 Colum LR 773, see Vol 4, s 1.3.9 below.

Volume 3: General 147 other forms of public ordering remaining subsidiary in this connection and only available for expansion when the parties cannot assess their rights and obligations by contract or reasonably anticipate the risks therein. These limitations are significant and entirely in line with the common law of contract and movable property having originated in commerce. A prime concern is here the information costs of potentially becoming engaged with existing legal relationships and their possible spill-over effects, closely related to transaction costs rather than with the effect on liquidity of the underlying assets which remains here secondary. In the Volume 4, section 1.1.4, it is considered the more central theme in the law of movable property, when transaction and information costs, although relevant, are considered more subsidiary issues.

1.5.2. Development of Contractual Third-Party Rights and Duties in Civil Law As we have seen, traditionally in civil law, the concern for third-party rights and duties under a contract was closely connected with the distinction between the law of property and the law of obligations. The essence is then the third-party effect of contractual clauses. The reference here to proprietary effect may confuse more than it reveals. It has already been said that it is the thirdparty effect itself that matters. Roman law did not yet maintain a clear conceptual distinction between in personam and in rem rights, although it accorded different actions (in personam or in rem) from which a difference between proprietary and other rights could be deduced but, as we shall see in the next Volume, it took the ius commune to arrive at a clearer understanding. Equally, Roman law did not maintain a conceptual approach to third-party beneficiary rights or third-party duties under a contract. Unlike under modern civil law (see for example section 328 BGB in Germany), it was not possible for parties to a contract to make a stipulation in favour of a third party (the stipulatio alteri) giving the latter any enforceable rights under the contract or otherwise (cf Inst II.9.5). The contractual bond was too formal and too ritually created for it to cover outsiders, and, in the equally rigid system of Roman law actions, there was no clear form of redress. In fact, for most contracts there was no action at all, as we have seen, let alone for third parties’ rights under them. Later when formality receded and more contract types became enforceable, the rule against third-party benefits and duties acquired a substantive law significance and was as such incorporated in the Justinian Codification (D.45.1.38.17). Through a penalty clause in the contract, at least the party agreeing to transfer a benefit to a third party could be pressurised into performance. It was also possible to make a stipulation in favour of the contract party together with a beneficiary. The latter had no independent action in these circumstances, but payment to him would absolve the party committed to giving the benefit. As formulated in C.8.54.3, the emperor eventually started to protect gifts to third parties, which had to be passed on according to the terms of the original contract. A right of the debtor to redeem, stipulated by a pledgee in an execution sale with a third party, also became enforceable (C.13.7.13). That was all the ius commune, in its further development of the Roman law on the subject, had to go by.275 The Dutch seventeenth-century writers were the first to abandon the Roman law constraints, especially in the natural law school of Grotius, who saw the impossibility of

275 See also R Zimmermann, The Law of Obligations (Cape Town, 1990) 41.

148 Volume 3: General stipulating in favour of others as against nature.276 There was here some emphasis on the autonomy of the parties’ intent, but it became necessary for the beneficiary to accept the benefit before he could enforce the stipulation in his favour, although such an acceptance could be implied until any outright rejection. This rejection could naturally come about if the third-party beneficiary did not want to accept a replacement for whatever the contract party negotiating the benefit for him might have owed him. Others, notably Pothier, stuck to the original maxim (alteri stipulari non potest).277 The French Civil Code of 1804 followed in this respect and therefore retained a restrictive attitude to third-party benefits (Article 1165 CC) except (following late Roman law) if it concerned a condition of the performance one had negotiated for oneself or if it concerned a gift that one was making to someone else (Article 1121 CC). The benefit could not be revoked once the beneficiary had declared his intention to profit from it. However, French case law widened the first exception and now assumes that there is also a benefit for the party negotiating the concession if it derives some moral profit from the transaction278 and allows the third party in that case to claim directly under the contract. German law in sections 328 and 311(3) BGB allows third-party benefit in general although still expressing in section 241 BGB the more general principle that contracts bind only the parties thereto. This principle is no longer generally so stated in the new Dutch Civil Code (but may still be inferred from Articles 6.213, 6.248 and 6.261 CC), and third-party benefits may be freely granted (see Article 6.253 CC).279 In the Netherlands, acceptance (not mere notice) is now necessary, however, and until such time the benefit may be withdrawn. In the case of a gift, acceptance is presumed as soon as the beneficiary has knowledge of it and does not immediately reject it. Modern Dutch law reverts here to the approach of Grotius, but the question is how far this acceptance must be explicit and what the situation was before it. German law in Section 333 BGB allows the beneficiary to reject the benefit, which is retroactive to the time of the conclusion of the agreement providing for it; explicit or presumed acceptance is not necessary.280 This is now also the French approach.281 It means that the third-party right dates and is enforceable from the moment of the conclusion of the contract under which it is granted. Third-party duties result commonly for principals from the acts of unauthorised agents, for lessees under supply agreements between third parties and the lessor concerning the leased assets, for debtors upon an assignment, for drawees of bills of exchange upon their transfer to subsequent holders, and for carriers upon transfers of the bill of lading: see the previous section. More difficult are situations under exemption or exoneration clauses, not so much if used by subcontractors or employees of the one contract party as a defence against the other (see Article 6.257 Dutch CC; (not, however, accepted in France),282 but rather if used as defences against third parties who claim. This is allowed in Germany and the Netherlands but only under certain circumstances. We are concerned here with situations in which the conduct of the third party or his relationship to the contract party may give rise to the defence.283 276 De Iure Belli ac Pacis, II, Cap XI, s 18. 277 Traité des obligations, Nos 54ff. 278 See J Ghestin, Traité de droit civil, les obligations (Paris, 1992), nos 835ff. 279 See further B Kortmann and D Faber, ‘Contract and Third Parties’ in Hartkamp et al (eds), Towards a European Civil Code, Ars Aequi Libri (Nijmegen, 1994) 237. 280 See further H Heinrichs, Münchener Kommentar zum Bürgerlichen Gesetzbuch, vol 2, Schuldrecht, Allgemeiner Teil, 2nd edn (Munich, 1985) 1003ff. 281 See Ghestin (n 278) nos 843, 853. 282 See Cour de Cass, 21 June 1988 [1988] Semaine Juridique, (ed) G, II.21125. 283 See for Germany RGH, 25 November 1911, RGHZ 77, 317 (1911) and for the Netherlands HR 12 January 1979 [1979] NJ 362.

Volume 3: General 149 Article 6.110 of the PECL contains a clause which allows a third-party beneficiary to benefit from a contract giving him a direct action, but the promisee may deprive him of it unless there has been notice to him that his right has become irrevocable or the third party has accepted the benefit. This is followed in the DCFR in more refined wording (see Articles II–9:301/303). It may be noted that only the third-party beneficiary notion is here covered, not other forms of the privity conundrum.

1.5.3. The Situation in Common Law and the Developments in the US and England In common law of the English variety, the doctrine of privity disallowing any third-party beneficiary to claim under the contract was connected with the doctrine of consideration, as we have seen, but was in its strictest form of relatively recent origin and was only formulated by Lord Haldane in Dunlop Pneumatic Tyre Co v Selfridge & Co in 1915.284 It remained contested, particularly by Lord Denning,285 but was reconfirmed by the House of Lords in Scruttons Ltd v Midland Silicones Ltd.286 In its most rigid form it has proved inconvenient and is not followed in the US. Even in the UK, there were many exceptions. The negative effects are now reduced through statute. In England there were as exceptions the situations of the principal having to accept the contracts concluded by his unauthorised or undisclosed agents, see also section 3.1.5 below, and of debtors under assignments, drawees under bills of exchange and carriers under bills of lading having to accept the transfer of receivables, bills of exchange and bills of lading, and perform towards other parties unknown to them. English law also construed situations of semi-contract or ancillary or collateral contracts where third parties, notably subcontractors of the counterparty, were deemed to have entered into a contractual relationship with the other (first) contracting party, notably if they had given certain assurances of quality to the counterparty on which the first party subsequently relied. The same approach is likely to be taken where a person buys goods from a dealer who was given a guarantee by a manufacturer. This approach was also likely to prevail in hire-purchase and finance leases when finance companies were interposed between the supplier and the customer (hire-purchaser or lessee). Any undertakings of the supplier to the finance company or lessor could then still be relied upon by the customer.287 Payment by credit card could also involve a collateral agreement between shopkeeper and credit card company, leading to payment services and giving the shopkeeper a direct action against the card company without a direct contractual relationship. At issue here are all cases in which third parties incur duties under a contract to which they are not (directly) a party. Collateral agreements were thus a most important tool for diluting the adverse effects of the privity doctrine in England. Consideration could, however, still be a problem, as noted before. In the cases mentioned, the consideration derived from the underlying relationship between the contracting parties. It could also imply reliance on the additional services, as in the case of a lessee

284 Dunlop Pneumatic Tyre Co v Selfridge & Co [1915] AC 847. 285 See Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500 and Drive Yourself Hire Co (London) Ltd v Strutt [1954] 1 QB 250. 286 Scruttons Ltd v Midland Silicones Ltd [1962] AC 446. 287 See also Treitel (n 98) 617.

150 Volume 3: General who would rely on the quality undertaking of the contract between his lessor and the supplier of the leased equipment. This could be sufficient to sustain also the collateral agreement as it could be said that there was here a detriment to the party seeking to invoke the collateral agreement or a benefit to the subcontractor or supplier.288 Equally having a car repaired in a garage appointed by the insurance company could still give rise to a direct action against the garage by the car owner, even though he did not pay or arrange anything but only left his car there in reliance on proper repairs.289 Naturally, the subcontractor or supplier, therefore the defendants in these collateral cases, ought to be well aware of the relationship between the main contractors and intend to play a role therein.290 Where in a contractual relationship between A and B there were benefits (rather than duties as in the above cases) for third parties, the question of consideration played no less a role. As we have already seen, if a true gift were meant, the beneficiary would be unlikely to be able to claim for want of consideration. That was also true in the US, where the beneficiary is then called a ‘donee beneficiary’. If the benefit were meant, however, for C to fulfil an obligation A had towards him, there would obviously be no gift and sufficient consideration may be assumed; but in England C would still not have a contractual right to claim the benefit from B, even if he agreed to the substitute performance. It was an important difference from the situation on the Continent and in the US, and one only recently remedied in England by legislation. Naturally, in appropriate cases the party negotiating the third-party benefit can always insist on performance, even specifically, so that the third party will receive the benefit unless refused, but this does not give the beneficiary an individual or direct right. Also, the party having negotiated the third-party benefit may claim damages if the counterparty does not perform towards the beneficiary, but only for himself and not for the beneficiary. It seems that these damages may sometimes include the beneficiary’s loss, although case law is not consistent on this point.291 If the promisor performs and gives the third party his benefit, there is, however, under English case law still a possibility that any successor to the promisee, such as his bankruptcy trustee, may still consider it a benefit for the promisee to be held by the beneficiary in trust for him. Yet there are cases of some urgency in which it has been held that the promisor performs to the promisee as trustee for the beneficiary,292 who thereby obtains an enforceable action but in equity and not under the contract directly. Also, exemption or exoneration clauses may provide examples of situations where there may be a truly enforceable third-party benefit, also in England, by using either the notion of an implied contract or that of agency.293 Besides the situations where a third party may owe a duty under an assignment or other type of transfer agreement or under collateral agreements, this is all to say that even in England, as everywhere else, the doctrine of privity was less well established than it may have seemed at first, notwithstanding its appearance of perfect logic. The English Law Revision Commission as early as 1937 demanded clarification and reform and proposed a general formula much like that adopted in Germany and now also in the Netherlands making third-party benefits under a contract generally enforceable. Legislation has now been passed in England to bring this about in the Contracts (Rights of Third Parties) Act 1999, following a Law Commission Report of 1996. It gives the third-party 288 See as the classic case Shanklin Pier v Detel Products Ltd [1951] 2 KB 854, 856. 289 Charnock v Liverpool Corpn [1968] 1 WLR 1498. 290 See Independent Broadcasting Authority v EMI Electronics [1980] 14 Building Law Reports 1. 291 See Treitel (n 98) 627. 292 See Les Affrêteurs Réunis Société v Walford [1919] AC 801. 293 See Treitel (n 98) 626.

Volume 3: General 151 beneficiary the same right to enforce the contract as if it were a party to it. It also means that it may rely on a contractual term excluding or limiting its liability. The new law does not concern third-party obligations except where construed as conditions for the exercise of third-party rights. The beneficiary is made explicitly subject to any arbitration clause. When the third-party right has crystallised (usually upon communication), it can no longer be revoked by the parties unless they reserve that right or any right of amendment (which may also be exercised if there is a need and the whereabouts of the beneficiary cannot be established or when the beneficiary lacks legal capacity). Established case law backs this up and remains effective in this area. The situation in the US has long been different ever since the leading New York case of Lawrence v Fox,294 in an important instance of an outright third-party benefit, provided always that there was consideration to support the benefit, which may exclude the donee beneficiary or any other who does not have a kind of relationship with the promisee that makes the benefit likely in the sense that the promisee has some interest. But it is now more commonly argued that as long as there was proper consideration under the contract from which the donee benefit arises, the fact that the donee has not paid consideration is irrelevant, as his benefit is a matter of the proper performance of the original agreement. Also in the US, we are here mostly concerned with substitute performance by a debtor asking someone else to perform in his stead. This is a promise which is enforceable by the creditor beneficiary under the contract once the benefit vests, which will normally be the case upon acceptance of the substitution by the beneficiary or even when the beneficiary hears of the benefit. But here again, the promisee may still insist on the original performance, while he may no less be able to sue under the contract to receive his benefit.

1.6. The UNIDROIT and European Principles of Contract Law. The Vienna Convention and UCC Compared. The Draft Common Frame of Reference in the EU and the Draft EU Regulation on a Common European Sales Law 1.6.1. Unification of Contract Law. Academic Texts and the EU Activity in this Area The unification of private law transborder has been a subject that has been with us at least since 1928 and was from early on tied in particular to the international sale of goods. Early efforts in that direction were described in Volume 1, section 1.4.21 and were based on treaty law. They resulted ultimately in the 1980 CISG as the most important achievement, but it was only a partial codification, even in the contractual aspects whilst it did not cover the transfer of title at all, which is a sale’s main objective. It had been preceded by the 1964 Hague Conventions. The text of the CISG is still considered important, even though several trading nations such as the UK and Portugal did not ratify it and commercial practice commonly excludes its application for the reasons that were mentioned earlier and will be revisited shortly. The Convention itself will be more extensively discussed below in section 2.3. 294 Lawrence v Fox 20 NY 268 (1859), see also Restatement (Second) of Contracts, s 302. See further MA Eisenberg, ‘Third Party Beneficiaries’ (1992) 92 Columbia Law Review 1358. See for donee beneficiaries and their right to claim the benefit, Seaver v Ransom 120 NE 639 (NY 1918).

152 Volume 3: General As from 1994, UNIDROIT started to publish a broader project in its Principles for International Commercial Contracts as a general part of contract law for all commercial dealings. It is not a text that was ever presented or meant for ratification and it never had an official status, although it could conceivably figure as expression of general principle in the modern lex mercatoria to which it made a reference. Separately, a private group of academics issued in 1995 the Principles of European Contract Law or PECL as a draft for an eventual codification of EU contract law. It had no official status either, even though the activity was subsidised by the EU. In the civil law tradition, it adopted a unitary approach, the same therefore in principle for business and consumer dealings. As such it could hardly claim to be part of the modern lex mercatoria, although it made also a reference to it. Both projects were followed later by texts for certain contract types. In the meantime, within the EU a project for the codification of all private law for the EU as a whole gained some ground. It is still largely driven by academics who received valuable backing from the European Parliament, followed in 2003 by an EU Action Plan, see again Volume 1, section 1.4.21.295 The Draft Common Frame of Reference or DCFR, already mentioned several times, was the result; it remains an academic project as well and was never an EU text either. The EU lacked sufficient authority. The general part on contract law was basically derived from the PECL.296 Not surprisingly in view of the EU’s professed interest in consumer matters, the DCFR, like the PECL earlier, found inspiration mainly in consumer law, which was indeed the professed interest of the Acquis Group,297 one of the driving forces behind the DCFR.298 It is demonstrated by the strong protection and prescriptive overtones in the text, but it is also evident 295 The EU interest is expressed particularly by the EU Action Plan set in motion in February 2003, although its basic direction and methodology were never made clear. Many EU projects start this way in which the aims and trajectory are regularly reformulated. In this vein, the 2003 Action Plan introduced the idea of a Common Framework of Reference (CFR), following an earlier publication in 2001 and was itself succeeded by a later one in 2004 (‘The Way Forward’). Originally, texts on contract, tort, property (including security interests and trusts), unjust enrichment and benevolent intervention were considered. This virtually amounted to all the traditional areas of civil law codification. The idea was subsequently withdrawn and later there was talk rather of a toolbox or dictionary to facilitate the drafting of European private law texts or legislation. To this end, a group of researchers, headed by Professor von Bar, was instituted and was to deliver a final report in 2007. The working papers were meant to come from three existing research groups: the Study Group on a European Civil Code (von Bar Group), the Acquis Group, and the Group Restatement of European Insurance Contract Law. ‘Stakeholders’ representing a diversity of legal traditions and economic interests were selected and asked to provide ‘detailed feedback and challenge to the academic researchers’, which ultimately did not prove a great success. The direction remained unclear, however; the final form will be up to the EU Commission to decide but some kind of text was wanted and it was hoped that by 2009 the CFR in terms of toolbox or dictionary could be ready for adoption. In the event, in early 2008 the group of researchers produced the Draft Common Frame of Reference (DCFR), which still amounted to a kind of codification, largely an update of the German BGB, even though it was expressly stated that no code was intended and lip service continued to be paid to the toolbox idea. Areas covered were contract, assignment, tort and unjust enrichment. Others followed in 2009, especially in the area of movable property law including acquisition and loss of ownership, secured transactions, and trusts. These will be dealt with in Vol 4, s 1.11. 296 See C von Bar, E Clive and H Schulte-Noelke, Principles, definitions and model rules of European private law: Draft Common Frame of Reference (DCFR) (De Gruyter Berlin, 2009) 10. 297 The Acquis Group searched more particularly for general principles in consumer law to be deduced from the EU’s Directives in this area, on which it promised a report by 2008. Texts on several topics started to be published as of 2007: www.acquis-group.org. In the meantime, it joined the DCFR project, see n 295 above. \There was a difference between the Acquis group and the DCFR Study Group in the sense that the former worked in the manner of a restatement and did not mean to bring substantial legal modification. The latter aimed at better solutions with the possibility of reaching beyond the common principles of the national legal orders of Member States. In the event, the text of the DCFR was predictably conventional in the civil law nineteenth-century consumer mould, in property virtually a complete reflection of German law and its model. 298 See also C Twigg-Flessner, The Europeanisation of Contract Law (Routledge, 2013).

Volume 3: General 153 from the continuation of an anthropomorphic attitude in contract law still based on intent and will theories and in movable property law on physicality and individualisation of assets in the nineteenth-century civil law perceptions and models, based on relationships between individuals without a business objective. Clear distinctions according to types of parties are seldom made. Again, there continued an on the whole undesirable spill-over effect of this consumer approach into commerce and finance as the DCFR’s aim still appears to remain a unitary approach and system for private law, in principle the same for all, therefore for consumer and professional dealings alike, even though occasionally some distinctions are made in the text. This unitary approach was earlier identified as the consequence of a lack of relationship thinking and in modern private law texts of this nature a serious shortcoming. Although the good faith notion might redress this situation to some extent, it is in this respect only at the beginning of this development in civil law, see further sections 1.3.2/3 above and 1.6.2 below and it is not apparent from the DCFR. If efficiency or other compelling reasons that require new rules to be imposed more generally EU-wide could nevertheless now be identified and formulated, this would still raise the important question not only of EU jurisdiction but also of objective, method, and efficacy. In particular, should the civil law codification methodology be adopted, again the same for consumer and professional dealings in the unitary approach, and then also supersede the operation and further development of the modern lex mercatoria and its different sources of law as a bottom-up process of private law formation in the transnational commercial and financial legal order described above, at least within the EU for cross-border professional dealings? And if so, why? And could it succeed? It would interfere with legal transnationalisation and put cross-border professional dealings within the EU beyond its reach and consideration. It may be recalled in this connection that in the perspective of this book, at the transnational or cross-border business level, the modern lex mercatoria applies and is perceived as a hierarchy of norms deriving from different sources of law of which a treaty or similar EU text would only be one in respect of professional dealings and would still have to find its place amongst the others, especially fundamental principle, custom and practices, general principle, and party autonomy. This tracks Article 38(1) of the Statute of the International Court of Justice, supplemented by Article 53 of the Vienna Convention on the Law of Treaties, in the approach to international or here rather transnational (private) law; see Volume 1, section 1.4.5. Presumably the main purpose behind the present EU effort is merely to eliminate some clearly nationalistic and historical overtones in existing codifications and so reduce (some) transaction costs, the result of which effort would subsequently also be extended to common law jurisdictions in all activity within the EU whether consumer or professional. A pertinent question in this connection is whether—whatever the true needs in a fast-moving environment may be—such a statutory text could ever do more than provide a common denominator based on an extrapolation of existing texts and past experiences in so far as academia has been able to study, understand, and summarise them. A further pertinent question here is whether abstract system thinking of whatever quality in the civil law codification manner should still be maintained. The DCFR text shows that especially in Europe, in civil law countries, there has been little forward movement or a proper rethinking in private law during the last generation. Notably interdisciplinary, empirical, and transnationalisation studies have been few and are commonly ignored. There is little knowledge of modern commerce and finance and a nationalistic attitude continues to prevail. There is no concept of the transnational commercial and financial legal order and its laws speaking for themselves in this order, also when operating and coming on shore in individual countries (unless their public policies forbid it, which however themselves may be eclipsed by transnational minimum standards as we have seen).

154 Volume 3: General At the practical level, the EU is then for this purpose considered one jurisdiction or a state and there would no longer be any activity within it that could be defined as transnational, activating thereby the other sources of law in the modern lex mercatoria, in particular fundamental principle, custom, general principle and its type of party autonomy. They would be irrelevant even in commerce and finance unless the DCFR text allowed them to operate and the unitary approach towards consumer and professional dealings would continue. To the extent this may be considered uncomfortable, it should be realised that, as real estate is excluded, there would still be a different system for it and therefore in private law in any event two systems of property law operating side by side in the same country. This may make sense on the surface, but how that would work in civil law countries that believe in system thinking and its unity may be a greater mystery. As EU jurisdiction is so far limited to the promotion of the internal market and therefore to cross-border activity within the EU under Article 114 TFEU, there would in any event result two systems: one remaining purely domestic for transactions within Member States and another (EU codified system) for cross-border transactions within the EU only.299 There would thus arise several types of domestic law: one at the Member State level for purely local transactions within Member States and one at the level of the EU for transborder transactions between Member States. It was already said that real estate would always be local. Efficiency is often used as the major argument, an issue more extensively discussed in section 1.1.8 above, here in the sense that a common legal framework of a statutory nature would promote transborder activity in the EU and reduce transaction costs, but this is hardly borne out in the US, where private law remains State law in a vastly more integrated economy, although sometimes helped by uniform law. Even within the UK there are wildly different systems of law whilst there is a perfectly functioning single market. In the US, the UCC is by far the most important example of uniform law, but it remains State law. Perhaps more importantly, it never meant to drive out other sources of law in a general fashion, as we have seen, and to monopolise the field as civil law codification thinking did and the DCFR continues to do: see section 1-103 UCC. Rather in the UCC, the common law, equity, custom, law merchant and party autonomy are not only recognised as independent sources of law besides the UCC text, but their further development in commerce and finance is actively encouraged. That would appear to be the better approach but is totally alien to the DCFR endeavour or method, which constitutes an uncritical continuation of the nineteenth-century civil law codification model as a statist, top-down consumer oriented or anthropomorphic private law formation facility that claims superiority for

299 Reference is here made more specifically to the discussion on EU jurisdiction in Vol 1, s 1.4.21. It should be noted in this connection that there is no general provision in the EU Founding Treaties giving the EU jurisdiction in private law formation, even for consumer law, and the authority must therefore connect with and be based on the urgent needs of the free movement of persons, goods, services and money under Art 114 TFEU. This is hardly obvious in connection with private law unification. See further S Vogenauer and S Weatherill (eds), The Harmonisation of European Contract Law (Oxford, 2006); G Alpa and M Andenas, Fundamenti del diritto private europeo (Milan, 2005), and J Mance, ‘Is Europe Aiming to Civilize the Common Law?’ (2007) 18 European Business Law Review 77. Even the EU efforts in the field of company law, employment law, financial law and consumer law have not always been considered a great success and responding to true needs. The ECJ is indulgent in these matters and accepts EU competences liberally but should become more mindful of its constitutional checking function and also of issues of subsidiarity if only to maintain its own credibility in the longer term. In terms of EU competence, the important decision Case C-376/98 Germany v EU Parliament and Council [2000] ECR I-2247 should be mentioned, holding the Tobacco Advertising Directive to be void for lack of a legal basis because it did not contribute to the establishment of the internal market. But this proved to be a unique constitutional review, cf also the decision in Case C-380/03 Germany v European Parliament and Council of the European Union [2006] ECR I-11543, which again showed the usual indulgence of the ECJ. It does not act as a proper constitutional court and protect Member States and its citizens against the central pull of the EU.

Volume 3: General 155 itself while pretending to be intellectually complete and having all the answers even without any serious empirical research. It still presumes to overrule all other law. Again, it would push out the transnational modern lex mercatoria or law merchant. Indeed, EU codification of this nature would attempt to continue to do so (even though the various informal sources of law come back through interpretation all the time as we have seen). In the area of public policy it knows little of transnationalised minimum standards. Whatever the pretence, in commerce and finance, the DCFR—should it ever become the European approach for interstate commercial and financial transactions—also raises the question why it excludes large trading nations such as the US, Japan, China, Russia, India and Brazil from the unification effort, all countries that may also have an interest in this process of legal transnationalisation or unification, at least for international or cross-border professional dealings. Especially ignoring American legal sophistication and its experiences is hard to explain. It is a fortress Europe mentality which benefits no one. At the most, the effort should be limited to consumer dealings and even then, it may be asked whether an EU approach makes sense for what remains largely localised dealing; there is also the more formal point whether the EU has sufficient jurisdiction even in this more limited area, largely associated with consumer law, where EU Directives only operate to promote the internal market, not consumers’ protection per se. There is also a problem with quality. The major qualitative problem with these European projects is that civil law is hardly advanced in its modern manifestation, at least in respect of professional dealings. Increased efficiency and sophistication is much more likely to come—it is submitted throughout—from moving towards a more flexible, dynamic concept of private law arising bottom-up out of multiple legal sources than from some updated but old-fashioned texts in the classical civil law codification mode, which is notably failing everywhere to accommodate modern financial products and has even much deeper problems with modern contract and movable property law in the professional sphere as explained in this and the next Volume. It is significant in this regard that nobody is asking for this project in Europe, not even after much prodding. The Collateral Directive in finance (see Volume 5, section 1.1.8 and Volume 4, section 4.1.5) was an exception, was wanted by the financial services industry, and is indeed sophisticated and inspired. It was therefore generally welcomed in finance as important progress. Yet it also demonstrated that projects of this nature could not truly be incorporated into the system of the civil codes in Germany and the Netherlands, which only showed how much behind they were. The text was added as exception. It is submitted that for professional dealings, industry initiative and support is always the way forward (unless public policy and order dictates otherwise) and is notably missing in respect of a project like the DCFR. Quite besides this civil law codification ethos, its system thinking and its lack of following in transnational professional dealings, the further question was raised whether treaty law or similar formalistic law formation at the international level proves to be sufficiently flexible as it is very hard to change.300 The EU for its Members has of course the more flexible device of its Directives or even Regulations, of which in this area the draft Regulation concerning a Common European Sales Law (CESL) was an important example, always assuming of course the legitimacy of EU jurisdiction in this area of formation of private law, which, as already said, is generally lacking and is in any event limited to transborder dealings within the EU. There is more: if the free movement of persons, goods, services and money is the jurisdictional base for this effort at private law unification at the EU level, the result would have to be interpreted first and foremost from this point of view. In other words, there would be a new external interpretation principle superimposed on 300 It is therefore now generally much less popular, see also J Basedow, ‘The Renascence of Uniform Law: European Contract Law and its Components’ (1998) 18 Legal Studies 121.

156 Volume 3: General the operation and application of this private law and it would limit its scope. In section 1.3.8, this point has already been made for the good faith concept. It is doubtful whether such a new principle of interpretation is truly suitable, especially in the consumer sphere where the free movement of goods, services and money is not (yet) a major issue, but free movement would prevail over other protections if Article 114 TFEU is the jurisdictional base for the effort.301 Rather, the only true and credible basis for unification of private law EU-wide, would be an amendment to the Founding Treaties to the effect, which would then also have to go into the method of such a unification effort. It is unlikely that there is any unanimity on this between Member States in the foreseeable future.

1.6.2. The Unitary Codification Approach To repeat, a key issue is whether this type of unification effort in private law should affect both purely local and transborder activities within the EU, and whether in addition a unitary system that does not distinguish between consumer and business dealings is at all still feasible and to be recommended. This needs further consideration. The former issue mainly concerns the operation of other sources of law besides statutory texts in the modern lex mercatoria which does not accept the civil law statutory codification ethos. The latter issue concerns, in essence, relationship thinking, which has always been better understood and developed in common law.302 The advent of the good faith concepts in civil law now opens a window for similar perspectives, but, as we have seen in section 1.3 above, there is still a long way to go. A different approach to the sources of law and to consumer and professional law would follow but is clearly not considered in the texts of the PECL and DCFR, nor in the modern codification adjustments in Germany, France and the Netherlands or Belgium. Again, in this book, revival of the traditional sources of law and relationship thinking are the central themes in modern private law, including commercial and financial law. In this regard, the continuing search for a unitary system of the statutory type for all relationships demonstrates lack of progress in civil law thinking. To repeat, on the back of defining contract types in general, this approach means similar treatment and protection for all types of parties unless specific exceptions are made. Consumer protection ideas thus soon move over into professional dealings so that even professional law becomes similarly prescriptive in its core.303 The development of the modern good faith notion in civil law was above considered only to be at the beginning and in the context of unification of private law further clarification would be needed, both in terms of the sources of law and relationship thinking. It was noted before that the more practical common law has an advantage as far as relationship thinking is concerned, much

301 The issue has arisen in long-distance selling in respect of the right of the buyer to cancel the contract and the matter of the state of the goods and cost of the return, see Case C-205/07 Gijsbrecht/Santurel, ECJ, 16 December 2008, Jur I-9947. The promotion of the internal market on which consumer Directives are normally based may require continuous consideration of this basic principle, if necessary against the protection of the consumer, and a balance must be struck. Cancellation without cost may therefore not always be the proper remedy. Especially further-going local rules in this respect in the country of the consumer under minimum Directives may not square with the operation of the internal market, but neither may the consumer protection of the Directives themselves. At least in the interpretation of them, the higher principle of the promotion of the internal market must also be considered. 302 See s 1.1.1 above. 303 It is well known in this connection that in Germany, in business dealings, there is a practice of opting for Swiss law in order to escape the grip of the German law on standard conditions.

Volume 3: General 157 helped by the development of the equitable fiduciary duties, to which the civil law is only now awakening.304 It was already noted that even now separate treatment of professionals has sometimes been important and may be spotted in international dealings, of which the international sale of goods as developed in the 1980 CISG is perhaps still the best example, even if it maintained a nineteenth-century anthropomorphic model, especially in its formation section, performance, and excuses. In this older vein, the UNIDROIT Principles of Contract Law were also meant primarily for international commercial contracts—in fact they were confined to professional dealings. The PECL, on the other hand, cover both professional and consumer dealings and adhere to the unitary approach, although the fact that both sets are very similar is confirmation that the UNIDROIT Principles also sustained a consumer orientation. That was unperceptive. The unitary approach is also followed in the DCFR, more understandable in that case (as it was for the PECL) since it covers all dealings, but a mistake nevertheless. Another issue is, however, that international financial dealings may well now exceed these trade related approaches in importance and intellectual depth. As in the perspective of these texts—which remain statist, positivist (law as technique) and fixed in the past—other sources of law are excluded even in cross-border dealings, the unitary statutory approach would be propelled in this singular manner throughout the EU and all contract and other private law becomes subservient to it. It was said already that the process of the more practice-oriented, informal transnationalisation of commercial and financial law as a dynamic force in the modern lex mercatoria, in which texts of this nature are only one source and must find a place among the others, is then blighted, at least within the EU, for no obvious reason. To repeat, progress at EU level would strongly suggests the need—at least transnationally, therefore in international or cross-border transactions, whether or not within the EU—first to distinguish clearly between professional and consumer dealings. Subsequently, it should be considered whether codification in this manner or similar law formation attempts from above, seeking to exclude all other sources of law, are still appropriate for professionals, even in transborder transactions unless the business community itself asks for it. It was submitted earlier in Volume 1, section 1.1.10 that all professional dealings, even if on occasion purely domestic, increasingly conform to the international practice and therefore are covered by the modern law merchant or lex mercatoria and its different legal sources of which again the statutory or treaty texts would only be one. In fact, it was argued that all commercial and financial dealings are now best placed in the transnational commercial and financial legal order with its own private law, see Volume 1, section 1.5. Consumer law would remain in essence the law of each Member State, even though subject to EU harmonisation to protect the internal market. The end result of the present projects, particularly the DCFR, would in fact be an updated BGB, much as the euro was an upgraded Deutschmark, now considered to operate at the EU level for all as if it were a domestic market where consumer protection needs dominate. To repeat, it would monopolise the field in the EU also for professional dealings and consider them all local transactions that need supervision, but it is unlikely to work well. It shows, as so much EU activity does, that there is no forward-looking perspective beyond some vague idea of a greater universe guided by government and imbued with consumer protection notions as if they come for free; in this world, markets are suspect; there is a censorious attitude that uncritically favours state intervention in private law formation far beyond what public order and public policy would appear to require, especially in business. Pushed by academia in Europe, which is isolated from the real 304 In s 1.3.7 above it was observed that the common law’s emphasis on the nature of the relationship between the parties means that it needs the notion of good faith much less than civil law. Implied terms, fiduciary duties, notions of reliance and sometimes resort to natural justice do the rest.

158 Volume 3: General world and from the dynamics of commerce and finance in particular, it shows the deep decline of private law in Europe in the last two generations, manifested by a lack of innovation and an unwillingness or inability to reinvent itself. Below the details of the two sets of Contract Principles and of the DCFR will be discussed in greater detail in the area of contract law,305 followed by a brief discussion of the 2011 proposals

305 For a rough comparative guide, the following references to the Vienna Convention (CISG), UNIDROIT Principles (UP), European Principles (PECL) and Art 2 UCC, as divided by subject, may be useful: Offer and acceptance (formation): Arts 14 and 18 CISG; Arts 2.1, 2.2 and 2.6 UP; Arts 2.101, 2.201, 2.204 and 2.205 PECL; ss 2-204(1) and 2-206 UCC; Arts II-4:101, II-4:201, II-4:204, II-4:205 DCFR. Bargain, consideration and causa: Arts 14, 18, 23 and 29(1) CISG; Art 3.2 UP; Art 2.101 PECL; ss 2-205 and 2-209 UCC; Art II:4:101(a) DCFR. Reliance or conduct: Arts 8, 16(2)(b), and 18(1) CISG; Arts 2.1, 2.4(2)(b), 2.6, and 4.2 UP; Arts 2.102, 2.202(3)(c), 2.204(1) and 6.101(1) PECL; s 2-206(2) UCC; Arts II:4:102, 4:202(3)(c), 4:204, 9:102(1) DCFR. Definiteness: Arts 14 and 19(3) CISG; Art 2.2 UP; Arts 2.103 and 2.201(1)(b) PECL; s 2-204(3) UCC; Arts II:4:103, II:4:201(1)(b) DCFR. Capacity, legality and validity: Art 4 CISG; Art 3.1 UP; and Arts 4.101 and 15.101 PECL; Art II-7:101 DCFR. Formalities, parol evidence: Arts 11, 12, and 24 CISG; Arts 1.2 and 2.17 UP; Arts 2.101(2) and 2.105 PECL; ss 2-201 and 2-202 UCC; Art II-1:107, and Art II-4:104 DCFR. Binding nature of offer: Art 16 CISG; Art 2.4 UP; Art 2.202 PECL; s 2-205 UCC; Art II-4:202 DCFR. Time of contract: Arts 18(2) and 23 CISG; Art 2.6(2) UP; Art 2.205 PECL; s 2-204(2) UCC; Art II-4:205 DCFR. Pre-contractual and post-contractual duties: Arts 2.15 and 6.2.1 UP; Arts 2.301 and 6.111 PECL; Arts II3:301 and III-1:110 DCFR. Contractual co-operation duties: Art 5.3 UP; Art 1.202 PECL; s 2-311(3) UCC; Art III-1:104 DCFR. Specific performance: Art 28 CISG; Art 7.2.2 UP; Art 9.102 PECL; s 2-716(1) UCC; Arts II-3:101 and II-3:302 DCFR. Defences and failure of consensus: Arts 3.5, 3.6, 3.8 and 3.9 UP; Arts 4.103(1)(a)(ii), 4.104, 4.107 and 4.108 PECL; Arts II-7:201, II-7:202, II-7:205, II-7:206, II-7:207 DCFR. Excuses and force majeure: Art 79 CISG; Art 7.1.7 UP; Art 8.108 PECL; Art III-3:104 DCFR. Privity: Art 6.110 (third-party beneficiary) PECL; Art III-3:104 DCFR. Interpretation: Arts 7(1) (of the Convention), 8 CISG (only of statements of the parties); Arts 1.6 (of Principles) and 4.1 (of common intention), UP; Arts 1.106 (of the Principles) and 5.101 PECL (of common intention); ss 1-102 (of the Code) and 2-301ff (of sales contracts) UCC; Art I-1:102 (of DCFR), Art I-8:101 (of common intention) DCFR. Concept of good faith: Art 7 CISG (only in interpretation of Convention); Arts 1.6 (not in interpretation of Principles), 1.7 (mandatory concept), 2.15 (negotiations in bad faith), 4.8 (supplying omitted term in the contract) and 5.2 (implied contractual condition) UP; Arts 1.106 (only in interpretation of the Principles), 1.102 (mandatory concept), 5.101(g) (interpretation of contract) and 6.102 (implied contractual term) PECL; s 1-103 (mandatory concept and contractual standards), s 1-304 (enforcement of duty or contract), s 2-302 (unconscionability only for sale of goods), s 1-201(20) (subjective definition) and s 2-103(1)(b) (between merchants in the sale of goods) UCC; Arts I-1:102(3)(b) (interpretation of DCFR, not in supplementation), III-1:103 (mandatory concept), II-8:102(g) (interpretation of contract) and II-9:101 (implied terms) DCFR. Fundamental principles and mandatory rules: Art 12 CISG; Arts 1.3, 1.4, 1.7, 3.19, 2.14 (probably), 2.19 (probably), 5.3 (probably) 6.2 (probably), 7.1.6 (probably), and 7.4.13 (probably) UP; Arts 1.102(2), 1.103, 1.104, 1.201, 2.301 (pre-contractual negotiation duties, probably), 4.110 (unfair contract terms, probably), 6.101 (significance of statements, probably) and 6.111 (change of circumstances, probably) PECL; ss 1-103 (policies), 1-302 (for good faith) and 2-303 (rejecting mandatory rules in principle, except for unconscionability) UCC; Arts II-3:301(2) (pre-contractual negotiation duties), III-1:103(1) and (2) (definition and mandatory nature), II-9:102 (pre-contractual statements, probably) III-9:401ff (unfair contract terms, not even adjustable

Volume 3: General 159 for CESL as a DCFR carve-out, now withdrawn in anticipation of new e-commerce texts. A more detailed discussion of the international sale of goods and the Vienna Convention will follow in Part II. The proprietary coverage of the DCFR will be discussed in Volume 4.

1.6.3. The UNIDROIT Principles for International Commercial Contracts The UNIDROIT Principles for International Commercial Contracts were first issued in 1994 and completed in 2004. According to their Preamble, they set forth general rules for international commercial contracts. Neither internationality nor commerciality are defined, but the use of these notions may imply some reference to the international commercial legal order. This idea is not pursued, however, even if it finds some further support in Article 1.6 on interpretation. The same definitional problems arise as in international commercial arbitrations; see also Volume 1, section 1.1.10. More generally, the operation of the transnational commercial and financial legal order needs consideration which means that in its modern lex mercatoria as the applicable law, principles such as these of UNIDROIT need to find their place among other sources of law obtaining in that order, see also Volume 1, section 1.4.15. In typical codification thinking, the UNIDROIT Principles do not, however, consider other sources of law to operate besides them and are not therefore an acknowledgement of the modern lex mercatoria even though it is mentioned in the Preamble, as we shall see, without any clarity in the use of this term. Rather the UNIDROIT Principles seek to replace it in an exclusively academic approach in the manner of the old-fashioned civil law codifications, at least to the extent parties have opted for its application. If not, it is hoped that it may serve as guide or some soft law, whose status then becomes unclear. Perhaps it should be repeated in this connection that although these Principles are referred to as the UNIDROIT Principles, they derive from this no special status in law. They are no more

between professionals but different criteria in II-9:405), III-1:110 (change of circumstances, possibly, although there may be variation through hardship clauses) DCFR. Contracts contrary to fundamental principles, illegality: Art 15.101 PECL, Arts I-1:102(3) (human rights and fundamental freedoms), II-7:301 (other fundamental principle left to Member States even if transaction is not connected, no autonomous source of law) DCFR: see also Introduction DCFR nos 10ff and Statement of (nonbinding) Principles before the text. Party autonomy: Art 6 CISG; Arts 1.1 and 1.5 UP; Art 1.102 (not an independent source of law) PECL; s 1-103 and 1-303(e) UCC; Art II:102 (not an independent source of law) DCFR. Custom and practices: Arts 4.7.2 (not in supplementation of Convention), and 9 (custom) CISG; Arts 1.6(2) (not in supplementation of Principles), 1.8 (custom and practices), 4.3(b) and (f) (interpretation of contracts), 5.2(b) (implied term) UP; Art 1.105 (custom and practices as implied contractual terms only), and 5.102(f) (only in interpretation of contracts) PECL; ss 1-103 (supplementation of the Code including law merchant), 1-103 (1-102(2)(b) old), 1-205, 2-202(a) and 2-208 (custom and practices) UCC; Art II-1:104 and Art II-9:101 (as implied contractual term only), II-8:102(1)(f) (in contract interpretation only) DCFR. General principles: Art 7(2) (supplementation of Convention) CISG; Art 1.6 (supplementation of Principles) UP; Art 1.106(2) (supplementation of European Principles); Art I-1:102(1), (4) (supplementation of DCFR). Private international law: Arts 1.1 (sphere of application), 7.2 (supplementation of Convention), and 28 (specific performance) CISG; Art 1.4 (in connection with mandatory rules) UP; Arts 1.103 (in connection with mandatory rules) and 1.106(2) (supplementation of the Principles) PECL; Art 1-301 (1-105 old) (territorial application of Code) UCC; not in DCFR (not even when rules left to Member States as in Art II-7:301).

160 Volume 3: General than the product of a UNIDROIT committee and as such have at best persuasive force in terms of a restatement. Their authority is hardly in their academic pedigree and content either. Their legitimacy, if any in terms of the modern lex mercatoria, could only derive from their reflection of international fundamental principles or values or transnational public order requirements, from their restatement of transnational custom and practices or general principle, and from the ability of the international legal practice to recognise itself in the results and to accept their guidance. Thus, short of their being imposed by statute or similar statist instruments like treaties or being chosen as the applicable law by the parties (when they still have to find their place among the other sources of law operating at the transnational level which might be higher), only the international marketplace can decide their ultimate fate. It means that international trade and commerce themselves have the last word, except in transnational fundamental principles or in matters of transnational public order, while domestic public policies, in particular regulation but also local public order requirements to the extent the relevant transaction in conduct and effect still comes demonstrably on shore in the particular country, can also not be ignored: see Volume 1, sections 2.2.6ff. In this vein according to the Preamble, the Principles are indeed more properly meant to apply only when parties have expressly agreed to them (when it may still be asked under which law they do so, national or transnational) but also (still according to the Preamble) if their contract is to be governed by ‘general principles, the lex mercatoria or the like’. It was already said that this does not present a clear view. It is further suggested that the Principles may also provide a solution when it is impossible to determine the relevant rule under a domestic law deemed applicable in the case. This would seem to refer to problems in the conflict of laws rules or to gaps in domestic law, not to atavistic or parochial domestic laws being superseded per se in cross-border transactions between professionals. It is also hoped that the Principles may serve as a model for national or international legislators. It is likely that that was the real ambition. They are also seen as interpreting and supplementing uniform law instruments, in which connection the CISG particularly springs to mind, of which it would then become the general contract law part (except for contract formation which nis covered by the CISG). It is obvious, however, that the Principles cannot determine their own status short of being chosen by the parties and even then the other sources of law cannot be ignored if higher. Again, there is here no clear concept of different autonomous sources of law operating and of their relationship or hierarchy among each other in the modern lex mercatoria approach in a new legal order as explored in Volume 1, notwithstanding the reference to the lex mercatoria in the Preamble. It is not known or considered how it works and what the place of a text of this nature within it would be if adopted. Thus, fundamental principles are not mentioned except perhaps indirectly in the reference to mandatory rules in Article 1.4. Custom and practices are implied contract terms only subject to the proper law of the contract and are not autonomous sources of law (Article 1.8), and party autonomy also operates merely by permission of the Principles (Articles 1.1 and 1.5). Again, this is typical civil law thinking, concentrating on legislation as the sole legitimate source of law in the strictest statist civil law codification manner. It would thus appear that in the mind of the drafters the reference to the lex mercatoria simply means its substantial replacement by the new text. Nevertheless, when Article 1.4 mentions mandatory rules, it would seem that they could only come from other sources of law such as fundamental legal principle, public order considerations or mandatory custom unless we mean legislation (that would likely take all); the Principles do not have the authority to create them by themselves, but they may recognise them and could even postpone themselves. This is, however, not what follows: whatever their origin—national, international or supranational—mandatory rules apply

Volume 3: General 161 in the perspective of the Principles in cross-border dealings not directly but only in accordance with the rules of private international law (Article 1.4).306 In terms of their own rules, according to the Principles, the most important one that cannot be excluded is the duty to act in accordance with good faith and fair dealing in international trade (Article 1.7(2)). It is considered absolutely mandatory; for another mandatory rule within these Principles, see Article 3.19 on validity, where it may be more understandable. There is a definition neither of good faith and fair dealings nor of international trade. That is to say first that we still do not know whether we have here in international dealings a transnationalised concept of good faith or not, or what it means: is it simply the opposite of bad faith as its mandatory nature would suggest, or does it stand for a liberal interpretation technique that reintroduces the other sources of law in professional dealings, when it would by no means always present mandatory law? (See the discussion in section 1.3 above.) Again, it should be doubted whether Principles of this nature can declare rules mandatory. They can at best recognise them as such and postpone themselves. As for good faith, it was earlier observed that good faith is not always a mandatory concept (see section 1.3.10 above) and has many functions: see further sections 1.3.1 and 1.3.4 above. The Principles are not aware of or ignore its multifaceted nature. It creates obvious problems, also where reference is sometimes made to related notions such as acting in bad faith, resorting to manifestly unreasonable behaviour, taking excessive advantage, or reasonableness. But the essence is that the drafters did not appreciate the revival of multiple autonomous sources of law behind this notion of good faith itself. Again, it was submitted, that it stands in truth for a liberal interpretation technique which at least in professional dealings reintroduces all other traditional sources of law that legislative texts have tried to eliminate. It is clear in the approach to the lex mercatoria as proposed in this book that fundamental legal principle cannot be set aside by parties to a contract (they may even be the expression of transnational public order), and that there is also ius cogens in international trade that does not depend on incorporation or recognition in Principles of this nature and which the UNIDROIT effort cannot supersede either. They concern mainly fundamentals such as the binding force of agreements itself (pacta sunt servanda), the liability for one’s own actions and probably some other fundamental principles (such as standards of care in the case of dependency) discussed in greater detail in Volume 1, section 1.4. They therefore cover primarily the legal infrastructure of contract and issues of capacity, not the contractual content, although there is also the issue of market abuse and anti-competitive behaviour where fundamental principles or public order requirements are likely to be corrective. Otherwise, it was concluded in Volume 1, section 3.1.2 that at least in the professional sphere, there are few fundamental principles of a private law nature concerning the contents of transactions but there may still be pressing moral values or notions of justice, social peace and efficiency in the way rights are subsequently exercised. In the area of good faith, even as a behavioural norm only, professional participants would still be able to set standards unless manifestly unreasonable. That is at least the UCC approach (cf section 1-302(a)) as we have seen. The Principles in respect 306 It is apparently not considered that these mandatory rules strictly speaking are not private and often more likely to apply directly as règles d’application immédiate (cf also Art 9 EU Regulation on the Law Applicable to Contractual Obligations, Rome I), certainly when regulatory, and not as a matter of private international law. It is further considered that there are mandatory rules in the Principles which may not be excluded by the parties, although the Principles themselves (as a whole) may be (Art 1.5). This would seem incongruous and shows again the absence of any clear view in these matters.

162 Volume 3: General of the force of the good faith concept are here unspecific and their absolutely mandatory nature confirms consumer law thinking, which is indeed more particularly concerned with contractual content and may test it on the basis of fairness. This use of the concept of good faith would be far too broad and lacks that kind of authority in professional dealings which the UNIDROIT Principles mean to cover. Again, it demonstrates the danger of consumer law thinking drifting into professional relationships. A censorious approach of this nature—if that is meant by the reference to a mandatory notion of good faith, if not then also becoming the expression of public order—is in its generality largely untenable in international commercial transactions and therefore not truly understandable in the UNIDROIT Principles, which were meant for professional dealings only. If nothing else, it could imply judicial control of content which professional parties should always be able to limit or exclude, all the more so in international cases, except again (a) where fundamental (transnational) principle is at work (which supports in particular the contractual infra structure but may also refer to deeper correcting values), (b) where notions of (transnational) public order operate (notably when fraudulent or monopolistic or abusive tactics have been used), and perhaps also (c) where there is mandatory custom as there may well be in proprietary matters, (d) when manifest unreasonableness, unfairness or unconscionability result considering the type of parties, less likely therefore in professional dealings, or (e) where contracting is used as an organisation technique affecting multiple relationships and thereby larger groups, although this is again more relevant in relation to consumers under standard contract terms and less between professionals even if in these Principles no proper distinction is made in this connection either, see Article 2.20.307 Again, the effect of regulation is a separate issue and not on the whole a good faith matter. Beyond this, professional parties should be able to redistribute the burdens, risks and financial consequences of their dealings in the way they see fit. The construction of good faith generally as a mandatory concept is then unhelpful or even misleading. Again, it could not go so far that professional parties substantially lose control of their transaction, which must be limited to pressing moral or societal values, public policy or public order considerations only, not merely to good faith as an undefined concept. In this connection it has been pointed out from the beginning that relationship thinking itself may de-emphasise good faith notions in the sense of more protection in professional dealings. It may even better support party autonomy. Relationship thinking of this nature may also de-emphasise concepts of capacity, mistake, misrepresentation, force majeure and frustration or hardship in terms of defences and excuses, unless in professional dealings the contract states otherwise as we have seen. Again, this is not reflected in the UNIDROIT Principles even if they pretend to be for professional dealings only.308 307 In the UNIDROIT Principles, other examples of mandatory rules are those concerning the validity of the agreement, that is those on fraud, threat and gross disparity. In view of what has just been said about exceptional situations, their mandatory nature may here be less surprising, but the approach is then more subtle. Thus the rules on the binding force of the mere agreement, initial impossibility and mistake may be varied by the parties (Art 3.19). In truth, these rules concerning validity are only sometimes fundamental (notably in so far as they refer back to how contracts derive their binding force) and otherwise structural (rather than mandatory) and it seems indeed possible at least for professional parties to make further arrangements in respect of the consequences of at least the latter, although probably less in respect of the former especially when public policy becomes involved, eg, for competition reasons. 308 By opting for another legal system altogether parties have in any event traditionally been able to circumvent them if less suitable (although this facility was never uncontested) and this will be no less the case under the UNIDROIT Principles (Art 1.5). In any event (and to repeat), in professional dealings and given proper relationship thinking, questions of innocent misrepresentation, mistake and gross disparity should not so readily arise, see also s 1.3.11 above, and it might be questioned in this connection why, eg, gross disparity (or at least its definition) may not also be left to the arrangements by or the definitions of professional parties themselves. Instead we see here again the impact of a consumer law mentality relying on mandatory protection.

Volume 3: General 163 The consumer-oriented nature of the UNIDROIT Principles may in particular be demonstrated in its hardship provision. In the case of intervening unforeseeable, unavoidable and undiscounted circumstances, renegotiations may be sought under the Principles as soon as the contractual equilibrium is disturbed, while there need not even be severe financial consequences (Article 6.2). This is especially difficult to understand for professional dealings, where questions of contractual balance are in any event harder to establish and may be less relevant. This again suggests consumer thinking. One may then also wonder whether this rule is equally considered good faith related and therefore mandatory. This could at most be so in manifest cases. In a similar vein, Articles 7.1.6 and 7.4.13 limit the parties’ freedom with respect to exemption clauses and agreements to pay fixed sums for non-performance. These rules also seem to be mandatory even among professionals. The question is why? Who needs protection here against what? Pointing in another direction, may be the absence in the Principles of pre-contractual disclosure and negotiation duties per se, which one would indeed not immediately expect in commercial contract principles, but Article 2.14 makes a party liable for damages in the case of negotiations in bad faith. As bad faith is also undefined, it may introduce another subjective element. Upon proper analysis, it is not necessarily the opposite of good faith, which, it was submitted, may have acquired a much broader meaning and scope. One instance is highlighted: one party entering into or continuing negotiations while intending not to make an agreement. This can happen when this party wants to prevent the counterparty dealing with competitors or seeks confidential or proprietary information. It would border on the fraudulent for which the more proper remedy may be in tort. Concern here seems fair enough; yet more generally between professionals the negotiating behaviour must have been very bad indeed before liability of any sort can result. This is not obvious from Article 2.14, although the reference to bad faith rather than lack of good faith may suggest a higher threshold for liability. It is not clear. In any event, it should be repeated that the authority of the drafters of the Principles to formulate mandatory rules is questionable unless they are demonstrably reflective of fundamental principle, public order or mandatory international commercial practice. Finally, it may be repeated that even if these Principles are meant for business dealings only, the basic attitude of the drafters appears to remain anthropomorphic, therefore derived from and tied to personal dealings and experiences in the nineteenth-century mode. More traditional notions geared to contracts between individuals in the sense of their psychological intent (cf Articles 4.1(1) and 4.2(1)) still seem to prevail throughout, only thereafter balanced by more objective notions of reasonableness: see Articles 4.1(2) and 4.2(2). The UNIDROIT Principles cannot therefore be presumed to reflect international commercial practice. This anthropomorphic attitude again suggests a consumer mentality. In a similar vein, formal offer and acceptance notions remain at the heart of contract formation. Conduct and reliance and risk acceptance are not central to this intent- and will-based notion of contract. It follows that the defences and excuses, including force majeure, are also subjective and as far as the excuses are concerned based on the notion of fault or guilt. For force majeure, this was already confirmed in the CISG and it is not surprising that it is maintained in these Principles but it undermined the credibility of the CISG from an early stage as discussed above in section 1.4.5 (see further also section 2.3 below) and makes these Principles also less suitable for business dealings for which they were specifically designed. One gets the feeling that the drafters did not really understand what was going on or what they were doing and never stepped back to consider it. To conclude: it cannot be avoided that this attitude seriously weakens the UNIDROIT Principles. For all their focus on commercial contracts, the risk-taking dynamics of international trade and commerce seems to have eluded the drafters and hardly found a reflection in the text. They presented principally an academic effort on the basis of a trade-off in domestic thought

164 Volume 3: General concerning consumer or smaller business protection steeped in the tradition of black letter rules civil law codification style and a more recent ethos of governmental intervention with a censorious undercurrent in the thinking, which goes well beyond legitimate public policy and public order concerns. To repeat, for any effort of this nature to succeed, it must be conducted from the point of view of fundamental principle and practical need, in international dealings more in particular from the perspective of the modern law merchant or lex mercatoria, and therefore be embedded in the totality of the law that prevails in that sphere between professionals, among which rules of this nature are only one of the pertinent sources of law. They may be considered general principle but then have to yield to other rules that may be considered higher. There are also public policy or public order requirements to consider, operating within fundamental principle or without, either of a national or transnational character. This goes back to the discussion of the hierarchy of norms within the modern lex mercatoria; see Volume 1, section 1.4.14 and for public policy Volume 1, sections 2.2.6ff.

1.6.4. The Principles of European Contract Law (PECL) The consumer-oriented attitude of the UNIDROIT Principles is also adopted by the PECL, first published in 1995 and completed in 1998. Here it is more understandable as they are also meant to apply to consumer transactions, but it means that the confusion between (international) business transactions and (domestic) private dealings is built into these Principles themselves, which in the civil law codification ethos confirms here also a unitary approach for all, no less undermining their credibility in business. Again, it suggests a serious lack of relationship thinking, which would affect especially duration contracts between professionals. To repeat, in the professional sphere, any rules concerning international dealings find their ultimate justification in their reflection of transnationalised fundamental principle, industry custom and practices, general principle, and of a (transnationalised) notion of party autonomy (whether or not supported or corrected by public order and public policy in appropriate cases). The rules concerning consumer contracts, on the other hand, basically find their justification in domestic perceptions and public policy. That in neither set of Principles (UNIDROIT and PECL) the needs and requirements of commerce were fundamentally re-evaluated is proven by the fact that the texts are largely the same, confirming the unitary approach in both. There are a number of differences in the details but they appear to have little to do with the distinction between professional and consumer dealings. First, there is an important difference in their interpretation or supplementation, as we shall see in section 1.6.6 below. Furthermore, according to Article 1.101 of the PECL (not here in a Preamble as in the UNIDROIT Principles), the European Principles are meant to be applied as general rules of contract law in the European Communities when (a) parties have agreed to their application or when (b) they have agreed that their contract is to be governed by ‘general principles of law, the lex mercatoria or the like’, or when (c) they have not chosen any system of law to govern their contract or (d) when the applicable law does not provide a rule.309 Especially in the 309 This reference in the PECL to the European Communities could mean a reference to the EU legal order in which case, for the applicability of the Principles, both parties would seem to have to be resident in the EU in order to be subject to it (just as the UNIDROIT Principles could only apply to participants in the international commercial legal order). If so, this would appear to exclude within the EU the application of the UNIDROIT Principles (wherever different). If, on the other hand, at least one of the (commercial) parties is not from the EU, that would seem to give precedence to the UNIDROIT Principles if they were also to become law. If, however, the European Principles

Volume 3: General 165 last two cases, one may ask where the authority of these Principles comes from. It would have to be transnational principle or practice. The reference to the lex mercatoria could also be understood in this manner, but it is far from clear and would, from the point of view of these Principles, have to be chosen by the parties first. This suggests at the same time, however, that even the legal infrastructure of the applicable law and the principles on which it is based are at the free disposition of the parties. This is borne out by the fact that the PECL maintain a system similar to the UNIDROIT Principles in respect of the possibility of exclusion of the Principles by the parties and the derogation by them from their provisions. This derogation may not affect any mandatory PECL rule (Article 1.102(2)), but it raises the question again whether PECL can declare some of its rules mandatory unless they reflect transnational fundamental principle, potentially including public order considerations, or implement mandatory customary law and general principle. The situation is here in so far different that, unlike the UNIDROIT Principles, PECL is meant to be the model for legislation. As regards mandatory law, more generally, the PECL follow the UNIDROIT Principles, also in allowing mandatory rules of national, supranational and international law to prevail pursuant to the relevant rules of private international law, again without considering the possibility of their direct applicability and other more objective standards of appropriateness or justice (Article 1.103).310 Clearly, at issue are first and foremost domestic public policy and public order notions or governmental interests, in respect of which the PECL need to determine first which ones are relevant in international transactions when the issue of their direct application arises. Beyond this there should be concern for other basic values, which may be increasingly transnationalised as minimum standards in international professional dealings as we have seen. The mandatory rules in the PECL themselves also track the language of the UNIDROIT Principles, especially on good faith and fair dealing and the parties’ mandatory duties in this regard (Article 1.201). The PECL which, as just mentioned, also cover consumer contracts, are narrower in that they do not refer here to international trade. These Principles are not therefore set primarily in an international context but only an EU one, regardless, apparently, of the reference to the lex mercatoria, a reference dropped in the DCFR, which has no concern on the subject as we shall see. The idea is clearly that the EU is one territorial area or internal market within which there are no longer cross-border dealings that justify an international regime and where the codification ethos excluding all other sources of law prevails unhindered. Again, it raises the issue of jurisdiction or authority so to legislate, which in the EU, as we have seen, is in practice at best limited to transborder activity, see also the next session and Volume 1, section 1.4.21 above. As to the relevance of other sources of law in this context, the PECL again follow in Article 1.105 the UNIDROIT Principles for the impact of custom, relying on implied terms subject to reasonableness, although the text may be slightly more objective. A new element introduced by the PECL (Article 1.302) was the definition of the requirement of reasonableness

were to be considered in the nature of an EU contract code, they could still be relevant to outsiders under the traditional rules of private international law or compete as transnational law with the UNIDROIT Principles (where different). The latter could, however, claim to be a truer expression of the lex mercatoria since they are not limited in their territorial reach and were written for the international business community, even though, as noted before, in truth they are no less consumer oriented than the PECL. That is what academic lawyers now usually know best. There is also the question of authority and legitimacy. In both sets, the sources of law are narrowed to the written text only, again something academic lawyers can best trace, but there is much more as we have seen, especially in international commercial and financial transactions. 310 There is a refinement in that, when applicable law so allows, parties may set its mandatory rules aside by opting for the Principles, which would appear to go without saying.

166 Volume 3: General itself (also for other purposes), which refers to good faith and takes into account the nature and purposes of the contract, the circumstances of the case and the usages and practices of the trade and profession involved, but notably not the nature of the relationship of the parties. It makes the test of reasonableness in the case of custom both circular and censorious and confirms that in these Principles no fundamental distinction is made between consumer and professional dealings. Although the circularity is curious (but followed in the DCFR), the reference to usages and practices in the definition of reasonableness in Article 1.302 may suggest a more objective source of law, therefore no longer merely implied terms, but it is probably just an oversight. Unlike the CISG (Article 4), the possibility of the operation of custom beyond implied contract terms is not considered. This also tracks the UNIDROIT Principles, where, since they are limited to business dealings, it was even stranger. Article 1.305, describing imputed knowledge of the parties, remains substantially based on personal dealings; again modern business transactions seem not to figure. In matters of capacity (Article 4.101), mistake and misrepresentation (Article 4.103), pre-contractual disclosure duties (Article 2.301, although cast in more objective terms), individual negotiation of unfair contract terms (Article 4.110), pre- and post-contractual renegotiation duties (Articles 2.301(2) and 6.111), the approaches of the UNIDROIT Principles are substantially followed also (except for any pre-contractual duties with which it did not deal, see section 1.6.3 above). The idea is that contracts remain intent or will-based and anthropomorphic. There is little room for reliance and risk-acceptance notions. Everything tends towards subjectivity, including the notion of good faith, breach and force majeure. Again, these Principles are essentially derived from non-professional dealings. Unlike in the UNIDROIT Principles, in the PECL, absence of good faith further creates liability for broken-off negotiations, while unconscionability of performance (‘excessively onerous’) is required for renegotiation duties to arise. The latter may be a more severe test than that of the UNIDROIT Principles, which only refer to the contract equilibrium being fundamentally altered as we have seen. One would rather have expected this stricter test to appear in the UNIDROIT Principles, which only cover commercial dealings. Mistake cannot be invoked as an excuse if the mistake was inexcusable or the invoking party assumed the risks or if in the circumstances they should be borne by it (Article 4.103(2)). That is some progress: the UNIDROIT Principles prevented a party from invoking mistake in the event of own gross negligence but also when that party took the risk (Article 3.5(2)). The PECL are also a little more subtle in the mandatory nature of the validity provisions: only the remedies for fraud, threats, excessive benefit and the right to avoid an unfair term not individually negotiated may not be excluded; remedies for mistake and incorrect information may be, except if contrary to good faith and fair dealing (Article 4.118). In the professional sphere one would have expected the possibility of exclusion also of the notion of excessive benefit and the right to avoid unfair terms not individually negotiated. Again, in a more perceptive approach, good faith limitations would be different in the case of professional dealings and less restrictive.

1.6.5. The Draft Common Frame of Reference (DCFR) The DCFR has already been referred to extensively throughout the text of this Volume. What has been said so far may be briefly summarised as follows. First, the DCFR, which means to apply in principle to both domestic and cross-border dealings within the EU, regardless of there being no original jurisdiction in the EU concerning the latter, assumes here the existence of one territory and maintains the old-fashioned top-down civil law codification approach in which legislation takes centre stage and intellectual system thinking

Volume 3: General 167 accompanies it. Private law is a governmental text, statist and static, formulated by academics, valid until official amendment, and to be interpreted as a self-contained system based on a set of coherent rules that pretend to be complete, capable of covering all eventualities, and derived from an analysis and extrapolation of past experiences, in an EU context freed only from too much of a Member State input. The idea of Volksgeist, the law emanating from the national spirit of a people, is here abandoned. It follows, however, that private law remains imposed and not found, and is in its application a technique of text interpretation, whose tenets are not questioned, basically connected with forms of logic, all entirely in the civil law positivist tradition. Other sources of law are excluded, at least that is the idea. Justice, social peace and efficiency are assumed to follow automatically. There is no need for interdisciplinary studies or empirical research. Transnationalisation through a bottom-up process of law formation is irrelevant and rejected. There is a unitary approach which is consumer oriented. The modern lex mercatoria is side-lined and then no longer applies to cross-border professional dealings within the EU. It follows that any other sources of law are only accepted to the extent specifically incorporated in the text.311 Fundamental principle is generally ignored. In the latest 2009 text in a kind of Preamble (nn 10–22), the drafters only try to demonstrate how much of fundamental principle is reflected in the positive rules of the DCFR itself, unless they are human rights related when the text allows them to be taken into account to the extent recognised by governmental instruments and only in the interpretation of the DCFR itself (Article I-1:102(2)).312 So not even then do they form an autonomous source of law. Article II-2:101 also contains specific wording as to discrimination, but again only as a statutory concession in interpretation and only in contract law. The new Introduction of 2009, which at last discovered fundamental principle, struggles mightily with this topic but leaves it to others to decide any overriding impact, clearly unaware of the EU case law in the area of fundamental principle, or even the text of the EU treaties themselves: see Volume 1, section 1.4.5. It means that the drafters themselves stick to the codification ethos, which does not allow higher principle to prevail. Other principles of this nature are left to Member States in a curious passage in the law of contract (Article II-7:301) which refers here indeed to fundamental principles and may allow an amalgam of them to operate in the manner of a public order requirement at EU level, but only if Member State imposed; infringement then leads to a void agreement.313 At least that would seem to be the idea. It may be noted that this was repeated in the text of the Study Group and in the CESL, to be discussed below. Custom or industry practices remain merely implied contract terms here (cf Articles II-1:104, II-4:205(3) and II-9:101) or appear in interpretation (Article II-8:101(1)(f)). They are therefore 311 See nn 12–16 above. 312 This is the so-called horizontal effect of human rights and related to or a reflection of the modern idea of constitutionalisation, see Vol 1, s 1.4.5 and n 12 above. It is a limited concept, however, human rights normally being maintained against states and their institutions and not against private persons, but there may be analogy in all situations where power is exerted. For example, due process protections operate against the state judiciary but could in arbitrations then also be considered to extend to these private proceedings. More importantly, the impact of human rights operates here as a DCFR concession although under the DCFR these human rights are themselves still dependent on legislative instruments of Member States. The idea that fundamental principle can only come in through the horizontal effect of government action, is in itself a severe limitation and still suggests, as the DCFR does throughout, that values are only relevant to the extent they are state recognised. The same conclusion applies to the reference to fundamental principles in contract interpretation under Art II-7:301(a), see further also Vol 1, s 1.4.5. 313 It could be seen as an extraordinary admission that fundamental principles in the EU only work at national level, are Member State imposed and work at EU level merely as general principle. There is here nothing of overriding European principle (or values or culture) and one could ask why, if there is nothing of this sort, a codification project of this nature can be conceived at the European level. It becomes at best some efficiency tool.

168 Volume 3: General dealt with mainly in a contractual context only, while party autonomy also operates merely by government licence (Article II-1:102). They are not autonomous sources of law. Language akin to Article 4 CISG is omitted, which suggested, at least for custom, its existence beyond implied contractual terms. This traditional codification approach means to monopolise the scene and pretends to contain in itself the solution to all problems, now at the EU level. In this vein, general principles have no autonomous status either but only come in to the extent they underlie the DCFR itself (Article I-1:102(1) and (4)). This is pure system thinking. It is of interest in this connection, but not surprising, that any reference to the lex mercatoria, which at least figured in both the UNIDROIT Principles and PECL as we have seen, was deleted. This only confirms that there is no place for other sources of law, even in interpretation, unless specifically allowed. It is to be noted that the proposal for a European sales law (CESL, now withdrawn), based on but lifted out of the DCFR as we shall see in section 1.6.13 below, limited itself to cross-border dealings in the EU—it was a consequence of EU jurisdiction being based on the promotion of the internal market under Article 114 TFEU. Article 114 TFEU is here implicitly explained as giving the EU not only jurisdiction to legislate in this area, but also authority to outlaw other sources of law and to adopt a narrow traditional codification approach. The result was, however, two different sales laws: one for domestic sales and another for cross-border sales within the EU. Beyond the EU, it becomes a matter of the traditional private international law or conflicts rules or, perhaps only then, a matter of the modern lex mercatoria as transnational private law for all international professional dealings in the international flows. Although good faith allows for a way out in principle and may now be a facade for the introduction of fundamental and general principle, custom and practices, at least in interpretation, as is maintained throughout, see more in particular Volume 1, section 1.4.3, in the DCFR it is defined more narrowly and in moral terms (Article I-1:103) although the connection with fair dealing would appear to suggest a more objective and also more down-to-earth market element. Social considerations or values are not mentioned. According to Article I.1:103(2), the concept remains behavioural—the opposite of bad faith—and therefore limited and confusing. Notably, good faith’s multifaceted character and impact on the technique of interpretation more generally is not considered (see also section 1.3.4 above), again especially clear in its being declared of a mandatory nature (Article II-3:301 and Article III-1:103(2)). This follows the UNIDROIT Contract Principles and PECL also, but can be true only, it was submitted, when good faith refers to fundamental principle, public order requirements, or mandatory custom: see also the discussion in section 1.3.10 above. The DCFR may be mainly concerned with the moral high ground and generally a more uplifting life, but it must be doubted whether in respect of business that justifies a more prescriptive and admonishing, censorious, or correcting attitude, short of fraud and abuse. The impression remains that the drafters lacked a clear view and were merely well intentioned. There is a separate reference to reasonableness in Article I-1:104, which suggests a different concept, although hardly defined either. The importance would appear to be that it is not mandatory per se, but again relationship thinking is absent. Although in the reference to the ‘relationship in question’, the good faith definition may itself introduce a beginning of relationship thinking, it was already said that it is expressed in terms of respect for it in moral terms rather than as the driving force behind a much broader concept of good faith. The further consequence of its mandatory nature is that not even professional parties can set standards: see also Articles II-3:301 (pre-contractual negotiation duties), II-8:102(1)(g) (interpretation) and II-9:101(2)(c) (terms of contract). For pre-contractual disclosure duties there is, however, now instead a reference to good commercial practices for professional dealings in Article II-3:101(2) while in the context of a change of circumstances, there is rather a

Volume 3: General 169 reference to what is reasonable and equitable (the latter term not being defined either) in Article III-1:110. Whatever the meaning, the mandatory good faith language is avoided here. That is new and may suggest more flexibility but also confirms the myopic view of good faith itself. There is also an interesting difference between pre-contractual and post-contractual negotiation duties, only the former now being mandatorily governed by good faith. It suggests that parties may agree otherwise in a post-contractual hardship clause, and even exclude the adjustment possibility. It is less clear why this could not be done also in respect of the pre-contractual phase, at least among professionals, in some disclaimer or waiver document. To repeat, the standards of good faith which the DCFR maintains, whatever they may be, apply in essence similarly, therefore to consumer and business alike. That is the unitary approach. They have a strong consumer flavour, as they had in the PECL. Indeed, it was observed before— even for the UNIDROIT Principles—that the consequence of the unitary approach and absence of proper relationship thinking is a spill-over effect of mandatory consumer protection thinking into the professional sphere while this law remains anthropomorphic and statist in concept. Again, the reason is lack of relationship thinking, which is in civil law still in its infancy. Only in some specific instances does the DCFR make a formal distinction between consumer and business dealings, but this confirms also that it is not fundamental to its thinking. Rather, in the codification manner, the DCFR defines types of contracts, not types of relationship and formulates seven types (sale of goods, services, rental agreements, contractual agency, loan agreements, distribution agreements, guarantees). It has been pointed out several times before that this attitude has serious adverse consequences for the credibility of the whole project. The thesis of this book is that, in international dealings, even within the EU, the distinction between professional and consumer dealings can no longer be ignored and is fundamental. The former are subject to immanent law formation, at least at the cross-border or transnational level, and codification in the traditional civil law mode is for them no longer an appropriate method of law formation and application. It may still be appropriate for consumers, but it has already been questioned whether creating consumer protection of this nature at the EU level is at this moment the way forward even for them. There are still important issues of different needs (and costs) per country, as the discussion about the consumer law Directives has shown, and there is also the matter of subsidiarity. In any event, beyond the promotion of the internal market, there is no competency. Protection of consumers does not create it. Again, a consumer approach continues to support an anthropomorphic attitude to the law in the area of contract generally (also in movable property law as we shall see), with continued emphasis on intent in terms of old-fashioned will theories, offer and acceptance language, and protection of the individual. Also here, the DCFR follows the PECL closely, see Articles II-401ff. Again, it is not suitable in professional dealings where in modern contract theory (see section 1.1.4 above), conduct and (detrimental) reliance,314 risk acceptance (in the DCFR only referred to in the case of mistake and change of circumstances),315 and the place of any particular contract in the overall business of a corporate participant need further to be considered in terms of defences or relief against performance, particularly therefore in the areas of mistake 314 Conduct and reliance are only referred to incidentally, see Arts II-4:101, II-4:204 and II-8:102 (conduct) and II-4:202(3) (reliance). On the other hand, reliance might even suggest a contribution or at least a commencing of performance, see s 1.1.6 above; cf also the unexpected reference in Art I-1:103(2) in the good faith definition. Again, the key is that conduct and reliance is here basically an alternative to offer and acceptance rather than the central theme in contract formation, of which offer and acceptance is then only a sub-category. 315 See Arts II-7:201(2)(b) and III-1:110(3)(c), but again the concept is not central to the DCFR.

170 Volume 3: General and misrepresentation, force majeure, and change of circumstances (see more particularly sections 1.3.11–1.3.14 above).316

1.6.6. Interpretation and Supplementation in the Principles and the DCFR. Sources of Commercial and Financial Law, Hierarchy, and Lex Mercatoria Compared The discussion on the issues of interpretation and supplementation was started in section 1.3.9 above, to which reference is made. As noted before, the language on the interpretation and supplementation of both sets of Contract Principles and the DCFR is heavily influenced by Article 7 of the Vienna Convention (see further also section 2.3.7 below and Volume 1, section 1.4.15), there only applicable to (some) contractual aspects of international sales agreements in respect of movable tangible assets. The 2011 Expert Group Project and draft EU Regulation on CESL (sections 1.6.12 and 1.6.13 below) reverted to the sale of goods, but with a more comprehensive text, again mainly for consumers and small businesses as we shall see. It has already been pointed out repeatedly and was discussed notably in Volume 1section 1.4, that ultimately, we are here concerned with the question of other sources of law, at least in respect of cross-border dealings, which sources the Vienna Convention (Article 7), both sets of Contract Principles (respectively Articles 1.6 and 1:106), and the DCFR (Article I-1:102) consider in the context of interpretation and supplementation of these texts but in an uncoordinated fashion. The first three documents make reference to good faith, uniformity, international character, and the general principles underlying them, and the Vienna Convention and PECL additionally to domestic laws through conflict of laws rules where there are gaps. The DCFR omits first the reference to the international character—aiming at creating one law for what it considers essentially an EU domestic market—and further only retains the references to uniformity and good faith. For the rest, it introduces a novel reference to certainty. It was earlier explained that in its generality, this is an unsuitable addition: see Volume 1, section 1.1.8. The issue is rather predictability, as will be discussed further shortly, and transactional and payment finality, of supreme importance especially in international sales, to which the development and operation of the old documents of title and negotiable instruments always testified but is a proprietary issue. On the other hand, the text of the Expert Group in Article 1 only asks for it to be interpreted and developed autonomously and in accordance with its objectives and the principles underlying it. Issues within its scope but not expressly settled by it are also to be settled in this manner, therefore without recourse to national laws either. This text was also in the CESL (Article 4). It confirms the tendency to see these texts in terms of national codifications even though the CESL only was meant to apply to cross-border dealings (within the EU).

316 Although the project is very German, an early critical article appeared in Germany, see W Ernst, ‘Der “Common Frame of Reference” aus juristischer Sicht’ (2008) 208 Archiv fur die civilistische Praxis 248, followed by two more technically critical contributions, first of the work of the Acquis Group, N Jansen and R Zimmermann, ‘Restating the Acquis Communautaire? A Critical Examination of the “Principles of the Existing EC Contract Law”’ 71 MLR 505 (2008), and subsequently of the DCFR, H Eidenmüller, F Faust, HC Grigoleit, N Jansen, G Wagner and R Zimmermann, ‘Der Gemeinsame Referenzrahmen fur das Europaische Privatrecht’ (2008) 63 Juristenzeitung 529. The impression is given that these authors did not find the result German enough. See for a more favourable comment from a member of the Acquis Group, T Pfeiffer, ‘Methodik der Privatrechtsangleichung in de EU’ (2008) 208 Archiv fur die civilistische Praxis 227. Here the consumer ethos appears uncritically accepted.

Volume 3: General 171 It has already been said also that custom and industry practices are not mentioned as an independent source of law in this context in the Vienna Convention or in either set of Principles and the DCFR, but are only considered as implied contract conditions, while the operation of party autonomy is also by statutory (treaty) licence only. That was also the approach in the text of the Expert Group and in the CESL. The status of other custom was expressly not considered in the CISG, Article 4; there is nothing similar in the newer texts, which thus ignore custom (beyond contract terms) altogether, the typical codification attitude. Indeed, both sets of Principles and the DCFR are unanimous in allowing the effect of custom, then referred to as ‘usages’ and ‘practices’ (following the Vienna Convention, Article 9) only if parties have incorporated them in their contract or as an implied term if they are widely known and regularly observed in the trade concerned. This narrow approach is followed by Article 5.2 of the UNIDROIT Principles, although not similarly repeated in Article 6.102 PECL, which use in Article 1.105(2) somewhat more robust language in the sense that parties are bound by any usage which would be considered generally applicable by persons in the same position as the parties. That is also the approach of the DCFR, Article II-1:104 and could then also extend to non-contractual issues: see further also the language in the text of the Expert Group (Article 65) and in the CESL (Article 67), but it is not clear. Both sets of Principles and the DCFR require application of these usages and practices not to be unreasonable. It has already been questioned whether that is appropriate in the professional sphere; there should be no correction of the adverse results unless manifest, therefore in extreme cases. Again, a test of content is generally only appropriate in consumer dealings. The requirement is in any event circular as Article I-1:104 in the definition of reasonableness itself refers back to relevant usages and practices. This is also the case in the text of the Expert Group and in the CESL (Article 4 and Article 5 respectively). More importantly perhaps, there is in all of these interpretational paragraphs no order or hierarchy and probably not even a clear insight into what was meant. The recognition of various sources of law and their rank was earlier identified as key in the concept of the modern lex mercatoria. At least it was still referred to in both sets of Principles but no longer in the DCFR, although it always remained undefined as we have seen in the previous sections. The DCFR (as earlier both sets of Principles) claims here exclusive application for itself, although it may still be fundamentally questioned whether, if it ever became law, it has the power to exclude other competing legal sources, at least in cross-border professional dealings. The text of the Expert Group and the Draft EU Sales Regulation (CESL) equally monopolised the law formation function at EU level for sales or at least attempted to do so. It can only be repeated that the authority that Article 114 TFEU may give to legislate in this area on the basis of the promotion of the internal market, which may itself still be questioned, does not at the same time confer authority to eliminate all other sources of law unless a specific case can be made that that is also demanded by the operation of the internal market, but it is hard to see in this connection that discarding the modern lex mercatoria is now also necessary to achieve that effect. It follows that in this codification approach, the freedom to contract is formulated as mere favour, see respectively Article 7 and Article 1, also derived from the DCFR and earlier the UNIDROIT Principles and the PECL. In the German manner, freedom is regulated and exists by force of licence only. It has been noted before that there is thus no true party autonomy. This has become traditional codification thinking, but again it should be questioned whether these texts can determine their own (superior) rank, at least in cross-border professional dealings. Article 114 TFEU would hardly appear to go this far. It was already said that these texts can only postpone themselves. Following what was mentioned about the hierarchy of norms within the modern lex mercatoria in Volume 1, sections 1.4.14 and 3.1.2 in defining their own place, these texts should have given

172 Volume 3: General precedence to fundamental principle and mandatory custom. Their own mandatory rules (if any) would then follow and subsequently mandatory general principle, party autonomy, directory custom, and their own directory rules followed by directory general principle. Regulatory rules of domestic law and domestic public order requirements are outside this hierarchy (unless they take the form of fundamental principle between private parties), to be considered separately. Article 1:103 of the PECL expressed this in an inadequate way as we have seen. No such reference is retained in the DCFR, although there may still be some considerable confusion in Article II-7:301: see the discussion in section 1.6.5 above. Whatever the shortcomings in this regard in the texts of the CISG, in both sets of Contract Principles, and in the DCFR, we also see that the good faith notion itself may be and often is used as the vehicle to (re)introduce other sources of law; see especially section 1.3.9 above. It is not clear whether these texts were aware of this; it is unlikely. In section 1.6.5 above, it has already been noted that there remain considerable problems with regard to what good faith is or does: merely the opposite of bad faith and then absolutely mandatory, or a liberal interpretation technique reintroducing the other sources of law, only those relying on fundamental principle being mandatory, while professionals may even then set standards unless becoming manifestly unreasonable. Doubts may also exist with regard to the concept of certainty, which is held in high regard in the DCFR as already mentioned (see Article I-1:102(3)(c)) where it is presented as a major interpretation tool in the interpretation of the DCFR itself, but rests on a misunderstanding of what a dynamic modern private law is or can be. Unconsciously, this cry for certainty may result from and be an answer to the subjective intentand will-based perspective of contract formation that still pervades these texts, became also the direction of the Vienna Convention, and is likely to be the true cause of it being mistrusted in business. By showing a better understanding of the modern lex mercatoria and of modern contract theory, which are both more objective in business dealings as we have seen in section 1.1.4 above, much of this unease might have disappeared and it would have been greatly more convincing. Indeed, the accent should always have been on predictability instead and on the much narrower concept of finality in transactional matters including payments: see Volume 1, section 1.1.7 and Volume 4, section 1.10.2. In the text of the Expert Group, the reference to certainty was rightly deleted from the interpretation clause—see respectively Article 1 and Article 4—but it came back in Article 1(2) of the Draft Sales Regulation (CESL), now in terms of objective. Again, transaction and payment finality are by far the more important issue, particularly in international sales, it is also much easier to establish but this vital importance was not identified by either the DCFR or the CESL. De-emphasising intent altogether is indeed another way of approaching these issues of certainty and predictability. In other words, there are other ways of dealing with ‘certainty’, also in a dynamic legal environment, which are much more perceptive, but again they were not within the perspective of the drafters of these texts, the Vienna Convention included. This is the reason why, it is submitted, at least in the professional sphere these attempts have received little respect.

1.6.7. Approach to Contract Formation: Consensus, Reliance and Exchange Notions, Capacity, Formalities and Specificity Generally in the area of formation, both sets of Contract Principles, the DCFR (which follows the PECL) and the CISG or Vienna Convention should be studied especially in the following areas: (a) the matching declarations of offer and acceptance in terms of the consensus notion, their continued relevance in international trade, the place of intent or the alternative in terms of

Volume 3: General 173 the notion of exchange or bargain, or consideration as a source of the binding force of contracts and any cause of action based on it; (b) the importance of conduct and reliance in this connection, the latter being detrimental or showing a commencing of performance; (c) the need for the definiteness of the offer, its binding nature, the importance of dispatch and receipt of offers and acceptances; (d) the time of contract and its continuing relevance; (e) the impact of nonintentional considerations, rights and duties, in particular the relevance of implied conditions, disclosure, (re)negotiation and co-operation duties; and (f) formalities and parol evidence. Attention to the nature of the agreement and especially to the difference in the relationship between the parties and the notion of risk acceptance are other key issues. Subsequently there is the extent and impact of defences and excuses to consider as well as questions of interpretation and the role of good faith and custom. It has already been said repeatedly that both sets of Principles and the DCFR remain dominated by the concepts of will or intent and consensus,317 rather than conduct, (detrimental) reliance, and risk acceptance. This has an important effect on the defences as we have seen and is closely connected to notions of blame in the excuses and their subjective nature. In section 1.1.4 above, this was summarised as a typical civil law codification approach which could be summarised in one sentence: ‘I did not mean it, I cannot help it, it is not my fault’. The common law attitude, which derives from commerce, was identified as being different and greatly less accommodating in principle, although relationship thinking may save the consumer but not the businessman. Risk management and otherwise risk acceptance are here the central themes in contract formation and implementation. Again, the civil law attitude remains in the nineteenthcentury anthropomorphic mode of contracting and also directs offer and acceptance,318 being in essence still perceived as acts based on personal dealings in a kind of mating dance.319 It results 317 Art 3.2 of the UNIDROIT Principles depends chiefly on the mere agreement of the parties, whatever may be meant by it, subject to reasonableness, established practices, good faith and fair dealing and the nature and purpose of the contract, but as implied terms only and not as more objective standards or other sources of law (Art 5.1.2). The broad and abstract notion of mistake in Arts 3.4ff also testifies to a psychological concept of consensus (although itself not expressly used). In a similar vein, the notion of avoidance of the contract and restitution is probably too broadly formulated for commerce, Art 3.17. It is clear that intent per se, rather than risk management in a business sense and the dynamics of risk-taking, concerned the drafters, never mind that these Principles were meant for commercial contracts. The PECL and DCFR, which also cover consumer dealings, substantially follow this approach, which for consumer transactions may be more understandable, but it pleads against a unitary set of rules also covering professional dealings. Thus the DCFR, in Arts II-4:101ff, makes the intent the essence of the contract as also shown by the language on mistake (Art II-7:102) and the interpretation language (in Art II-8:101). It refers to the common intent of the parties, failing which there is resort to the ‘reasonable person approach’. For contracts concluded under the DCFR, Art II-8:102 substantially uses the language already developed in the UNIDROIT Principles and thus also retains here the consensus idea and the parties’ intention, leading to an anthropomorphic notion of contract. Even reliance itself is not a concept much favoured, but appears in Art 16(2)(b) CISG and Art 2.1.4(2)(b) UNIDROIT Principles in connection with the withdrawal of an offer, which cannot be done if the offer was relied on. The concept of reliance is more broadly used in the DCFR, see Art 2.202(3)(c) PECL, although only in connection with the possibility to revoke an offer, and Arts I-1:103, II-4:202(3)(c), II-7:204, II-8:101. See for the notion of conduct Art 18(1) CISG, Arts 2.1 (only added later), 2.6(1), 4.2 and 4.3(c) UNIDROIT Principles, Arts 2.102 and 2.204(1) PECL, and Arts II-4:102, II-4:204 and II-8:102 DCFR, cf also s 2-206(2) UCC. 318 The rules are derived from the CISG (Arts 14ff), therefore from the sale of goods, but were extended to all types of contracts in the UNIDROIT Principles and PECL and thus also introduced for duration contracts of all types, a substantially different world, see also DCFR, Arts II-401ff. 319 Both sets of Principles and the DCFR are of interest in that, while avoiding consensus language as the Vienna Convention also does, Art 5.101 PECL, Art 4.1 UNIDROIT Principles and Art II-8:101 DCFR on interpretation of the contract continue to refer to the common intention of the parties as the interpretational base. Here arises the civil law notion of consensus as common platform of the rights and obligations of the parties under a contract, which itself may inject some objectivity or even the concept of reliance.

174 Volume 3: General in a fixed moment of contract formation, cf Article II-4:205 DCFR, an approach copied in this aspect also in the common law and CISG. The notion of a gradual build-up and decline in rights and duties, some of which may be non-intentional such as duties of care and co-operation, disclosure and (further) negotiation, and a dynamic concept of contract remain underdeveloped here. All three texts closely follow each other in this regard and are clearly inspired by the compromises reached within the formation rules of Part II of the 1980 CISG (Articles 14 and 18) and in the earlier Hague Sales Conventions concluded more than three generations ago in language that dates from the 1930s and which succumbed to the nineteenth-century intent and will approaches prevailing in those days on the European Continent. They consider conduct and reliance only as a subsidiary way to form a contract rather than the main notion, of which offer and acceptance would then be a mere subset. This is old sales language, in fact mostly geared to spot sales of individual items (one bicycle, one shirt, etc) between individuals, extended by the Principles and DCFR to all types of contracts and brought into its general part even in respect of duration contracts or, for sales, long-term sales agreements with a large service and technology content. The 2011 Expert Group text, and the Draft EU Sales Regulation (CESL) adopted the same language (Article 34 and Article 35 respectively), as we shall see, but it is at variance with modern contract theory and practical realities in business transactions. No less important in this connection is that the notion of risk acceptance only appears in the DCFR in connection with mistake and change of circumstances, and also in the force majeure clause in all four texts, albeit in a different language. So it is in the relevant text of the Expert Group and the Draft EU Sales Regulation (CESL). The result is a subjective approach all through, again in its generality unsuitable for business. The Vienna Convention (Articles 14 and 29(1)), both sets of Principles (Article 3.2 UNIDROIT Principles and Article 2-101 European Principles) and the DCFR Article II-4:101) all implicitly rejected the more objective notion of consideration in a common law sense and also of causa in a civil law sense (more clearly Article 3.2 of the UNIDROIT Principles). So do the text of the Expert Group and the Draft EU Sales Regulation (CESL). It may be some progress but offers are, however, not binding unless they say so or are reasonably relied upon (Article 16(2) Vienna Convention, Article 2.4(2)(b) UNIDROIT Principles and Article 2.202(3) PECL, see also Article II-4:202(3) DCFR). Note that reliance needs not here be detrimental and that it does not necessarily lead to a contract.320 The idea seems to be that if the offeree is at least incurring some cost in reasonable reliance on the offer, it cannot be withdrawn at will. This should be distinguished from acceptance by conduct.321 It shows, however, that, unlike in most of civil law, offers are not binding per se, 320 But one may notice an interesting curiosity in this connection in the text. In Art I-1:103(2) DCFR, a main example is given of acting contrary to good faith (as the opposite of bad faith in the perception of the DCFR). It is ‘for a party to act inconsistently with that party’s prior statements or conduct when the other party has reasonably relied on them to that other party’s detriment’. So here detriment is necessary. One wonders about its more general requirement in the context of reliance. 321 Nevertheless, as regards offer and acceptance, the Vienna Convention (Arts 14 and 18) largely assumed the formal common law terminology and concepts of offer and acceptance except that acceptance, if not by conduct or in the manner indicated by established practices between the parties, is effective only upon receipt by the offeror (see Art 18(2) following s 130 BGB), even if by mail, therefore rather than upon dispatch, which is the traditional common law rule (motivated at least to some extent by the need to lock in consideration and thus the binding force of the contract as early as possible and reduce the incidence of non-binding offers). The Contract Principles, in Art 2.6(2) UNIDROIT Principles, Art 2.205(1) PECL and DCFR Art II-4:205(1) respectively, follow this approach, allowing alternatively also for acceptance by other conduct reaching the offeror (Arts 2.1 UNIDROIT Principles, 2.102 PECL, II-4:102 and II-4:204 DCFR). Clearly, this conduct does not need to amount to detrimental reliance (the notion of reliance is only used in connection with the revocability of the offer and need then only be reasonable, not detrimental, see text above). The offer itself is effective when it reaches the

Volume 3: General 175 even for a reasonable period, except if so stated or when there has been such reasonable reliance (as in the case of subcontractors’ quotes enabling a main contractor to make a final offer). That is also the approach of the UCC (section 2-205). Again, what reasonable reliance is, is not made clear. A reply that states or implies additional or different terms materially altering the terms of the offer is a rejection and counter-offer. Both sets require an offer to indicate the intention of the offeror to be bound (respectively Articles 2.2 and 2.103), followed in Article II-4:103 DCFR.322 Under the CISG, an offer must be sufficiently definite but needs to specify only the essentials of the (sales) contract needed to be agreed, which meant quantity (the goods) and price (Article 14(1)), although even for price (if not expressly fixed) Article 55 gives further rules. Additional terms which did not materially change the offer did not result in a rejection or counter-offer but, if bearing on price, payments, quality, quantity, place and time of delivery, parties’ liability, or settlement of disputes, they were considered material per se and therefore in the nature of a counter-offer (Article 19(3)). This looks like a list of fundamental clauses or conditions in an English law sense, even if only the one on quantity (and price) must be specifically expressed in the contract. Article 2.14 UNIDROIT Principles and Article 2.103 PECL, which do not cover mere sales contracts only, do not require minimum terms. They rely on mere definiteness: see respectively Article 2.2 UNIDROIT Principles and Article 2.201(1)(b)/ Article 2.103(1)(a) PECL and also Articles II-4:101 and II-4:103(1)(a) DCFR.323 Under the Contract Principles, there is no need for documentation (Article 1.2 UNIDROIT Principles and Article 2.101(2) PECL, followed in Article II-1:107(1) DCFR). The Vienna Convention has in Article 11 a similar provision but left this matter ultimately to the Contracting States, which could make a contrary declaration (Article 12) as the US has done. There is no parol evidence rule. The UCC continues to require documentation for sales contracts in excess of $500 and has retained the parol evidence rule but ties it to intent (see sections 2-201 and 2-202 UCC). On capacity all are silent. Finally, one might consider how the system of the Vienna Convention, and especially of both sets of Principles and the DCFR, applies to some common formation complications, such as to cash sales especially for consumers (where Article II-4:211 DCFR, following the PECL, asks for the appropriate adaptations of the offer and acceptance notions rather than recognising that they are here at an end), to the nature of the contractual obligations that derive from reliance on conduct, to the meaning of a signature under an agreement, to the impact of good faith on the formation of the contract and the disclosure and investigation duties in that context, to the duties of care and subsequently to the co-operation duties of the parties in the various phases of the contract, a number of which were discussed above in sections 1.3.11–1.3.14.

1.6.8. Defences. The Question of Continued Validity of the Contract In the previous section, it was established that the UNIDROIT and European Principles do not openly favour the civil law consensus notion even if in the UNIDROIT Principles there offeree (Art 15 Vienna Convention and Art 2.3(1), a rule not found necessary to repeat in the PECL, but, as already mentioned, the offer may be revoked until acceptance unless reasonably relied upon. This is also the approach of the Expert Group and CESL. 322 Like the UCC in the US for the sale of goods, the Vienna Convention dispensed with the traditional common law distinction between so-called unilateral and bilateral contracts for formation purposes, the first ones being dependent for their effect on full performance (and notice thereof instead of mere acceptance) as in offers to the public (if not an invitation to treat) and (normally) in offers for services. So do the Principles and DCFR, see Arts II-4:101, II-4:201, II-4:204, and II-4:205. 323 The issues of disclosure and negotiation duties at the formation stage were dealt with in s 1.3.11 above.

176 Volume 3: General may still be some reference to it in Article 3.2 and still more in the PECL, Article 5.101 and in Article II-8:101 DCFR. Yet it is the key idea and follows from the basic approach that sees contracts, even in the professional sphere, as intent based, which, erroneously and unnecessarily, it was submitted, leads to a basic flaw in the whole contractual set-up in professional dealings, which remains here anthropomorphic. It is clear in particular that the more objective common law notions of consideration and matching individual promises are not followed although this approach was still close to the natural law concept of contracting which, at least in the old French law of sales, could also include a commencing of performance, see the discussion in section 1.1.5 above. In these texts, the more objective approach of the modern lex mercatoria, resulting from its different legal sources and modern contract theory, which also shows sensitivity to the notion that a party must invest in a professional contract before it can claim thereunder, is also ignored. From this there flows a more conceptual, but also more subjective approach to the defences as we have seen. This subjectivity follows through in the concept of fundamental breach and in the excuses, such as force majeure, and in the remedies concerning breach as a matter of blame, which again is much less relevant in the common law of contract relative to the excuses as we shall see in the next section. Indeed, as noted, this generally more subjective approach still remains dominant in the minds of many and is the one adopted also in the text of the Expert Group and CESL. Thus the common law fragmented case law and equity approach underlying the defences, and in particular the notion of rescission, is substantially abandoned here (see for this approach section 1.4.2 above) in favour of the civil law concept of validity, which concerns itself mainly with the binding force of the agreement absent failures of common intent or will, with the subsequent avoidance of the contract should the consensus have been undermined in the particular circumstances of the case. Threat or force, error and fraud remain then the major defences and lead to the avoidance or voidability of the contract. In civil law, invalidity in this sense also tends to be retroactive so that the earlier effects of the contract will be undone. In common law countries, this is (mostly) not the case when a contract is rescinded on the basis of non-performance (rather than invalidity). Delivered assets will then be returned only to the extent feasible. This problem of replevin will be more extensively discussed in connection with a default in international sales in section 2.1.10 below; rather it is covered by the rules on unjust enrichment under the DCFR (Article II-7:212(2)), where it is then a personal action only. This is in the German tradition. The CISG, according to its Article 4, is not concerned with validity in this sense. The texts of the Expert Group and CESL do not deal with proprietary issues either, but they deal with restitution in the case of contract avoidance or termination (see Articles 172ff CESL) and again follow the German lead here, which was earlier also adopted by the DCFR. In both sets of Principles and the DCFR,324 all defences lead to voidability in the civil law manner. Avoidance (in whole or in part, see respectively Article 3.16 UNIDROIT Principles, 324 Both sets of Principles and the DCFR exclude from consideration matters of immorality and illegality (respectively Arts 3.1 and 4.101 or invalidity in the common law sense), see also Art II-7:101(2) DCFR, although in the last version of the PECL there is a chapter (15) on illegality, which ties in to fundamental principle and has its counterpart in Art II-7:301 DCFR, referring here to the law of Member States apparently as a kind of amalgam. As just mentioned, the texts explicitly concern themselves with civil law validity concepts in terms of initial impossibility (respectively Arts 3.3, 4.102 and II-7:102), mistake (respectively Arts 3.4 and 3.5, 4.103 and II-7:201), error (Art 3.6, essentially equated with mistake and covered by it in the PECL, Art 4.104), cf Art II-7:202(1), fraud (respectively Arts 3.8, 4.107 and II-7:205), threat (respectively Arts 3.9, 4.108, II-7:206), and gross disparity (respectively Arts 3.10, 4.109 and II-7:207). The concept of fraud appears to put emphasis on what the fraudster did or intended to do. Mistake is used here as a generic term. Error as a neutral term is covered in Arts 3.5 and 3.6 UNIDROIT Principles, in Art 4.103(1)(a)(iii) PECL, and Art II-7:201(1)(a)(iii) DCFR. Inaccuracy is mentioned in Art 4.104 PECL and Art II-7:202 DCFR.

Volume 3: General 177 Article 4.116 PECL and Article II-7:212 DCFR) not voidness is, however, the normal remedy in all cases, therefore leaving the initiative to the adversely affected party even in the case of fraud and threat. Hence also the personal nature of the retrieval action. It is further noteworthy that the issue of risk acceptance, especially in the case of mistake, is not dealt with in a relationship manner, although, as already mentioned, there is some reference to risk acceptance in the later texts: see Article II-7:201(2)(b) DCFR, followed by the Expert Group and the CESL (Article 48(2)). In this set-up, the affected party may always confirm the arrangement (respectively Articles 3.12 UNIDROIT Principles, 4.114 PECL and II-7:211 DCFR) or may, in the case of mistake and gross disparity, also seek adaptation of the contract (respectively Articles 3.10 and 3.13 UNIDROIT Principles, 4.105 and 4.109(2) PECL and II-7:203, II-7:207 DCFR). Avoidance may be accompanied by a claim for restitution and damages (respectively Articles 3.17 and 3.18 and 4.115 and 4.117 and II-7:212(2) and II-7:214). These provisions are considered mandatory, except that as to the remedies, mistake or incorrect information may be excluded unless the exclusion is contrary to good faith and fair dealing (see respectively Articles 3.20 and 4.118(2) and II-7:215),325 which again raises the question of their meaning in professional dealings in particular. To repeat, the common law rescission notion, with its broad inherent judicial discretionary element depending on the facts and circumstances, including the type of parties, does not operate in a similar manner. Under the Principles and DCFR, the common law notions of duress and undue influence may have found a place under ‘threat’ in Article 3.9 UNIDROIT Principles and Article 4.108 PECL, see also Article II-7:206 DCFR.

1.6.9. Performance, Breach and Excuses Both sets of Principles and the DCFR distinguish between fundamental and other breaches leading to a differentiation in remedies, derived from Article 25 CISG, which only covered international sales.326 In the DCFR, the concept is generalised for all contract law and expressed in Article II-3:502. That is also the approach of the Expert Group and the CESL (Article 87), although they limit themselves again to sales. If the breach is less than fundamental, notice fixing an additional time may be given after which the breach becomes fundamental in language also derived from the CISG. For fundamental breach, the key is that the creditor is substantially deprived of what s/he was entitled to and it leads to termination if the creditor so wants, but the concept remains too subjective to be workable especially in professional dealings.327 So is the related concept of force 325 Of particular interest are the questions of innocent misrepresentation and mistake, which were earlier identified as requiring lesser concern in professional dealings, see s 1.3.11 above. The concepts are combined in both sets of Principles but the PECL and DCFR seem to deal better with the issue of professionality. As already mentioned in s 1.6.2 above, under the PECL, mistake cannot be invoked as an excuse if the invoking party assumed the risks or if in the circumstances they should be borne by this party (Art 4.103(2)(b)). This language also appears in Art 3.5(2)(b) UNIDROIT Principles, but the latter prevent a party also from invoking mistake in the event of its own gross negligence (Art 3.5(2)(a)). The PECL refer in this connection to inexcusable mistake in Art 4.103(1)(a)(ii). There is also a reference to good faith which may suggest a more normative approach. Art 3.5 UNIDROIT Principles refers instead to a reasonable person and reasonable commercial standards, probably a lower test, which could be the consequence of its concern with business dealings only. See further also Art II-7:201 DCFR, which tracks the PECL language. 326 See also O Lando, ‘Non-performance (Breach) of Contracts’ in Hartkamp et al (eds) (n 145) 333. 327 See for the concept of fundamental breach in the CISG, its subjectivity and therefore inappropriateness, M Bridge, ‘Avoidance for Fundamental Breach under the UN Convention on Contracts for the International Sale of Goods’ (2010) 59 ICLQ 911.

178 Volume 3: General majeure of Article 79 (Article 88 CESL), the main reason why professionals usually exclude the application of the Vienna Convention (another reason being the unilateral right of the buyer to reduce the price under Article 50, cf Article 120 CESL). Again, it is the subjectivity of the overall approach and then accent on fault, which in commerce distinguishes the civil and common law of contract. The CISG also adheres to this subjectivity, compounded by its intent- or will-based notion of contract, and to the related concept of blame in the excuses, all to the detriment of its credibility in business, it was submitted. Again, it is the consequence of unitary anthropomorphic thinking in civil law which spills over into the corporate professional sphere. It may be recalled that in the common law of contract, will and blame or fault are very differently handled. All major contract conditions are only excused by non-performance of the other party. They are guaranteed in a civil law sense and force majeure is no excuse, even less a change of circumstances, unless the relative concepts are introduced and defined in the contract itself as risk management tools. They are not normally implied and the objective law will not normally redistribute the risk between professional parties. Intent and blame are not fundamental and contract formation does not depend on the one and excuses do not depend on the other. As we have seen, texts are important and literally interpreted where the contract is perceived as a roadmap and risk management tool. The excuses of force majeure and change of circumstances were dealt with more extensively in sections 1.3.14 and 1.4.5ff above. Again, they are perceived in this book as operating fundamentally differently in professional dealings, a view which the DCFR could only incidentally accommodate. Both sets of Principles and the DCFR further follow the civil law rule that specific performance is the normal remedy where there is no voluntary performance except when it imposes unreasonable burdens or the performance is of a highly personal nature, see respectively Articles 7.2.2, 9.102 and II-3:302, and also section 1.4.1 above. This is followed by the Expert Group and the CESL. It does not preclude damages while in bilateral agreements the other party may also withhold performance until the first party starts or continues to perform, see respectively Articles 7.1.3 and 7.2.5, 9.103 and 9.201, and III-3:303 and II-3:401. Under the UNIDROIT Principles, penalties may be imposed for the benefit of the aggrieved party unless the mandatory law of the forum dictated otherwise (Article 7.2.4). It was noted before that the Vienna Convention refers back to the lex fori (Article 28) on this point. Besides this option of specific performance, whether or not combined with damages and/or the temporary withholding of individual performance, in the case of a fundamental breach, the aggrieved party has the further option of terminating the contract or, in some cases, price reduction. Naturally, if the contract requires only a best effort, these remedies will not be available (the French distinction between obligation de résultat and obligation de moyens). On the other hand, where a guarantee is given or implied, even the force majeure excuse may not excuse the debtor in civil law, although it remains a matter of interpretation. Payment is as such virtually never excused either, as we have seen in section 1.4.6 above.

1.6.10. Privity of Contract As already mentioned in section 1.5.2 above in fine, Article 6.110 of the European Principles contains a clause which allows a third-party beneficiary to benefit from a contract giving him a direct action, but the promisee may deprive him of it unless there has been notice to him that his right has become irrevocable or the third party has accepted the benefit. This is followed in Articles II-9:301ff DCFR. No other instances of inroads into the privity of contract are specifically covered in this connection.

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1.6.11. The Nature and Impact of the PECL and DCFR On the general nature of the new texts, there are other points to be made. Although the term ‘principles’ was used at first, what has in fact emerged in all these texts are sets of precise rules. At least for professionals, it may be doubted whether this is needed at this juncture. Indeed, if a text is wanted, principles rather than details would seem greatly preferable at so early a stage of the development of transnational law, at least in respect of professional dealings. They should identify the main issues and provide key clarifications, not at this stage any more precise language except if commercial practice asked for it or public policy requires it. At least for professionals, the emphasis is on the sources of law in the transnational commercial and financial order. The commercial and financial practice itself, case law, or perhaps even arbitral awards at the transnational level should be given ample room to develop these sources and notions further on the basis of practical experience and need, while determining their contours and validity in an empirical manner. For many, the idea remains nevertheless full codification,328 that is their uncritical mindset, while there is an attempt to extend this approach also to common law countries in order for this law to operate at EU level, therefore even in the international markets so far operating from London. That this is considered at all, even in England, is due to a strong positivist strand in English academic thinking, which is also moving towards a belief in private law texts and rules through legislation at the expense of fact (and common law, equity, market practices or custom), an attitude popular in England in circles around the Law Commission, but it would likely be deeply resented in other circles and probably by the public at large. In any event, the traditionally different common law attitude would immediately become clear again in the interpretation in the courts in England, or after Brexit in countries like Ireland, Malta and Cyprus, which are unlikely to give up their more pragmatic approach and tradition. It would create extra stress in the system if this newer approach were to be adopted and prevail in the European Court of Justice (ECJ) which would likely become the ultimate umpire. More importantly, it has already been said that for texts of this nature to have any real meaning in terms of quality, at least in professional dealings, they must for their credibility show both direction and inspiration (unless barred by public order or policy) and be clear, concise and flexible, while the international practice, dynamics and needs must be recognisable in them and be seen to be properly advanced, again unless there are clear (policy) reasons for it to be otherwise. Thus, new ways must be shown, old ways discarded and above all, in professional dealings, a view of the needs of international commerce and finance presented; see also the discussion in Volume 1, sections 1.1.6 and 1.1.7. This is about the law of tomorrow, not about the law of yesterday. It may be added that the difference between the US and Europe in this regard is that the various chapters or Articles of the UCC were adopted with alacrity by business in the US. The reasons were participation, quality and realism. That cannot so far be claimed for these texts in Europe. To make an effort of this nature credible, it can only be repeated that first the methodology in terms of top-down or bottom-up law formation and the sources of law must be made clear. Subsequently, there must be relationship thinking and an understanding of the dynamism in modern contract law for professionals as distinguished from consumer dealings and the unitary approach must be fundamentally reconsidered. Intent and will-based perceptions of the professional contract, its subjective features and notions of blame should be de-emphasised, including the effect on the notions of fundamental breach and force majeure. If there still has to 328 See for the jurisdictional aspects, Vol 1, s 1.4.2.

180 Volume 3: General be codification, even for professional dealings, the case should be proven for which a forwardmoving perspective must be presented. Subsequently the relationship with, and effect of, public policy and order in Member States should also be clarified. In the absence of clear insights into these issues, at least for the professional sphere, it may be far better to wait until commercial and financial practice asks for help unless public policy requires otherwise. The DCFR as it now stands is not a text fit to direct the international marketplace in Europe. The same applied to the CESL as we shall see, no matter its narrower scope.

1.6.12. The 2011 Project of the Expert Group on European Contract Law Whatever the pros and cons, in April 2010, the EU Commission set up a special group, now under its direct authority, called the Expert Group on a Common Frame of Reference in the Area of European Contract Law, limited therefore to assistance in the development of a future EU contract law instrument. It has already been referred to several times. In the summer of 2011 this Expert Group came with yet another text. It dealt with the general part of contract law, in the event elaborated for only one contract type: the sale of goods and related services. It remains substantially inspired by the 1980 Vienna Convention, at the time conceived for professional dealings only, but in the meantime incorporated in the general (formation) and sales sections of the DCFR, as we have seen, thus extending much of it also to consumers (in which unitary form the CISG earlier already found its way into the BGB in 2002). The Expert Group used the DCFR’s relevant parts in this regard. The result was presented as a feasibility study on European Contract Law for consumers and business, covering therefore both business to business (B2B) and business to consumer (B2C) dealings. Notwithstanding its short gestation period, it was said to be the result of stakeholders’ and practitioners’ feedback. In truth, it was one more attempt by well-meaning scholars to arrive at yet another text better to convince, now mainly in an area limited to the contractual side of the sale of goods. However, it showed all the same problems, such as the confusion between consumer and professional dealings and the conceptual limitation to (spot) sales of individual assets instead of conceptualising, at least for professionals, long-term supply agreements with large service elements (regardless of some lip service in Article 3), technology, computer programs and similar modern technological features, and the effect of flows of assets in constant transformation in the international sphere with its newer supply and distribution chains. Without any further consideration of method, there was no greater relationship thinking nor were there other sources of law. All was codification thinking and methodology in the traditional civil law manner, where the contract remained intent and will-based, with the subjectivity that follows. The references to fundamental principles in the DCFR, confused as they were, were eliminated but that also meant even less sensitivity to extraneous, more objective considerations whilst on the other hand maintaining a censorious public policy attitude. There were also the more traditional and now well-known shortcomings derived from the CISG itself already mentioned before and to be discussed more extensively in the next Part of this Volume, especially in the area of fundamental breach (Article 90), force majeure (Article 91) and unilateral sales price reduction (Article 122). It has already been said repeatedly that the rules in these areas are too subjective and anthropomorphic to be workable in professional dealings, the reason why professionals normally exclude the application of the Vienna Convention, motivated further by the subjectivity that follows from the intent- and will-based approach to contracting. It is hard to see how these texts could better serve smaller companies if the bigger ones reject them. A special (uniform) overlay of consumer

Volume 3: General 181 protection was extra. In essence, there is here a double dip as the general part of the contract itself was already basically a consumer document following the unitary approach in the UNIDROIT Contract Principles, PECL and DCFR, meaning the same rules for all unless exceptions were made. Further rules of special protection for consumers were inserted, notably in the area of precontractual duties, but also in interpretation (Article 64), and were advertised as an important new feature of the project. Given its tenor and progeny, this project remained thus in essence a consumer law document and was more especially drafted as such. It would have been better to limit it altogether to consumer sales, although there might even be less need for it in that area as they are usually not transborder. If we consider the details, it may indeed be noted that in Article 1 the alternative sources of law are eliminated. There is thus no longer any place for the modern transnational lex mercatoria in cross-border sales transactions, even for professional dealings in transborder sales within the EU, nor it may be added, for custom and market practices and general principles derived from more advanced thinking in the laws of Member States (Article 1(2)) as objective sources of law. As in the earlier texts, custom merely operates by licence in the nature of implied contractual conditions (cf also Articles 57 and 65). Again, the reference to it having to be reasonable is no less confusing and in fact improper—see Volume 1, section 1.4.7. It is also circular. There is no concept of basic values either, even for consumers, unless specifically so expressed. There is the good faith concept at large, but its meaning remains unclear in the sense already discussed for the DCFR, while there is no realisation that the contract may require a literal interpretation when dealing with risk acceptance in the professional sphere unless the result becomes manifestly untenable. The offer and acceptance language, also derived from the CISG, further shows and confirms the intent- and will-based subjective approach to contracting, in fact the well-known consumer model. Although the sale of goods was the major contract contemplated in the text of the Expert Group, property law and the proprietary consequences of a sale were not covered as befits a project that only deals with contract law. However, if one truly believes in a sales text of this nature, it could only be of real importance if the whole field was covered in all its major aspects, title transfer being the main aim of the whole exercise in sales, and should then also cover floating charges and reservation of title in these assets, and payments. Equally the key issue of transactional and payment finality was ignored—it is also a proprietary issue. As it is, the project remains truncated; the draft only requires the seller to transfer ownership (Article 94(1)(b)). All the rest remains local law. The idea, therefore, that this type of law is uniform is a fallacy. Even on the contractual side, it is not complete, for example in the important areas of illegality and of representation and capacity, and does not pretend to be so. But the major problem is the lack of a proper insight into the dynamics of modern contract law, the fixation of the contractual content at the time of the conclusion of the agreement, whenever that may be (Article 29), and the old-fashioned intent and offer and acceptance language (Articles 30ff), still based on the sale of a single asset. Again, it demonstrates an out-of-touch approach. Then again, there is the unclear attitude to the role of good faith (Article 8), reasonableness (Article 4), and pre-contractual and post-contractual co-operation duties (Articles 23 and 89 respectively) in the sense of the dirigiste or censorious and supervision approach in respect of content, here also in professional dealings, and no less the confusion of what is in this connection mandatory, even as to the contractual infrastructure itself (cf Articles 7 and 64). Why the Expert Group continued substantially with the CISG approach that had been rejected by professional practice and was never accepted by important trading nations like the UK and Portugal is a mystery. The answer is probably that the drafters were never fed anything else and

182 Volume 3: General could not think anew. The text meant to contribute to the economic recovery in the EU after the crisis of 2008 and was also concerned with transaction costs. The first aim was mere hubris but undoubtedly the reduction of transaction cost is an important issue, and it is not wrong that this area is reviewed from this perspective, therefore from the point of efficiency. However, the simple truth is that, quite apart from the issue of EU authority, which does not sufficiently exist in this area of EU codification of private law—nor generally in the consumer area either, see Volume 1, section 1.4.21—business would have proposed the project itself a long time ago if it saw important savings here. An Expert Group of this nature can hardly have an idea of what is needed in this respect, nor of what is required in regenerating the EU economy. In any event, progress cannot be achieved on the basis of antiquated texts as proposed; business rightly fears the limitations in such state-imposed academic models which endlessly regurgitate the past but have no concept of what is needed now or in the future. Again, in the US, which is a far more integrated market, the need for federal private law has not been felt. Even the UCC remains State law and there are differences between the States, which also do not adopt amendments simultaneously. More importantly, this Code was never imposed from above but was a private initiative and remains so in its amendments. It accepts the traditional other sources of law, especially custom and equity, as operating besides it; it favours them as we have seen. Rigorous system thinking is alien to it. Will and intent are de-emphasised in favour of an altogether more objective approach to contracting. In areas of good faith, parties can set the standards unless they become manifestly unreasonable in their application. That is the right attitude, at least for business dealings. It is true that there is federal consumer law, especially in the area of payments, but it is limited as, given the concept of proportionality and subsidiarity, it should also be in the EU.329 In summary, one may say that what still appears to characterise the EU approach in private law formation is: (a) its unquestioned concept of the supremacy of the statist legislative approach and the subordination thereto of all other sources of law, including those based on fundamental principle and values even in cross-border activity within the EU; (b) the assumption that in areas where the EU has sufficient jurisdiction to legislate in the area of private law, it is also able to push out or subordinate all other sources of law, and that this is a good thing; (c) the will- and intent-based subjective approach to contracting supplemented by the subjective nature of the concept of fundamental breach and force majeure in the area of excuses supported by the notion of blame; (d) the lack of relationship thinking and the confirmation of a unitary approach that is ignorant of social diversity and the (legitimate) needs of different groups; and (e) a consumer protection ethos with a censorious attitude to all private dealings and a suspicion of market forces well beyond normal public policy and public order concerns.

329 If there has to be private law codification in the EU, countries being asked to give up their own private law traditions, the founding treaties should have spoken to it and state on these issues, giving each Member State a prior say. The Lisbon Treaties notably did not cover these issues. There is therefore no proper EU authority and it should not be fabricated on the basis of doubtful internal market arguments or the use of hyperbole, see also Vol 1, s 1.4.19. This being said, if a truly modern commercial law could be conceived that takes care of all different constituencies, it should not be rejected out of hand. In the US, the UCC was in that category, had a considerable academic input, and was often enlightened. In Europe, we are unfortunately not in that position. It has already been said that at the academic level these exercises show the deep decline of the study of private law in Europe, especially in commerce and finance, over two generations and at the political level they show an EU further arrogating to itself dubious competences seriously detrimental to its already battered image in this area.

Volume 3: General 183 It was earlier said that this civil law approach in contract is still defined by the cry: ‘I did not mean it, I cannot help it, it is not my fault,’ whenever there are contractual problems. This anthropomorphic attitude remains the model also of the DCFR and its progeny. It is accompanied by an uncritical acceptance of the old civil law codification model, a lack of interest in methodology, and an absence of any serious empirical research. In the European positivist tradition, the intellectual system is all, by definition reflects reality, provides the correct answers if properly applied, is just, promotes social peace and is efficient per definition, and cannot be questioned. It is the law. Facts must conform and are otherwise irrelevant.

1.6.13. The 2011 EU Draft Regulation on a Common European Sales Law (CESL) In the meantime, little suggests that diversity of private law is an important impediment to trade in the EU although moving away from present perceptions in business could be a great help. It is, however, a fallacy to think that especially SMEs would trade much more cross-border if there was uniform sales law. Tax, regulation, language and other impediments such as lack of physical facilities and credit risk of distant clients are much more likely to limit them. In any event, most SMEs do not want a larger radius for their activities as it would expose them to far greater risk. They are small because they are profitable in that way. International adventure in order to grow larger is seldom in their best interest. If, nevertheless, they wish to make the jump, private law variety will seldom be their major concern or problem and a uniform sales law of the limited type, as now proposed, whatever its merits, would do very little for them in the bigger picture of different laws. A partial codification may in fact create more trouble in determining the alternatives. Opt-in versions would require more technical advice; costs would increase. It has already been said that in major areas of sales, especially in the property aspects, there will not be a uniform law even after these EU initiatives. That would also very much concern the issue of the use of these assets as security for payment as well as transactional and payment finality. Again, the most important aspects of a sale therefore remain uncovered and SMEs would still have to make many enquiries. Thus transaction costs might be increased. This being said, it was already admitted that it is not wrong to consider the question of transaction costs for dealings within the larger EU area. It is a fact that different laws and the traditional private international or conflicts of laws approaches split the international flows often in unsuspecting ways also in the EU, and this needs to concern us but quite apart from the issues of quality and methodology, the present EU approach is not going to reduce these problems, only the modern lex mercatoria approach with its multiple sources of law and relationship thinking does. It may well be that better insights may eventually recommend an EU approach in this area, but we are not there and if legislation were going to help it will have to be much more along the UCC approach than civil law codification. In October 2011, the EU Commission nevertheless came up with a DCFR carve-out in the area of the sale of goods, in the form of a draft Regulation concerning cross-border sales, the substance of the proposal being derived from the Expert Group text discussed in the previous section. That was the CESL. In its introduction, the EU Commission talked about billions of euros lost in trade between Member States because of the differences in private law. This is delusional and a gross over-sell to support a jurisdiction in this area that the EU may not sufficiently have under Article 114 TFEU. Similar fantasies surfaced in arguing that consumers do not deal cross-border because they do not know the legal regime. The simple fact is that no consumer in whatever country ever knows it. In a free market, it has never stopped anyone from transborder shopping if the

184 Volume 3: General price is better on the other side but most consumers do not make daily or weekly shopping trips in other Member States, if only because of the extra transportation costs and bother. The text of the Regulation itself was short with 16 Articles mainly dealing with definitions, the scope and field of application, and the future review of the proposed Regulation. It was preceded by a Preamble of 37 indents, and followed by two Annexes: one concerning the details of the sales law itself (186 Articles and two short Appendices), and the other concerning a standard information form, summarising the key consumer protections. The reference to the CESL normally means a reference to the Appendix text, but that was not the entire picture. Under Article 1.1 of the draft Regulation, the scope and field of application of the Regulation was confined in several ways. It concerns here: (a) transactions for the sale of goods, supply of digital content or related services as defined in Article 2(j), (k) and (m), other mixed-purpose contracts being excluded as are all contracts that defer payments for consumers (Article 6), (b) these transactions being cross-border in the EU as defined in Article 4(2) and (3),330 which ties in with the limited jurisdiction the Commission claims in this area of private law formation under Article 114 TFEU, (c) the parties to the transaction having agreed to the application of the CESL Articles 3 and 8, which agreement in the case of a contract with a consumer must be explicit (Article 8(2)), meaning that a reference in standard terms is not sufficient. Article 7 further stated that the CESL could be used only if the seller of the goods or supplier of digital content is a trader, while the sale, or digital equipment and related services contracts must be concluded between traders or a trader and consumer (Article 4). A trader is here someone acting in its trade, business, craft, or profession (Article 2(e)); a consumer is any natural person acting outside of them (Article 2(f)). If all parties are traders, there must be at least one SME, which means someone employing fewer than 250 people, having a turnover not exceeding EUR 50 million equivalent (or a balance sheet total not exceeding EUR 43 million equivalent). It may thus be seen that the CESL did not apply when all parties are consumers or when the sales are between professionals who are of larger size. The latter are covered by the Vienna Convention if parties come from ratifying states, but there is a twist: SMEs would also come under the Vienna Convention and the CESL choice would then have to be construed for them as an opt-out from the Vienna Convention under its Article 6. It was said earlier that dealings between professionals are often repeat business and longer-term contracts for the supply of commodities or semi-finish products, not infrequently cross-border. The sales contract with consumers is normally of a different nature and usually concerns only the sale of one asset, paid for immediately so that the contract is promptly terminated except for guarantees of quality and service if any, and mostly domestic. The latter situation seemed to remain essentially the perspective of the CESL but it is mainly in duration contracts that most legal problems arise and they may easily surface in the business between a trader and smaller SME, either as seller or buyer. Here again, the CESL appears not to make the proper distinctions. It would have been better and simpler to limit itself to these consumer sales only. That proved essentially the focus as the further feature of CESL was that contracts between traders and consumers were subject to a comprehensive set of consumer protections 330 The definition of a cross-border contract under Art 4 is different for contracts between traders and contracts between a trader and a consumer. In the former, only one party needs to have its habitual residence in the EU, in the latter, the contract is cross-border if the address of the consumer, or the delivery or billing address are in a country other than that of the trader while at least one of these countries must be in the EU.

Volume 3: General 185 (Article 1(3)). The agreement of the consumer to the CESL meant, however, that the consumer was deemed to lose any better protection of its home state, which, under Article 6(2) of the Rome I Regulation, would otherwise be guaranteed. While an agreement to the contrary is not valid under the Rome I Regulation, it was considered valid if the CESL were chosen in which respect the Regulation could therefore have been seen as an amendment to Rome I. More important may be that the CESL adhered to the fiction that it was still national law, see Preamble 9, and that opting for it was therefore not a choice of (another) law under Rome I (Article 2, subject to its limitations in consumer dealings under Article 6)).331 It subsequently assumed that Rome I was not amended by it—Preambles 10–12—especially by invoking the lack of any conflict of laws after an opt-in, but the consequence was all the same the loss of the benefit of Article 6(2) of the Rome I Regulation.332 There was here a degree of legal sophistry that never convinced. The consequence would indeed have been a kind of domestication of international sales law, made ready for consumers and SMEs in their cross-border activity within the EU, still with a different law, however, for completely domestic sales, while the proprietary consequences also remained determined by local laws. Most importantly, the cross-border sales activity, even within the EU, presents a different world, traditionally intertwined with other important arrangements in terms of shipping documents, payment, transportation and insurance. These common arrangements were here largely ignored although Articles 93 and 94 dealt with some core ideas.333 They are at least in part covered by EU Directive 2011/83/EU for dealings between professionals and consumers (see its Preamble 27), which Directive is therefore probably more important in the specific crossborder aspects of these sales to which EU jurisdiction is confined. It is only to show that there may be other and more effective ways properly to deal with true consumer concerns in this area. On the other hand, the introduction of the concept of trader, SME and consumer may have suggested the introduction of a form of relationship thinking in the law of sales in Europe, a key concept for contract law overall in this book. But this is deceptive. It has already been said before that there was here a double dip. Indeed, some special consumer protections were introduced and summarised in Annex 2 in terms of rights before signing of the contract, rights after signing of the contract, and what can be done when products are faulty or not delivered as agreed, while there was also the protection against unfair contract terms, but the general part of contract law itself had followed consumer law. The fact that the project was to be limited to consumer sales (B2C) and to those B2B sales involving small SMEs could have made this more tenable but it was a political choice and not the product of any fundamental insight that sets professional contracts apart as a matter of 331 See for these problems more particularly HP Mansel, ‘Der Verordnungsvorschlag für ein gemeinsames Europäisches Kaufrecht’ (2012) 28 Wert-papier-Mitteilungen. 332 More generally, private international law specialists may object to this approach. It ignores the normal conflicts rule, which first appoints a law of a Member State and only subsequently determines the applicable law on the basis of what this Member State may have agreed to in Conventions or EU Regulations. It is nevertheless also the CISG approach (Art 1), see the comment in Vol 1, s 2.3.1. There is a further complication, in that the opt-in is itself contractual but not covered by CESL and therefore still subject to ordinary conflict of laws notions applying in each relevant Member State, see also C Harvey and M Schillig, ‘Conclusion of Contract’ in S Vogenauer and G Dannemann (eds), The Common European Sales Law in Context: Interactions with English and German Law (Oxford, 2013). See further also H Eidenmueller, ‘What can be wrong with an Option? An optional European Sales Law as Regulatory Tool’, SSRN.com. Here the market test in respect of options of this nature is stressed and its defects in terms of regulatory competition explained. There is also attention to the lack of substantive quality and to the danger that the project will be made appealing regardless and prove to be very harmful. 333 See further also M Heidemann, Does International Trade Need a Doctrine of Transnational Law? Some Thoughts at the Launch of a European Contract Law (Heidelberg, 2012) 2.4.1.

186 Volume 3: General relationship thinking. As dealings between traders (except with small SMEs) were outside the CESL, the more objective modern lex mercatoria development in Europe would not appear to have been greatly hindered by this project, as it would be by the DCFR, but it was not a good signal. It remains a fact that this sales carve-out from the DCFR was seen by many as a first step in the latter’s progress especially towards a general part of contract law for all, DCFR style, which, it has been submitted all along, would be severely detrimental to the further development of professional law in the EU. In this connection, it may well be remembered that the objective was always political. Nothing of this was ever a practical initiative. This being the case, the modest quality of the effort, its parochial methodology, and its dangers for participants became entirely secondary and in the minds of its promoters probably even irrelevant. As already mentioned several times, the draft regulation concerning CESL received little support and was withdrawn in December 2014. Further texts concentrating on e-commerce were promised instead but have not so far emerged. It is likely that the entire DCFR has been put on the backburner and is discredited, but it is not beyond all possibilities that it may be revived after Brexit in the mistaken belief that projects of this nature promote cross-border dealings within the EU.

Part II Contracts for the International Sale of Goods 2.1. The Main Aspects of the International Sale of Goods 2.1.1. Introduction One of the most important contracts in international commerce remains undoubtedly the international sale of goods, that is to say the contract for the sale of tangible movable assets or chattels, which is the meaning of ‘goods’ in common law, although the concept of what a good is, has become less clear and has become composite: an amalgam of physical movable assets, services, information, software and technology. A sale, whether domestic or international, remains the principal means of effecting a transfer of ownership or title in such chattels even if the definition needs expansion in modern manufacturing and distribution chains, covering also classes of assets in transformation. The transfer itself may also be achieved in other ways, for example through an exchange (barter) or a gift. The price or monetary element is here the main distinguishing feature. Indeed, in the case of the transfer of title through a sale, one party, the seller or vendor, normally promises in the sales agreement to deliver a specific good or now more likely an amalgam or a quantity of generic goods to the other party, the buyer, for an agreed price. Agreement on the asset being sold and its definition and quality, and on quantity in the case of commoditised products and on price and payment is therefore the minimum one expects to find in a sales agreement. Transportation and insurance may be other important issues. These are commonly the contractual aspect. Further formalities may follow to achieve the proprietary aspects of the sale in terms of title transfer, which will be mainly dealt with in the next Volume. For international sales, with which we shall be here mostly concerned, the minimum contractual requirements for the formation of a sales agreement are confirmed in Article 14ff of the 1980 Vienna Convention on the International Sale of Goods or CISG, which is a leading text covering international sales, to be discussed more fully below in section 2.3 and which has already been mentioned several times before.334 It is limited to international sales (as defined) but is only a partial codification concerning itself mainly with the contractual aspects of quality, quantity, price and payment, place and time of delivery, passing of risk, default, force majeure (exemption) and remedies, therefore mostly to sales aspects that are normally covered in the sales contract itself (see also the list in Article 19(3)). The CISG concerns itself therefore with default

334 The Vienna Convention referred to in this context is the UN Convention on Contracts for the International Sale of Goods concluded in Vienna under the auspices of the United Nations Commission on International Trade Law (UNCITRAL) on 11 April 1980, also referred to as the CISG. An authoritative commentary is by J Honnold, Uniform Law for International Sales, 4th edn with HM Flechtner (Deventer, 2009).

188 Volume 3: Contracts for the International Sale of Goods rules or directory law, therefore with issues which are normally dealt with by the parties in their contract, at least if written. This written form is to be expected when the deal is of some size as will normally be the case in international sales. Given, however, the fact that even in this area of default rules, the Convention is only a partial codification, its importance should not be overstated. As we have seen the commercial practice commonly opts out of the Convention because it was never asked for by them and remained largely an intellectual effort based on nineteenthcentury anthropomorphic insights in what deals of this nature legally mean, and it showed on the whole a consumer mentality to risk distribution and management. It followed that the text is still addressing the sale of individualised final products, properly set aside, and was not geared to the sale of classes of assets in transformation from commodity to end product, therefore to bulk transfers of future assets in repeat transactions extending over long periods. There was no connect either with transportation and insurance issues which are so important in international sales, the CISG still being based on the delivery (of individualised, mainly consumer assets) ex works. What probably more fundamentally undermined its relevance was that the CISG did not cover most aspects that cannot be so easily covered in the contract itself but that are matters of objective law or of the contractual legal infrastructure, such as the binding force of the agreement and its defects or defences (in cases of mistake and the like) or other aspects of validity (Article 4) and any disclosure, (re)negotiation, and special performance duties (of care). Again, it did not deal with the transfer of title and the important issue of finality of the transaction and payment either. Coverage of all these areas would have made the Convention much more significant. Here the UNIDROIT Principles and European Contract Law Principles (PECL or ‘European Principles’) for the contractual aspects and now also the DCFR even in respect of title transfer could acquire additional significance, the latter two in Europe perhaps in terms of general principle or even customary law within the modern lex mercatoria. In section 1.6.13, reference was also made in this connection to the 2011 EU Draft Regulation on a Common European Sales Law (CESL). It was a carve-out from the DCFR and dealt with many aspects of what is commonly considered the general part of contract, but unlike the DCFR, it did not deal with the transfer of title and transactional and payment finality either and thus reverted to the limited approach of the CISG as partial codification only, albeit with a fuller contractual regime. For reasons discussed in section 1.6.13, it did not convince and was withdrawn in December 2014. The Vienna Convention also covers some aspects of the general law of contract as applied to sales, in particular aspects of contract formation like offer and acceptance (referred to as ‘formation’ in Part II), an area of the law that concerns the contractual infrastructure and therefore does not merely embody default rules or matters at the free disposition of the parties barring their total exclusion of the Convention. Coverage of these aspects was criticised from early on and led in 1939 to a split into two texts, formation issues being separated out in what became the 1964 Hague Conventions as precursors of the Vienna Convention, which brought them together again. As noted before, the language used still suggests a subjective will- and intent-based approach (see Article 8), in the nineteenth century anthropomorphic tradition which we now associate with consumer law and may, it was submitted, be inappropriate for professional dealings. It is in its subjectivity, also maintained in the notion of fundamental breach and force majeure as we shall see which further contributed to the lack of confidence in the text among practitioners, not only in England, the UK never having been a signatory. This formation regime of the CISG became nevertheless much of a standard and was followed, not only in newer German (2002) and French (2016) contract law amendments, but also in the UNIDROIT, European Contract Principles (PECL), and the DCFR as model for the formation of all contracts, both for consumers

Volume 3: Contracts for the International Sale of Goods 189 and professionals. From there it entered into the text of the EU Expert Group in 2011 and the CESL project of the same year: see sections 1.6.12 and 1.6.13 above. In the CESL, this approach—in the Vienna Convention only meant for professional dealings—was largely used for cross-border consumer sales, professional sales being covered only if one of the parties was an SME. This followed the civil law unitary tradition, which does not sufficiently distinguish between professional and other dealings in its approach to contracting and lacked relationship thinking in its core as we have seen throughout this Volume. But it could also be argued that since the CISG had remained anthropomorphic in its approach even in professional dealings, the shift to consumer law was easy to achieve and that this approach might work there better. Again, the Vienna Convention does not cover any proprietary consequences of the sale (Article 4) nor the issue of transactional and payment finality, especially important in international sales as noted before. The passing of title itself, the manner in which this is done, the moment at which the buyer becomes the new owner, and the position of bona fide purchasers upon delivery in the case of a defective contract or a lack of capacity in the seller, are therefore not covered by the Convention. Neither were they in the CESL and earlier in the text of the EU Expert Group. They are covered in the DCFR, which aims at full codification and then also deals with title transfer more generally in its Book VIII on property law as we shall see in Volume 4, section 1.11. Many domestic sales laws, especially in countries that require delivery for the title transfer to be complete, do not deal with these aspects in the context of the law of sales either. This may require some further explanation. As the object of a sales agreement is the transfer of ownership or title, it would not be illogical to expect parties to cover this aspect in the contract. It is certainly normal for them to specify the time and place of physical delivery. The title transfer itself is, however, a proprietary issue affecting third parties who will have to respect it in order to make it effective. The law is not likely to leave this aspect—therefore the questions whether, how and when the ownership transfers—to the parties to the sales agreement alone. Again, this important issue (as well as the protection of bona fide purchasers) will be discussed more fully in Volume 4. This Volume will mainly deal with the contractual aspects of the sale of goods, but suffice it to say that countries like Germany and the Netherlands, following Roman law in this respect, require besides a sales agreement also delivery of possession for ownership to pass, therefore in principle a certain form and/or some measure of publicity to achieve the transfer of title. Without it, ownership cannot transfer in these countries whatever the contract may say in this regard. Creating proprietary rights in the sense of acknowledging a new owner is not truly a matter of party autonomy but rather a matter of objective law. The law of other countries such as France (at least for the transfer of title in goods) and notably the traditional common law, at least of England, is here less formal, does not require delivery for the transfer of chattels, and allows parties to at least determine the moment of the transfer freely. Under these laws, the timing of title transfer is as a rule the moment of the conclusion of the sales contract (although it may be deferred by common agreement). This might suggest that the title transfer is a contractual matter, but this is misleading. At least in France, and in countries like Italy following its example in this respect, title transfers here only because the objective property law so determines and there is no true party autonomy in the creation of proprietary rights in this manner either. Thus even in countries such as France, where title transfers upon conclusion of the sales agreement, the proprietary consequences of the sale do not strictly speaking flow from the sales agreement itself. Again, whether or not the transfer of title follows is a matter of the objective law, no less so than in countries requiring delivery even if the moment of transfer of title is a different one.

190 Volume 3: Contracts for the International Sale of Goods So are the formalities of the transfer, no formal act of delivery being required, although it is sometimes still said that, even in France and in countries following its lead, title transfer is equally dependent on delivery but that it is merely constructive (constituto possessorio, see for this notion Volume 4, section 1.5.2). As we shall see in Volume 4, section 1.4, common law is here more flexible and also leaves the modalities of the title transfer (therefore how it is done) more to the parties. This is probably the result of the fact that the common law was never prone to clear distinctions in these matters, therefore between contract and property law or too much critical analysis. Probably more importantly, the common law is comfortable with a larger degree of party autonomy in proprietary matters, especially in equity as we have seen in Volume 1, section 1.1.6 and as will be revisited in Volume 4, sections 1.3.8 and 1.10 below. These differences in the law of title transfer in the various countries were one reason why the 1980 Vienna Convention explicitly excluded the proprietary aspects of the sale from its scope (Article 4(2)), following in this respect the example of the 1964 Hague Sales Conventions that preceded it, so that, short of transnationalisation, the domestic law resulting in international cases from the applicable private international law rules still determines the proprietary and finality aspects of an international sales transaction. These rules normally refer to the lex situs, that is the law of the location of the assets, which may create problems in international sales when the contract requires transportation of the goods cross-border, which will often be the case. The laws of the country of origin and of the country of destination might then both qualify as applicable and, short of legal transnationalisation, a choice will have to be made under the objective (private international) law. In fact, the situation is likely to be more complicated and there may in such cases be some adjustment of the law of origin in the country of destination, particularly important in the case of security interests or other asset back-up in financial transactions, which may otherwise be incompatible and dysfunctional in the destination country, see Volume 4, section 1.8.3. Indeed, transnationalisation of the ownership concept in movables, if commoditised and meant to trade cross-border or serve as asset back-up in international financings, may well provide here a new angle and better way forward. This may increasingly result in transnationalised ownership and proprietary concepts no longer affected by domestic rules, as happened earlier with negotiable instruments, in modern times especially manifested in the Eurobond, see Volume 1, section 3.2.3. The ultimate objective would be the creation and operation of floating charges in the international commercial flows. These aspects will be more fully discussed in Volume 4, section 1.8 and will be summarised in section 2.1.7 below. As will be shown, they are also of importance in international finance, and may then take the form of (conditional or temporary) sales such as repo financing and finance leasing, leading to the international transfer of goods acquiring here a different function and not remaining merely a mercantile facility. This is an important evolution, not considered in the CISG or CESL either, and will be discussed more extensively in Volume 5. As far as the more traditional mercantile sales contract itself is concerned, both domestically and internationally, it has already been said that the quantity and price are the minimum terms one expects the parties to agree, but the agreement is also likely to cover other aspects of the sale and notably to describe the quality of the goods with or without some warranties. The contract may further specify the time and place of the passing of the risk in terms of liability for unavoidable loss or damage occurring before completion of the transfer of possession or conceivably even payment. Then there are the price, time, place, currency and manner of the payment. Commonly, the sales contract will also detail some excuses, such as force majeure, frustration or economic impossibility or hardship, the latter especially where the sale is connected with a long-term supply contract as is common in the construction and supply industries, and may need adjustment in the

Volume 3: Contracts for the International Sale of Goods 191 case of unforeseen circumstances (see also section 1.4.7 above). This may acquire special, more restricted, features in professional dealings, which international sales normally are, as we have also seen in sections 1.3.11 and 1.3.14 above. The contract may also include some special provisions or (sales price) protections in the case of default—it may thus make provisions for termination of the contract upon a substantial default (or fundamental breach in the terms of Article 25 of the Vienna Convention) and in the case of non-payment by the buyer it may attempt to provide for an automatic return of title to the seller if under applicable law it has already passed to the buyer. Reservation of title will reinforce this remedy in the nature of a sales price protection device. Again, these are proprietary issues not dealt with in the Vienna Convention. There may also be a liquidated damages clause, particularly if damages are difficult to assess—a method usually upheld if the agreed amounts do not prove disproportionate. They are not covered in the Vienna Convention either.

2.1.2. The Minimum Requirements of the Sales Agreement: Special Features and Risks of International Sales As we have seen, it is not uncommon to introduce special description and protection clauses into the international sales contract, often also the moment of delivery and title transfer, sometimes even to secure a return of title (in reservation of title or rescission clauses) and consequently a return of the asset upon non-payment, or to define the damages in the case of default or reduce judicial involvement in the early termination or adjustment of the agreement in other ways. This should be seen against a background in which the minimum contractual terms necessary for the mercantile sales agreement to be binding were steadily reduced. As mentioned in the previous section, they now centre on the identification and quantity of the goods sold, the price, and (at least) the intention and duty to transfer ownership, as confirmed for international sales in Article 14 of the Vienna Convention. Yet in modern sales agreements, at least those of the international type, even the price need no longer be fully settled, see Article 55 of the Vienna Convention,335 while the intention to transfer ownership may be considered implied. Absence of these and other obvious sales terms, such as a description of quality, does not then render the contract void, and these terms may in such cases be derived from objective, often market-related, ‘normal’ or customary standards to fill in the gaps, which standards may be further elaborated in accepted practices. They are then considered supplementary or directory in nature and apply only if the parties have made no further arrangements themselves. In international sales in terms of the modern lex mercatoria as presented in this book, fundamental and general legal principles as well as custom and practices of the relevant trade would also enter the determination of these standards within the hierarchy of norms in which party autonomy and domestic laws equally have their place in the manner explained more fully in Volume 1, sections 1.4.14 and 3.1.2.

335 Even under French law, according to which the price had to be determined by the parties (Art 1591 CC) and could not be left to be determined by one of the parties, which would have rendered the contract subject to a potestative condition, as such a cause for the invalidity of the contract, Art 1174 CC, an objective price standard may now be applied to the relevant party’s decision, which could allow the contract still to be implemented: see Cour de Cass, 1 Dec 1995 [1996] JCP 22.565.

192 Volume 3: Contracts for the International Sale of Goods These standards may also support the notion that sellers ordinarily sell from their place of business or manufacturing plant (ex works) at which point title (upon proper delivery in countries which retain this requirement for title transfer) and more particularly the risk, are likely to pass. As a consequence, at least in domestic sales, no provision on the division of labour and cost in terms of organising transportation and insurance is normally found in the law of sales, which means that the buyer usually makes its own arrangements, except perhaps in larger countries where substantial distances may have to be covered. However, this is more likely to be different in international sales, which, when properly understood, acquire here distinctive features as transportation and insurance become substantive issues while additional risks, organisational problems, and payment complications may also be encountered, so that this type of international sales contract can no longer be seen in isolation but must be considered part of a whole cluster of arrangements without which an international sale cannot be truly meaningful, safe, or effective. It makes it more difficult to consider the international sale on a stand-alone basis (as is usually possible for sales domestically). It is a serious issue in respect of the CISG which still is based on and supports a domestic ‘ex works’ approach. There may be further complications, such as the formalities to attend to at borders (and the delays they may create and attendant risks to quality), and other special risks, such as those connected with proper custody and care and the use of third parties in this connection. It all suggests a more elaborate scenario to be set out between the parties with clear instructions on what each of them will do or arrange to be done by others, aided, if necessary, by their own dispute-settlement arrangements or courts.336 These details cannot habitually be left to greater informality and a co-operative spirit that may prevail in the performance phase between parties to a sale purely domestically. To these may be added the likelihood of sharper conflicts in international sales because of the often-greater value of the merchandise, the higher cost of handling, and extra time it takes to complete the transaction while parties may be less well known to each other and at any rate likely to be in different jurisdictions. As a consequence, the international sales contract is apt not only to be encapsulated in a number of ancillary arrangements in respect of transport, insurance and payment, but is often also more formal, precise and comprehensive and likely to be more fully documented and specific, also on dispute resolution techniques in which especially a choice of a domestic forum and the applicable law, or rather international arbitration may figure. In sum, the most important risks implicit in international sales chiefly lie with the increased difficulties in delivery (transport risk), the protection of the goods and their continuing good quality (quality risk), or payment (credit risk). There may also be problems for the parties in the arrangement details on the spot (completion or management risk) and access to the judicial system and clarity concerning the applicable rules in the case of difficulties (legal risk) in view of the differences in jurisdiction and the greater uncertainties as to the applicable law and its meaning. This is especially the case now that application in international dealings of a national law through traditional conflict of laws rules may no longer be sufficiently credible in view of the fact that much of the sale may be virtual and ever more difficult to locate. In any event, international sales as part of supply and distribution chains operate in different countries so that, in the older conflict of laws approach, in the proprietary aspects different laws of different countries may 336 It was noted in s 1.6.13 above that the EU sales carve-out from the DCFR in the CESL considered the sale of goods in the EU as a domestic sale at that level, in principle the same for consumers and professionals, which conforms to the civil law unitary tradition, but it also ignores the special nature of cross-border sales within the EU. The result is that we would have within the EU domestic sales and cross-border sales, the latter now perceived as another type of domestic sale without consideration therefore of the special incidents and concerns connected with cross-border activity.

Volume 3: Contracts for the International Sale of Goods 193 apply to different parts of the transaction, with further differences in the laws applying to the contractual, proprietary and enforcement aspects. It was argued all along that it may no longer make sense legally to break international transactions up in domestic pieces in the hope that the different local laws that become so applicable per piece still make for a rational legal regime for the transaction as a whole. Transnational law in the form of the modern lex mercatoria may then start to figure as a matter of efficiency. It is a question of necessity to retain rationality and efficiency, not a matter of choice or preference any longer. Traditionally, parties were also exposed to tariffs or other import or even export restrictions as already mentioned also. They have become less important after the various GATT (General Agreement on Tariffs and Trade) liberalisation rounds; see Volume 6, section 2.2. More important are different regulatory standards, most obvious in health and safety, which may inhibit transborder movement, in the EU largely overcome through the operation of and harmonisation efforts in the internal market. Parties remain also exposed to potential upheaval in the other party’s country or in those through which the goods must pass (political risk), which may leave the seller or sometimes also the buyer largely unprotected with regard to proper delivery and payment. Another kind of political risk derives from subsequent governmental interference in the deal, the most immediate being the refusal of foreign currency to the buyer in order to make the required payment under the contract (currency and country risk). Some of these events when occurring may qualify as a force majeure excuse although not necessarily all—it depends on the definition of this concept under applicable law or in the contract and much may be known or foreseeable—but even that does not solve all problems, especially the immediate practical problems when the goods are already in transit. They need to be managed. If there is a delay in payment as a consequence of these complications, there may also be extra currency risk for a party who contracted in a foreign currency. This highlights the illiquidity risk attaching to goods in transit, which means that they must be financed and, if there are complications, may tie up capital longer than anticipated (funding or liquidity risk), subjecting them at the same time to the effects of adverse price fluctuations (price and currency risk).337 It has already been noted that the CESL, although largely made for cross-border consumer and small business sales within the EU, did not take these special issues and risks much into account either, but this different environment was also not reflected in the Vienna Convention. In particular, its definition of the internationality of sales agreements is not directly related to these different needs and risks, but merely to the parties’ residing in different countries (Article 1). It has already been noted that under the Convention international sales continued to be considered sales ‘ex works’ if nothing else is intimated by the parties in the contract (Article 31(c)). It follows that payment remains in principle also required at the place of the seller upon delivery unless otherwise agreed so that sales credit and payment in the country of the buyer continue to be considered exceptional features (Articles 57 and 58). Although the Vienna Convention focused on international sales, curiously, this is all still in the domestic sales law and consumer tradition. It may well be considered to reflect a narrower and perhaps less realistic notion or model of an international sale as already suggested. As previously mentioned, it is in any event only a partial codification, mainly concerned with issues that professional parties will normally settle among themselves in their contract text. Another aspect already noted is that it is not much aware of modern contract theory either, the result being an intent- and will-based anthropomorphic attitude to contracting, compounded by subjective notions of fundamental breach and force majeure

337 See n 305 above for a quick guide to the corresponding and supplementary provisions in the UNIDROIT and European Principles, DCFR and Art 2 UCC.

194 Volume 3: Contracts for the International Sale of Goods and the unilateral right of the buyer to reduce the price (Articles 25, 79 and 50). Again, it suggests a consumer law approach for professionals. Altogether, this may explain the limited impact of the Convention and the well-known lack of confidence among practitioners in what it was trying to achieve. Although ratified by many countries, but notably not by the UK and Portugal, the application of the Vienna Convention is commonly excluded by professional parties. Although frequently presented as a major achievement, when properly considered it does not represent the progress that was expected from it and was in many respects a missed opportunity and disappointment. The project was always too academic and even then, not very good. Much of it is conceptually more than 80 years old!

2.1.3. Legal Risk in International Sales Whatever the basic approach, attitudes and shortcomings of the Vienna Convention or CISG, it follows from the foregoing that parties seeking to deal with the various needs and special risks in international sales need to allocate them in the contract as best they can. For lawyers, legal risk is here of prime concern, that is to say that, especially at the time of the conclusion of the contract, there is the need and opportunity for them to divide the tasks and provide a roadmap for performance and a risk management scenario that is legally as safe as possible, certainly in sales contracts of longer duration. This is necessary to minimise misunderstandings between the parties on the interpretation, but also to gain some insight into the types of legal issues that may arise later and their possible solutions, either under the terms of the contract, under domestic default rules (including treaty law like the CISG) or under transnational law in terms of the modern law merchant or lex mercatoria. As noted, there are also mandatory laws, whether of public or private nature, which are not at the free disposition of the parties and cannot therefore be avoided by the parties through contractual disposition or a choice of law clause or even by the modern law merchant, although they may become part of it through fundamental principle, mandatory custom or general principle elaborating on it. They largely concern the key proprietary, finality, and regulatory aspects of the transaction as well as the contractual infrastructure mainly dealing with validity and capacity. There are also the non-consensual pre-contractual, contractual and post-contractual duties to consider. They may not be capable of variation by the parties either, although lawyers will explain their impact and may structure around them, increasingly using the sources of law prevailing in the modern lex mercatoria also aware of the gravitation of public policy from national to international minimum standards. Legal risk then also highlights the concern for the capacity and authority of the parties to contract and from the outset especially for the validity and legality of their agreement and the formalities and finality of the transaction. Besides a legal preoccupation with the ancillary arrangements, especially transportation, insurance, payment, and taxation, as already mentioned, there will then also be concern with existing or even future import and export restrictions, tariffs, or public standards in respect of quality, safety and environment, the impact or likelihood of which (in terms of the effect of mandatory domestic rules on international transactions) needs to be assessed (or captured in a force majeure or change of circumstances clause). Again, it concerns especially the impact of public policy and signifies political risk or the risk of further governmental intervention. Its cost may then also be redistributed, at least to the extent some of this can be foreseen. In that sense political and legal risk are closely related. The contract may even make the continued validity of the agreement dependent on the absence of such intervention. Nevertheless, the same governmental action may seek to abrogate such clauses, the effect of which on the international transaction then also needs to be established or predicted.

Volume 3: Contracts for the International Sale of Goods 195 In case parties should not be able to clear any differences or complications that may arise subsequently, this raises the question of the eventual access to the judicial process, therefore questions of jurisdiction, available remedies, and the applicable law. It is another aspect of legal risk. Here the contract may steer the parties into the direction of certain courts or international arbitration tribunals and their procedures and they may elect the application of a chosen law to the extent the issues are at their free disposition, which law might then also be the modern lex mercatoria. Even if it is not, it was submitted that national laws so chosen must still be put in the context and hierarchy of all transnational sources of law within the modern lex mercatoria, that now operate in international business world or more properly in the modern transnational commercial and financial legal order. This was much the subject of the discussion in Volume 1. Thus, in an international context, the relevance of foreign or transnational private law, the level of knowledge thereof as well as the legal impact of subsequent foreign governmental intervention in terms of new legislation of a private or public law or regulatory nature or other action, and the effect of foreign adjudicatory jurisdiction need also to be considered in an international sale. There may even be the issue of their retroactive effect or administrative legality and proportionality. Another aspect of this is the measures that may be taken in advance to avoid or minimise any adverse effect by structuring the deal differently, for example directing it through different countries or including rebalancing or termination clauses in the agreement. Again, this all goes well beyond the Vienna Convention and its more limited ambition. It has already been said that in truth it was never much more than a variation on the domestic sales approach with little obvious awareness of the intricate nature of the international sale and its many ancillary problems and arrangements, including the concern for legal risk in a more modern world where the international flows are now larger than the GDPs of the largest countries or EU as a whole. Even where the Convention applies, in terms of clarification much must therefore still be done by writing full agreements setting out as much of the deal as possible. This also avoids reliance on unknown or unfamiliar directory or default rules of various legal systems that may otherwise become applicable to supplement the Vienna Convention under its Article 7. Standardisation of international contract types in the area of sales may help here too, but, as has been said earlier, especially in the capacity and validity aspects of the contract, its proprietary, finality, and public policy effects, there is a limit to party autonomy, also in professional dealings, and to what the parties may agree in a binding manner in this way. Long-form contracts in the common law style are now normal everywhere in international commerce for these reasons. Yet they cannot foresee every complication either—in fact, they often foresee and contain a list of complications that have arisen in other types of situations handled by the law firms in charge of the final documentation, sometimes without much likely relevance to the present transaction. This historical burden often makes these agreements even longer and over-complex, while they still cannot see into the future and cover every eventuality. Nevertheless, as risk management tools, they are often better than the short forms which prevailed in the continental European tradition, now increasingly abandoned in international transactions there also, although again it leaves everywhere the question of mandatory laws of a public and private law nature, whose application cannot be avoided by inserting other rules, although their effects might still be redistributed between the parties and customary law may also help. To provide clarity in the legal issues that remain at the free disposition of the parties, in these contracts a choice of a domestic law and choice of forum clause are still common. In Volume 1, section 1.1.7, it has already been said that the certainty that may be expected from choosing some domestic law could be of low quality and such a choice could therefore be increasingly undesirable in its consequences as domestic law of whatever choice is seldom written for international

196 Volume 3: Contracts for the International Sale of Goods transactions. In any event, the other sources of law in the modern lex mercatoria may be higher and, in the approach of this book, will then prevail, domestic laws thus becoming the residual rule, which even then figures as part of the transnational law meaning that it is shorn off its typical domestic features, see again the discussion in Volume 1, section 1.4.14. This leaves unresolved the question of how far mandatory policy rules of other countries connected with the transaction may be avoided and such rules of the chosen system prevail. This is particularly relevant as these policy rules usually derive from the need to police certain deals for their conduct and effect in the country formulating such (regulatory) rules; they may have no relevance if executed elsewhere or in as far as these deals take place somewhere else: see for these problems more particularly Volume 1, sections 2.2.6–2.2.9.338 They may increasingly be replaced by transnational minimum standards, for example in competition law or environmental and financial regulation. There may now also be transnational standards against market abuse, money laundering, tax evasion, and corruption, potentially rendering transnational contracts invalid. It was already said before that even to the extent international transactions come on shore in conduct or effect in a particular country, globalisation may increasingly mean that local standards may give way to transnationalised minimum standards at least for countries who claim the benefits of globalisation at the same time. That is an issue that may favour international arbitration in particular, because of a greater neutrality than may be expected in local courts when it comes to balancing conflicting governmental and other public policy or public order considerations in international transactions as we have seen. Not only the choice of an applicable domestic law, but also the choice of a domestic forum is not without complications as it may result in jurisdiction in countries that have little relation with the case. Their courts may therefore not take it, and there may in any event be hardly any assets in that country so that recognition and execution of the resulting judgment elsewhere becomes necessary, leading to further proceedings and cost. Such a choice of forum may then prevent action in the most suitable forum from the point of view of the claimant. A contractual non-exclusive jurisdiction election clause may eliminate the danger of (a) the appointed court not taking the case as there may be others that are also competent, or of (b) another more suitable venue being excluded. The importance is to realise that applicable law and jurisdiction clauses may increase the risks in international transactions and must be considered with the greatest care, probably more so than is at present usually the case. Where no law is or can be chosen by the parties, traditional private international law rules still obtain in the absence of uniform law (such as the 1980 Vienna Convention, which, however, does not cover many areas of an international sale as we have seen). However, these conflicts rules, habitually only identify national laws, hardly ever written for international transactions, and may be increasingly artificial and uncertain themselves, another subject of Volume 1. They may also show great gaps. In fact, it has already been said that the preponderance of whatever domestic laws resulting under them may prove ever more objectionable in international transactions and may impose a certainty that is unsuitable and destructive, while the more proper law may not be a contractually chosen national law either in areas where parties still have that freedom

338 It has already been said repeatedly that domestic or foreign governmental action or interests when the execution of the contract is required outside its jurisdiction may have little impact, but as a matter of extraterritoriality of governmental policy this will remain a matter of appreciation by the competent court asked to rule on it as a question of comity or règles d’application immédiate, see Art 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations and in the US ss 401ff Restatement (Third) of Foreign Relations Law 1986. International arbitration panels will no less be forced to balance conflicting governmental interests and are probably better able than domestic courts to do so neutrally.

Volume 3: Contracts for the International Sale of Goods 197 but be the transnational lex mercatoria and its hierarchy of norms from different legal sources, including treaty law, even though also subject to higher principle and practice. Especially international commercial arbitrators may be more sensitive to these concepts when properly pleaded and an arbitration clause may make a great difference here. In any event, in terms of public policy in respect of conduct and effect on the territory of the relevant state claiming a governmental interest, usually in terms of regulation, traditional conflicts law had no good answer. Yet the lex mercatoria is deferential to such policies or governmental interests (see also Volume 1, section 1.5.6) and must respect the sovereign and its demands in its own territory, although as was already pointed out, international arbitrators may be more objective than national courts can be and may try to balance these interests if coming from different countries and conflicting in international transactions when determining the consequences for the relationship between the parties. The issue of whether transnational law or the new lex mercatoria itself can be chosen in areas at the free disposition of the parties, and what it means, was more fully discussed in Volume 1, sections 2.2.9 and 3.3.3 and such a choice is now increasingly accepted. As objectively applicable law, in international sales of commoditised products, it might even affect the title and its transfer as well as the issue of transactional and payment finality. Legal fragmentation and globalisation of markets do not go together and the markets themselves may no longer accept the former and enforce change while creating their own transnational legal frameworks. Indeed, it has been submitted all along that rather than looking for a particular domestic law to apply, in a globalised professional legal order, modern parties must learn to work with the modern law merchant or lex mercatoria instead, including its hierarchy of norms from different legal sources, among which international custom may figure large but also party autonomy. Domestic law thus becomes the residual rule. Again, this new law still implies a deferential attitude to domestic mandatory regulatory and public order considerations albeit that transnational minimum standard may increasingly supersede them in countries that are part of globalisation. Written legal opinions are now often required by the parties from their lawyers to assess these and other legal risks at the time of the conclusion of the contract. They normally address questions of legal capacity and the authority of the parties, the proper formation, validity and legality of their contract and in this connection also make an assessment of the applicable laws. In the more traditional mould, they still tend to break up the international transaction into domestic parts in the hope that these parts add up to some credible legal regime for the international transaction as a whole. These opinions may even pronounce on the effectiveness and risks of any choice of law, although especially the possibility of arbitrators applying the lex mercatoria as non-state law is often still ignored. In any event, the closer the legal risk comes to political risk, the more these legal opinions are likely to be tentative or inconclusive. But especially lack of understanding of the international scene and a continuing confinement to domestic legal orders, which are the only ones most lawyers know and still experience, may make these opinions a great deal less reliable than they should be, often now only too obvious in subsequent international arbitrations.

2.1.4. Special Arrangements to Cover the Risks of International Sales As has already been said, a consequence of the additional complications and risks in international sales is that specific arrangements will normally be made at the more practical level with carriers, warehouses, insurance companies, and bankers in terms of transportation, warehousing and safekeeping before or after transportation, insurance, funding, payment or related security or guarantees (such as letters of credit), while an easy facility to on-sell the goods may become very

198 Volume 3: Contracts for the International Sale of Goods valuable to reduce liquidity risk, which facility may be created through the issue of negotiable documents, most notably a bill of lading when goods are carried by sea. The international sales contract will be concerned with all these aspects in terms of (a) who will make the necessary arrangements, (b) who bears the costs, and (c) what else can be done in the circumstances to reduce risk or how best the risks can be shared in the balance of the contractual stipulations as by their very nature not all risks (for example legal risk) can always be insured against, which would in any event become very expensive. The key in all this is to appreciate that the various risks may be separately considered and dealt with in different ways according to their nature. This is now commonly called the unbundling of risks. It means that each of the parties will attempt to reduce its risks through these arrangements. Market conditions or practice and otherwise bargaining power will determine the success of either party if they mean to transfer the burden and cost, for example of transportation, insurance and payment protection, onto the other party. Indeed the objective law, either of a transnational or domestic nature, may not add much to this, although it usually deals with the passing of risk (unless parties want it otherwise) and it could conceivably also clarify the different trade terms as the UCC in the US does, and deal with the essence of letters of credit, or even introduce a force majeure or change of circumstance legal regime, redistributing the risk of the parties by law, which was found earlier to be less suitable in international professional dealings. This being said, under the contract, the risk of safe arrival and deterioration of the goods while in transit will normally remain with the seller until physical delivery (quality risk): see Articles 66ff of the Vienna Convention. It means that it will be the seller’s concern and cost to insure these, although the contract may always provide otherwise. For the transportation risk, the seller may be able to put this burden also on the buyer; it depends therefore on the sales contract who must make the transport arrangements and who pays, in which connection the best-known terms are CIF (cost insurance freight) or FOB (free on board): see more particularly section 2.3.9 below. The payment risk may be covered by modern bank guarantees, especially letters of credit, the cost of which are normally carried by the buyer who also makes the necessary arrangements (subject to the seller’s approval). The buyer may, however, try to have some of these costs discounted in the sales price. In this manner, the quality and transportation risks are likely to be separated from the payment or credit risk, especially under the terms of a letter of credit, under which payment is usually made in the country of the seller subject to the handing over of the documents (bill of lading if issued) only, therefore only to prove that the goods were properly shipped but not their safe and unspoiled arrival. Payment under a letter of credit thus supersedes for the time being the implied conditionality of all sales agreements under which conform delivery would be a normal condition of payment, but this immediate payment under a letter of credit is still subject to argument later and to possible litigation, which may lead to a return of the price in whole or in part. That does not, however, affect the paying bank under the letter of credit, which is reimbursed by the debtor separately if not prepaid, see more particularly the discussion in Volume 5, section 3.3. The letter of credit therefore has, in the first instance, the effect of transferring the payment or credit risk of the buyer to a bank that is likely to have a better credit standing and has no defences connected with the sale. Thus, the bank will make the payment regardless of the quality of the goods and their safe arrival. It receives a fee for doing so and will have an arrangement for reimbursement with the buyer, but the payment to the seller will not be conditional on either. The letter of credit derives its true importance from this double independence or abstraction

Volume 3: Contracts for the International Sale of Goods 199 (from the contract between seller and buyer and the arrangement between buyer and bank) and further from the fact that it will normally lead to payment at the place of the seller. Yet, even under the terms of the letters of credit, it may be agreed that the buyer may still insists on a certificate of quality or confirms delivery upon arrival of the goods before the bank may pay on its behalf, which obviously makes the letter of credit much less attractive to the seller and is a facility much discouraged in modern practice. On the other hand, the bank in the letter of credit could require that the buyer default before it will pay. This is equally unattractive to the seller and therefore also discouraged in modern letters of credit. As suggested above, payment or credit risk may also be safeguarded against by the seller retaining a proprietary interest in the assets, particularly through a rescission clause or a reservation of title. In international sales they are likely to be less effective after the goods have sailed, first because the legal status of these clauses may be less clear elsewhere, raising difficult choice of law problems and doubts over their effect in the traditional conflicts of laws approaches leading to application of national laws only, while practical problems connected with custody and disposal and extra cost unavoidably result if title returns in goods that are in foreign lands. As regards the other risks, political risk may be insured against or divided between the parties depending on the place where the interference occurs (in the place of the seller or buyer or during transit). As with quality, it is likely to be entirely separated from payment when payment is guaranteed by a bank under a letter of credit, as just mentioned, which means that the bank will pay on the agreed day regardless of the safe arrival under the circumstances or of whatever payment impediment is subsequently imposed on the buyer through government action. The liquidity risk may be mitigated by the seller while negotiating the bill of lading for early payment, often part of the letter of credit arrangement under which payment may be made immediately upon loading and turnover of the bill of lading to the bank, therefore long before arrival of the goods. It will imply a discount on the purchase price. Another common method for the seller to obtain early cash is to assign the receivable to a bank (or factoring company) or more traditionally to discount (upon acceptance) a bill of exchange drawn on the buyer, a technique now outdated in most countries339 except where the assignment of the receivable is not well developed, for example in countries where prior notification is still a requirement for the validity of such assignments. This used to be the case in France and Belgium under Article 1690 CC and became the case in the Netherlands340 under Article 3.94 CC (new), particularly inhibiting bulk assignments of future receivables, although for financial transactions it was alleviated in France by an amendment in 1980 and in the Netherlands in 2004: see Volume 5, sections 1.2.1 and 1.3.5.

2.1.5. International Sales as Contracts between Professionals. Effect on the Applicable Law The extra risks and complications outlined above mean that international sales are, in a technical sense, normally considered to be contracts between professional (merchant) parties only,

339 Another reason for the modern unpopularity of the bill of exchange in international transactions is that payment will often follow at the place of the drawee or buyer as only his bank will discount. It leaves the creditor/ drawer with the foreign exchange and political risk if he wishes to convert the proceeds into his own currency and transfer these to his own residence. As already mentioned above, the letter of credit tends to remedy these problems as the paying bank will normally be in the country of the seller. 340 It did not mean, however, that the bill of exchange practice was reviving in the Netherlands.

200 Volume 3: Contracts for the International Sale of Goods therefore between parties who are both knowledgeable in the area of their sale and its risks, likely and able to make the special transportation, insurance and payment arrangements necessary in this connection and regulars or experts in doing so to make a profit, and are aware of special industry customs or practices to this end. One should always look out for these customs or practices (which are here not distinguished), especially in the additional arrangements completing an international sale, as in the transportation, insurance and payment aspects; participants and lawyers must develop extra sensitivity towards them. It is one of the theses of this book that this is true in the case of all professional dealings and supports the operation of the modern lex mercatoria of which they form an important source of law, see in particular Volume 1, section 1.4.8. Unlike in domestic sales, the subject of international sales is thus not commonly thought to cover consumer sales or even sales of goods of which an otherwise professional party does not have special knowledge. This is expressed in the Vienna Convention (Article 2) only in a negative manner in the sense that consumer sales are excluded from its scope. The international sale is further limited in that, as a term of art, it is not believed to cover the sale of real estate, negotiable instruments, other documents of title, bonds and shares, or assignments of intangible property (such as receivables), which does not exclude, however, the possibility that they are also commonly traded under transnational law, the whole Eurobond market may be the example. International sales could, on the other hand, technically still cover finance sales which are conditional or temporary sales of assets for funding purposes (see Volume 5, section 1.1.5). One may wonder whether that was ever the idea behind the Vienna Convention. Again, the types of sales outside the scope of the Vienna Convention may still be the subject of international sales contracts, as indeed consumer sales, transfers of receivables, and the rendering cross-border of related services may also be, but they are not commonly deemed to be included in a reference to international sales, which as to subject matter are therefore limited to tangible movable assets commonly sold between professionals and therefore limited to the commercial or professional sphere. Meant here primarily is the international commodity trade. As for international sales, the feature of cross-border delivery appears to be the principal aspect of these sales as commonly understood. It was already said that this aspect is often not directly relevant in purely contractual terms. In the Vienna Convention (Article 1), the internationality of the (sales) contract is, as already mentioned also, in the contractual aspects tied to the contracting parties residing in different countries (which need not necessarily be Contracting Countries) and not to the cross-border movement of the assets341 or to the other complications that are likely to arise in an international sale in connection with title transfer. As we have already seen, the proprietary aspects are excluded from the Vienna Convention (Article 4(2)), which limits the requirement of delivery to a duty only to hand over the assets physically, no more. It means that the Vienna Convention, which only deals with contractual issues at the free disposition of the parties, may apply even if there is no border crossing of the sold goods at all as long as both parties are in different countries. The Hague Conventions saw it still differently but it may be admitted that where a Convention of this nature does not concern itself with proprietary issues, the movement of the asset is not the main legal issue. The problem is, however, that the true nature and meaning of an international sale is then not fully captured.

341 Art 1 effectively refers to the place of business of each party rather than its residence. A similar criterion is usually followed in conflict conventions concerning sales, cf Art 1(1) of the Hague Private International Law Convention on International Sales of 1955.

Volume 3: Contracts for the International Sale of Goods 201 Delivery, even in the limited physical sense of the Convention, is likely, however, to include some special duties of the seller in terms of transportation and insurance, usually to an agreed loading point (if not ‘ex works’) and these aspects are referred to if not systematically covered (cf Articles 31 and 32, mentioned earlier). From this point, the buyer will arrange further shipment and insurance (usually pursuant to an FOB term), although s/he may in this respect also rely on the seller (the CIF term). It depends on the contract which trade term is used in this respect and it is not part of the Convention. These terms may have some further effect on the time and place of the passing of the risk (but not directly of title): see more particularly section 2.3.9 below. As already mentioned, in view of the distance, there may also result some special duty of care of the buyer to protect the goods upon arrival, should disputes arise and goods be rejected. On the other hand, the seller may have a special duty of care to preserve the assets if the buyer delays in taking delivery, even if the risk has passed to the latter (for example upon tender of delivery), an aspect that finds some recognition in the Vienna Convention, cf Articles 85ff. It should be recalled in this connection that there are other possible approaches to internationality in international sales, even in their contractual aspect. Indeed, in France, early on, a legally relevant criterion closer to the ordinary meaning of ‘internationality’ depending on goods and payments crossing borders in opposite directions was used to preserve the validity of gold clauses, often illegal under applicable national law at the time. In the late 1920s and early 1930s, an exception was thus made for this type of clause in international sales as so defined.342 The earlier 1964 Hague Uniform Sales Conventions (Article 1(a) of both) also used this additional criterion, as already noted, therefore even to activate the Convention in purely contractual matters. In arbitration laws, a similar approach to internationality may be taken, not only applying therefore a special internationalised regime when parties come from different countries, but also when the subject matter is of an international nature or the arbitration takes place in an unrelated country, cf French Decrees n 80-345 and n 81-500 now followed by Decree n 2011-48, which in Article 1504 simply states that an arbitration is international when international trade interests are at stake, cf also Article 1(3) of the UNCITRAL Model Arbitration Law, now accepted in several common law countries, including some States of the US, Scotland and some east European countries including Russia. This may lead to the application of some additional or different arbitration rules, especially providing for procedural flexibility in international cases and a limitation of review by the domestic courts, either when challenged or in the context of recognition. This is the discussion in Volume 2. Another approach altogether is the distinction between the professional sphere on the one hand and the private or consumer sphere on the other, and the application of transnationalised concepts to the former and local concepts to the latter. In sales, it leads to the basic distinction between commercial and consumer sales, with all of the former increasingly internationalised even if the relevant sale may not have any international aspects at all: see for this approach, Volume 1, section 1.1.10, but it will increasingly adopt and conform to the international format. There is here no need to define internationality and the unity of the legal framework is maintained at a transnational level. Any arbitrary distinctions are thus avoided as economically there is no clear justification for treating such deals differently depending on the origin of the parties. As explained in Volume 1, this is the approach preferred in this book in which internationality is therefore a function of and included in commerciality or professionality.

342 See Cour de Cass, 27 May 1927, D.1928.25, followed in several other cases regardless of the applicable domestic law under the relevant conflicts rule; see also Y Loussouarn and JD Bredin, Droit du Commerce International (Paris, 1969) 617.

202 Volume 3: Contracts for the International Sale of Goods To repeat what has already been said in Volume 1, section 3.1.1, the consequences of a transaction being in the internationalised professional sphere are (a) the increasing likelihood of the existence of transnational legal concepts in a unifying transborder development suggesting the existence of a distinct legal order (from which the new lex mercatoria hails); (b) the resulting impact of fundamental legal and general principle and the emergence of own custom or practices therein; (c) the reduced impact of directory and even mandatory or policy rules of a local nature if only marginally impacting on the international transaction; (d) a lesser need to rebalance the relationship on the basis of social considerations as professional parties are on the whole well able to look after themselves; and (e) a less refined application of the basic legal protections among professionals in terms of disclosure, time to protest, undoing of transactions and the invocation of all kinds of legal exceptions, such as force majeure, hardship or even negligent behaviour of the other party. It was posited above that only in more explicit and obvious cases is relief likely to be granted and that between professionals, the contract is foremost to be seen as a roadmap and risk management tool that may be literally interpreted: see further also the discussion of modern contract theory in section 1.1.4 and the discussion in sections 1.3.11–1.3.14 above. This then also applies to international sales if properly understood. It may even imply a distinct ownership concept and ownership transfer regime with a notion of transaction and payment finality under transnational law; see further Volume 4, section 1.10 below.

2.1.6. Currency and Payments in International Sales: Free Convertibility and Transferability of Money In international sales, a price is likely to be stated in whatever (foreign) currency the parties may choose. In domestic sales, on the other hand, a foreign currency election is exceptional and used to give some problems as it was often thought that the contract in such terms should be qualified as an exchange or barter rather than a sale, although the differences between the two are not great in every legal system. In international sales this is not an issue in itself but concern shifts to the agreed currency (of payment) being fully convertible and freely transferable: see also Volume 5, section 3.3.3. The key is that, unless parties have agreed otherwise, payment is made in an agreed (hard) currency and then not out of accounts blocked by government action. Also, the seller should be concerned that payment is not automatically converted by applicable (mandatory) law, usually that of the buyer/payor, into the latter’s (often non-transferable and weak) domestic currency. It again raises the question of the effect of such a mandatory rule on international sales contracts. The risk is that the agreed currency is not then put at the free disposal of the seller. It may mean that there is no payment proper. This puts the buyer/debtor in default of proper payment, although possibly under the protection of his/her own law. With the general liberalisation of exchange controls (in respect of both capital movements and current payments) in most trading nations, this has become less of an issue. Modern payment methods, especially irrevocable confirmed letters of credit payable in freely convertible and transferable currency in the seller’s country, also help; it was always an important reason for their popularity. Banks then take over the currency risk, which they are often better able to handle if only through informal clearing and set-off, likely in the context of special arrangements with the relevant central banks as we have seen. In this connection, it is possible that the international sales contract itself uses two different currencies, one the currency of account, usually a hard currency, to denote the real obligation of

Volume 3: Contracts for the International Sale of Goods 203 the buyer, and another the currency of payment, which is usually the softer currency of the buyer and is then to be adjusted if the exchange rate changes between both of them. Especially in longterm agreements, this gives the seller at least some protection against devaluation.343 Judgments were usually expressed in local currency but when it comes to judgments from the national courts, even in common law countries like England, these may now be expressed in foreign currencies.344 The modern emphasis is on what would produce better justice or on what most accurately reflects the plaintiff ’s loss better under the circumstances. Recognition of foreign judgments by another domestic system may also extend to the foreign currency of the original judgment, at least if properly related to the underlying claim. However, this point is not universally settled, and conversion sometimes still takes place.345 Any devaluation loss may be claimable if the debtor is unwilling to pay or causes delays during which devaluations take place.346 In Germany, it appears that the currency is respected, even in proceedings for recognition of foreign judgments, but may in the course of enforcement be converted into the local currency at the option of the debtor: section 244 BGB. The exchange rate prevailing in the place of payment as at the original payment date is then controlling, foreign exchange losses resulting from pending enforcement being in principle for the account of the creditor.347

2.1.7. The Transfer of Title in International Sales. Finality Issues Transfer of title as a proprietary concept will be more properly the subject of Volume 4, section 1.4 below. It has already been mentioned that it is often still considered a typical issue of national law. As such there is strictly speaking no distinct concept of transfer of title in international sales except where the transnational law merchant has come to fruition as might be said for international documents of title and negotiable instruments especially of Eurobonds (see Volume 1, section 3.2.3). The European Court of Human Rights in Strasbourg also developed a distinct internationalised ownership concept: see Volume 1, section 1.5.8. This transnationalisation even of ownership notions is of the greatest interest, now in particular also in international finance in respect of new forms of asset-backed funding as we shall see in the next Volume. Traditionally, however, the applicable domestic law was considered to determine the issue of how and whether title had been transferred. In international sales, this law was in principle the lex situs of the asset as we have seen. It is the general proprietary conflicts rule, but it is under considerable pressure in international sales where goods are likely to be in constant transformation in production chains and also are likely to move from one country to another. Under the old rule, the applicable law could then still be either the law of the country of origin or that of the country of destination.

343 See also CM Schmitthoff, Export Trade: The Law and Practice of International Trade, 9th ed (London, 1990) 224. One of the most authoritative treatises on the subject is by FA Mann, The Legal Aspects of Money, 4th ed (Oxford, 1982). 344 cf for the UK, Miliangos v George Frank (Textiles) Ltd [1975] 3 All ER 801, reversing earlier English case law on the matter. 345 cf in France Tribunal de la Seine, 18 December 1967, GP.2.108 (1968). 346 cf for the Netherlands, HR, 8 December 1972 [1973] NJ 377. 347 cf OLG Cologne, 2 February 1971 (1971) 47 NJW 2128, although for equitable reasons some adjustments may follow if actual damage can be proven: see P Oertmann, Kommentar zum BGB, s 244, Anm 3 (Berlin, 1984–90).

204 Volume 3: Contracts for the International Sale of Goods This issue will be covered in greater detail in Volume 4, section 1.8 below, where the different domestic attitudes to the transfer of title and its formalities will also be discussed. The essence is that as far as private international law is concerned, a sale and transfer completed in the country in which the asset is situated at that time will most likely be accepted in the country the asset moves to as a matter of acquired right. If pursuant to the original law further formalities are to be performed in the country of destination necessary to make title pass, the situation will be reviewed upon the arrival of the goods in the new country. This may require some further explanation. In section 2.1.1 above, it has already been mentioned that there are in essence two types of systems for title transfer. In the first, the title in goods passes immediately upon the conclusion of the sales contract. That is the French and English system. In other countries there is the necessity of delivery as an additional requirement for title transfer. This is the German and Dutch system and also the one adopted in the US under Article 2 UCC (unless parties have made other arrangements). Conceptual problems arise when goods are sold in France for delivery to a German buyer in Germany. In France (the country of origin), the sale is complete, in Germany (the country of destination), it is not. The most favoured approach is that if the goods are with the seller in France, the French lex situs (of origin) applies and the goods will be deemed to have left the estate of the seller and belong to the buyer immediately upon the conclusion of the sales contract. This will also be accepted in Germany. So, when the goods arrive there, they will be considered to belong already to the German buyer even short of delivery. In a bankruptcy of both buyer and seller, the goods will rightfully belong to the German estate. If, on the other hand, the sale is between a German seller and a French buyer while the goods are with the German seller at the time of the sales contract, no title passes until delivery to the buyer in France and the goods continue to belong to the German estate until such time. French law could still consider title in the goods to have passed under French law immediately upon their arrival in France, so technically speaking even before delivery to the French buyer there, but this is not normally considered to be the case. Other problems may arise in connection with the reservation of title in goods thus sold, especially between countries that have a different attitude towards this sales protection device, as indeed Germany and France did before 1980 when a reservation of title was not valid in a French bankruptcy, while France even now adopts a more restricted concept of a reservation of title, especially in the extension of the protection into replacement goods and proceeds and in the entitlement to overvalue: see more particularly Volume 5, sections 1.3.5 and 1.4.1. Here again the rule applies in principle that if the reservation of title is properly established in the country of origin of the goods, the country of destiny will respect it. If the original country does not, the reservation of title could still attach upon arrival of the asset in the latter country if it accepts the device. On the other hand, even if properly created, the proprietary interest may still be transformed upon arrival in the country of destiny, for example into a more limited proprietary right or into a security interest as the nearest equivalent. That may be the case when a good moves between Germany and France or indeed between Germany and the US where under the UCC the reservation of title is a security interest, the impact of which in capital goods may be much reduced for lack of registration if a finance statement was not filed in the US. The consequence is that the rank of the foreign interest is only just above common creditors. It follows, on the other hand, that goods subject to such an interest moving from the US to Germany may benefit from an upgrade and become a full-blown proprietary interest in Germany subject to appropriation by an unpaid seller and to his right to retain any overvalue, which would have been denied it in the US. For further detail, again, reference may be made to Volume 4, section 1.8.

Volume 3: Contracts for the International Sale of Goods 205 In the area of finality, there are also problems in international sales. It was explained above in Volume 1, section 1.1.7 what is at stake here and in Volume 4 below the issue will be extensively revisited. It concerns first the protection of the buyer if upon delivery of the asset, it appears that there was an insufficient disposition right in the seller or that the contract failed. In the former case it is now common to protect the bona fide purchaser; in the latter case the delivery may be considered a different legal act that is separate from the underlying sales agreement, the disappearance of which does not then affect the earlier transfer of title. That is the German abstract system of title transfer. These are the two major prongs of what is called transactional finality (see further Volume 4, section 1.4) but for neither is there unanimity and short of transnationalisation, there may be considerable differences in the laws of different countries leading to the possibility of conflicts of laws when assets move to another country as part of the deal. If physical possession is required for this type of finality, which at least for bona fide purchasers is often the case, the law of the buyer in possession is likely to apply. For payments there may be similar finality concerns and again the payee, having collected, may find a similar kind of protection in his own law against faulty payment instructions, see Volume 5, section 3.1.3.

2.1.8. Conform Delivery and the Passing of Risk in International Sales Another subject that needs particular attention in sales of goods is the non-conform delivery, the liability for deterioration or loss of the goods in transit, and the passing of risk in this connection and its relevance. In consumer (domestic) sales, there may be more refined features in this connection than in professional (international) sales. As regards the required quality standard, parties are likely to be specific, but, if not, the common law requires merchantability, the essence of which is that the asset must be ‘fit for purpose’ for which it is ordinarily used and as such safe; compare also section 31 together with section 15 of the UK Sales of Goods Act 1979 and section 2-134(2)(c) UCC. It may be seen as a matter of reasonable expectation. This is also the rule of the Vienna Convention (Article 35(2)(a)), a more general warranty having been thought to be incompatible with international commercial practice. Civil law, on the other hand, still looks here more at the intrinsic qualities of an asset, which must be good in that sense. It thinks rather in terms of guarantees and is traditionally based on the notion of speciality assets rather than commodities, but at least for commodities it moved (at first in case law) also to a more extrinsic merchantability standard. This is important as more and more goods are of the commodity type. Even then, the seller is responsible for the goods’ fitness for any particular (other) purpose if the buyer relies on the seller’s skill and judgement in this respect, provided this is known to the latter, easier if the contract is specific. Naturally, the goods must also be fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract (see Article 35(2)(b) Vienna Convention, cf also section 2-315 UCC), again the contract may be more specific. As part of the conform delivery, the goods must also be properly packaged in the manner usual for such goods which may mean having regard to their disclosed destination and known mode of transport (Article 35(2)(d) Vienna Convention). The seller is thus responsible for these standards or any other agreed by the parties, except where he cannot deliver them for reasons of force majeure, always assuming there was no express or implied guarantee of delivery. Thus, even if the seller is in a force majeure situation, in these situations, he may still be responsible for the consequences of non-conform delivery

206 Volume 3: Contracts for the International Sale of Goods (except probably for consequential damages). As discussed in section 1.4.3 above, this is quite normal for common law and a guarantee of fitness as well as one of conform delivery is commonly deemed implied and they may be seen as a condition of the sales agreement, only excused if there was a force majeure clause. Under the Vienna Convention, no such clause is necessary, it will redistribute risk by law, an important departure from the common law as noted before. It follows the civil law approach and may be considered a weakness in business dealings. But it is still a matter of interpretation whether there is an implied guarantee which could, however, still be counterbalanced by a more explicit force majeure clause in the contract, as we have seen. For sales, this is further affected by the notion of the passing of risk discussed below and in the next section. It was noted also that in civil law, in the normative approach, it is also becoming a matter of interpretation whether there may be such an implicit guarantee for commodity goods. Differences may here also emerge between professional and consumer sales, in the sense that these guarantees may now more readily be deemed to exist for consumers even in commodity sales. This is proper relationship thinking and likely to be followed in the modern lex mercatoria. In Germany, fitness for the agreed purpose upon delivery is a primary duty under the contract (Hauptleistungspflicht, cf section 433 BGB), although not necessarily supported by an implied guarantee. Only in the case of guarantees (see also section 460 BGB) must it normally be assumed that the seller means to remain liable during the guarantee period as well, whether or not the non-conformity was due to his fault or negligence. This normally implies a facility for the buyer also to claim consequential damages and to relax his prompt inspection duties. The question is then for how long? Even if there are special quality undertakings, other factors, such as the buyer’s noncompliance with its own investigation duties or any waiver of inspection or acceptance by buyer, might still shorten the risk period for the seller and could thus affect the recovery possibility. Impossibility of inspection and hidden defects that could not be discovered in time may, on the other hand, extend this period. Defences based on mistake or misrepresentation at the outset may also become relevant for the buyer in this connection. Much depends on the factual situation and it is often difficult to draw clear lines in advance. This touches on the moment at which risk passes (unless there is another contractual arrangement). In the sale of goods, this is a term of art and concerns in essence the risk of the deterioration of the goods between the time of the sale and the delivery of the asset, assuming that this deterioration is not caused by either party. Thus, the question becomes exactly when the risk in this sense passes from seller to buyer in the case of force majeure in respect of the conform delivery duty. It means that in sales during this particular period (again sometimes extended as we shall see) force majeure of the seller may not be a sufficient excuse as long as the risk in this sense has not passed. To put it differently: who has the risk of force majeure (in terms of deterioration in particular) and when? Under modern law, this risk now normally passes at the moment the physical possession or control is transferred regardless of whether title has legally already passed before or passes later. It means that before such moment, the seller is still liable for conform delivery regardless of force majeure as he is still considered to have the risk. Never mind therefore whether title has already passed upon the conclusion of the sales agreement, which would amount to substantial performance thus requiring the buyer to pay, which even now remains the English system, where the risk in this sense is for the buyer (periculum est emptoris).348 That may have to do with the fact that force majeure is no legal excuse in common law at all, as we have seen. 348 The Principles of European Law concerning Sales (as compiled at Utrecht University in 2004) contain in ch 5 the following language:

Volume 3: Contracts for the International Sale of Goods 207 Although the passing of risk is normally associated with the unavoidable deterioration over time of the assets, most often seen in perishable products such as foods and vegetables while still in the hands of the seller, it may also cover other extraneous events. They may be theft or acts of god (casus fortuitus) such as fire, flood or earthquake affecting the goods before physical delivery. It introduces another layer of exposure, in which connection physical possession or control is in modern law normally also the determining factor as to which party bears these risks. Although generally the passing of risk has no relevance if the losses are attributable to one of the parties as that party will be liable for the consequences vis-à-vis the other, it assumes that also otherwise that party could have reasonably prevented the problem and that the risk was not discounted in the contract. Importantly, even reliance on force majeure in such a situation still raises the question of its definition in terms of vis maior or the more subjective theories, including impracticability or economic impossibility, see section 1.4.6 above. An expansive notion of force majeure means that the seller in possession remains liable for all such events pending physical delivery. Where at least in civil law the risk in the case of a sale is now commonly connected with physical possession (or control), even after the transfer of such physical possession to the buyer, the transfer of risk may still be delayed, however, if the seller has given special undertakings or guarantees or if the buyer could not reasonably exercise his inspection rights. If hidden defects are discovered later, of which the buyer could not have been or become reasonably aware upon delivery, there may still be a default on the part of the seller so that the passing of risk issue loses its relevance retrospectively. It was already noted that parties may always agree another moment for the passing of the risk between them or divide these risks in another manner. The passing of the risk in this sense does not play a role if the situation gives rise to other types of redress as in the case of mistake or innocent misrepresentation, for example if there was no sufficient disclosure at the outset, with or even without the seller being directly to blame, although in the first case there may be further redress beyond the voidness or avoidance of the agreement. Actions based on illegality, voidability or nullity of the contract after its execution are not affected

s 12: General Provisions Art 5: 101: Risk Loss of, or damage to, the goods after the risk has passed to the buyer does not discharge the buyer from the obligation to pay the price, unless the loss or damage is due to an act or omission of the seller. Art 102: Time when risk passes Unless otherwise provided in s 2, the risk passes: when the buyer takes over, in accordance with the contract, the goods or the document representing them, or in any case where the buyer is not bound to take over the goods or the documents representing them, at the time the buyer becomes owner of the goods. Section 2: Exceptions Art 5:201: Identification of the goods The risk does not pass to the buyer until the goods are clearly identified to the contract, whether by markings on the goods, by shipping documents, by notice given to the buyer or otherwise. Art 5:202: Goods placed at buyer’s disposal If the goods are placed at the buyer’s disposal but the buyer does not take them over in due time because of non-performance by the buyer of an obligation under the contract, the risk passes to the buyer from the time when the goods should have been taken over. If the goods are placed at the buyer’s disposal and the buyer is bound to take them over at a place other than the place of business of the seller, the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at the buyer’s disposal at that place. Art 5:203: Carriage of goods Art 5:204: Goods sold in transit

208 Volume 3: Contracts for the International Sale of Goods by the risk allocation either and render it also irrelevant, even though for professionals the effect of these defences may under modern contract theory be reduced: see section 1.3.11 above. There are therefore other important concepts that may play a role in this connection, even if closely related to non-conformity, especially if there was some misunderstanding about the quality requirements in the first place. In international sales under the Vienna Convention, the concept of non-conformity might itself include the concept of mistake as to the qualities of a sold good (Article 35(2)), so that the non-conformity remedies of the Convention apply, including the rule concerning the passing of risk throughout, rather than domestic notions of mistake or misrepresentation, which, in the absence of the coverage of these subjects in the Convention, might otherwise supplement it under applicable rules of private international law (Article 7(2) Vienna Convention). Physical possession would not appear to make any difference here but again one may ask how this affects the risk for outside events, such as acts of god and the like. May these risks then still shift back retroactively to the seller, regardless of who was holding the property at the time of these events? Where default (retroactively) dissolves the contract, as is still the situation in France, this could easily be considered. Where the rescission of the agreement is only ex nunc, as under present German and Dutch law, it could be thought to be different. The question appears to be whether the onus shifts here back from the possessor/new owner to the seller/old owner. It would not seem unreasonable if the latter was the cause of the failed sale, even regardless of whether s/he was to blame.

2.1.9. The Passing of Risk in the Sale of Goods in Civil and Common Law Traditionally, the law, in the absence of a contractual provision dealing with the passing of risk, tended to let the ‘chips fall where they fell’. Thus the actual owner, whether old or new, in possession or not, was the most likely party to have to accept the consequences of whatever was happening to the goods as long as no one else could be blamed (res perit domino). It was therefore the existing owner who bore the risk of force majeure in the sale of the goods to, or handling of them by another as long as title was not transferred. It meant that in sales the passing of risk depended on the moment of title transfer under applicable law. This is still in essence the situation in France and England, in the former country at least for speciality or identified goods. It means that the buyer is exposed if something happens to the goods after title has passed regardless therefore of whether s/he physically received the goods and is in charge of them (again assuming there was no fault in the seller). It is therefore implied under both traditional French and English law (where title transfers immediately at the moment of the conclusion of the sales contract) that the new owner (the buyer) has the risk regardless of possession pending delivery (periculum emptoris), which is also expressed in the maxim caveat emptor: see in France Article 1138 (old) Cc retained in Articles 1196 (new), 1351 and 1583 Cc assuming goods are individualised, and in England section 20(1) of the Sale of Goods Act 1979. It meant in Germany (which traditionally requires delivery for title transfer), that until (legal) delivery, the old owner (the seller) had the risk (periculum venditoris). However, for Germany and the Netherlands, it was already noted that it is now in principle the physical delivery (or control) that determines the transfer of the risk, regardless of whether the transfer of title follows (which it normally does): see in Germany section 446 BGB and in the Netherlands Article 7.10 CC. See also section 2-509(3) UCC in the US, which abandoned the common law approach and now accepts the German approach in the absence of breach and,

Volume 3: Contracts for the International Sale of Goods 209 according to the Official Comment, intentionally shifted away from the earlier property approach in this connection.349 Thus, the modern variation on this theme is to attach the consequences of unavoidable loss or damages to actual (not legal or constructive) possession or control (or tender of delivery in this sense) rather than to ownership itself. It follows from the realisation that the physical holder of the goods is in the best position to know what is happening to them, look after them, and insure them. In a commodity environment, the necessary setting aside may in any event not take place sooner than the moment of physical delivery, and the completion of the (conform) performance usually follows at the same time. It also proved the logical approach in the Vienna Convention in the absence of a uniform provision on the passing of title in international sales (Article 69). The buyer without physical possession is thus becoming better protected against the early passing of risk everywhere even if acquiring ownership at the time of the sales agreement (wherever such a system obtains), but as mentioned in the previous section, there are further refinements, and the buyer may even be protected for longer, especially when there are implied guarantees, while in the case of hidden defects the transfer of the risk may be postponed or lifted as there may be a situation of default. The buyer has information and inspection duties here, balanced, however, by the duties of the seller in this regard. Here again it follows that professional sellers are more vulnerable in consumer sales than in sales to other professionals. In respect of consumers, it could even be said that a situation of force majeure of the seller in respect of the required quality of commodity goods is increasingly unlikely to arise because of its own technological capabilities and investigation facilities. This may still be different in the sale of speciality capital goods, either manufactured for, or resold to, other professionals. Yet upon physical delivery, the buyer must promptly inspect and protest as he accepts full responsibility thereafter, assuming the seller has met its own (disclosure and other) duties at the time of the conclusion of the agreement and still barring undiscoverable hidden defects, again particularly in consumer cases, and certain safety defects under product liability statutes, or if the buyer has a guarantee. Again, it presupposes that the contract is not voidable or void for other reasons, such as mistake as to the quality of the goods or misrepresentation upon a lack of full disclosure when, as mentioned before, the passing of risk has no relevance but the question of restitution and damages may still present problems. In the foregoing, some references have already been made to domestic laws concerning the passing of risk in the sale of goods: see more particularly Article 1138 (old) Cc, now Article 1196 Cc in France, section 446 BGB in Germany, Article 7.10 CC in the Netherlands, section 20(1) of the Sale of Goods Act in the UK and section 2-509(2) UCC in the US. Although all use the concept of the passing of risk in the case of a sale of goods, they often select, as we have seen, different moments and may also maintain different definitions of force majeure and different approaches to the subject of non-conform delivery and to its consequences in terms of the various actions that may be used, often for historical reasons. The approaches of common law based on developing case law are the most flexible, with their emphasis (within their concept of conform delivery) on merchantability, common standards, and investigation and disclosure duties, but still restrained by the early transfer of risk (immediately upon the conclusion of the sales agreement, now abandoned under the UCC in the US as we have

349 Only Dutch law under its old Code had a system where the risk was for the buyer while title would only pass to him upon delivery of the good. This approach was considered justified on the theory that the seller should be able and keen to deliver immediately and, if he did not do so, the buyer was believed to have had some interest in the delay.

210 Volume 3: Contracts for the International Sale of Goods seen), and tempered by a case-by-case approach which allows for little conceptualisation and drawing of lines. In Germany, under its Code of 1900, the emphasis remained on speciality assets with their own intrinsic quality expectations, even though the risk was allowed to pass later. The emphasis was thus less on common standards of the kind, more on contractual definition, on information rights and duties, and on disclosure in order to determine whether there was a breach in the first place. The Roman law concerning the sale of goods and the passing of the risk in them had been fairly simple. It assumed that virtually all sales concerned speciality goods, in which the risk passed immediately upon the agreed sale, thus periculum emptoris (D.18.6.8pr.). However, this was not the case if the price had not yet been fixed or if the goods were not yet identified, if the sale was conditional or suspended, if there remained a choice between various performance duties, or if the buyer had to approve the goods: see Inst 3.23.3, D.18.6.8 pr, D.6.19.1.13.12 or D.47.2.14 pr. In those cases, the risk could not pass, therefore notably not before the final price was determined (pretium certum), which was seen as a substantive protection for the buyer and assumed at the same time a sufficient individualisation upon counting, weighing or measuring. To redress this instant transfer of risk, at first, knowledge of hidden defects in the seller was necessary, which was considered to come close to a situation of fraud (for which there was an actio empti). Ultimately, however, the knowledge of the seller (and his disclosure obligations) became irrelevant (his knowledge was presumed) and the recourse for the buyer in the case of hidden defects was then the rescission of the sales agreement with a return of goods or a reduction in price (actio redhibitoria of D.21.1.38pr. or the actio quanti minoris of D.44.2.25.1), limited in their effect, however, by a short statute of limitations. These actions derived at first from the special jurisdiction of the aediles curules who regulated the market functions and were in charge of the street police. They were later on integrated in de actio empti but not abandoned. This essentially still presents the system of the French CC (Article 1644 old), which at least in professional sales assumes that the seller always has knowledge of the defects until proved otherwise.350 Except for the timing of the risk transfer, it is also the system of the BGB (section 437).351 In France, the law in this area traditionally centres on ordinary default, hidden defects (vices cachées, Articles 1641ff old CC), and mistake (erreur, Article 1109 old CC), each with a different set of consequences, redress, statutes of limitations and actions.352 For commodities, the Cour de Cassation353 increasingly shifted the transfer of the risk, however, as noted before, to the moment of identification, which is likely to be the moment of delivery.354 In Germany, the starting point as we have seen was also the individual asset with its own intrinsic qualities, but the development has equally been in the direction of commodity-type assets that have at best a standard quality of the sort which is normally further described in the

350 See Cour de Cass, 30 October 1962 [1962] Bull Civ I 457 and 27 November 1972 [1972] Bull Civ IV 282. 351 See further B Windscheid and T Kipp, 2 Lehrbuch des Pandektenrechts (Frankfurt am Main, 1906) 660; M Kaser, Römisches Privatrecht, 14th edn (Munich, 1986) 193; F de Zulueta, The Roman Law of Sale (Oxford, 1945) 31; and R Zimmermann, The Law of Obligations (Cape Town, 1990) 281. 352 See J Ghestin, Conformité et garanties dans la vente (Produits mobiliers) (Paris, 1983). 353 See Cour de Cass, 8 July 1981 [1981] Bull Civ IV 316. 354 Particularly for identified goods, the early transfer of the risk left little room for an action by the buyer for deterioration or loss of the asset but the risk transfer may in modern French law be postponed, amended or restricted by investigation, information and custody duties of the seller in possession on the basis of which a default action may still be brought by the buyer also in the case of speciality goods rendering the passing of risk rule irrelevant. There may be no force majeure proper, so that the early transfer of risk to the buyer has no meaning. It allows for a wide range of remedies, including specific performance, replacement and repair, rescission, damages or price reduction or combinations.

Volume 3: Contracts for the International Sale of Goods 211 contract so that the contractual quality clause and the seller’s disclosure and buyer’s investigation duties often determine the (non-)conform delivery issues.355 German law no longer distinguishes here between a default action (sections 323ff BGB) and an action for defects as a matter of principle, but the former is not available upon force majeure even if the seller still has the risk, which is the case in Germany until the physical delivery of the asset (section 446 BGB). Under section 437 BGB the consequences may vary and are based on the old actiones redhibitoria and quanti minoris, but not apparently in a limitative way: replacement, repair, price reduction, damages or even a return of asset and price may all be possible. An action for mistake voiding the sales agreement altogether may also be available if there is an erroneous declaration of the seller (Irrtum of section 119 BGB). There is not only an important difference (voidness) in the consequences, but also a different statute of limitations: for mistake it is 10 years (section 121 BGB), but for a default action under section 323 BGB it is three years (section 195 BGB) and for the action pursuant to sections 437ff BGB it is only two years after delivery, except again in the case of fraud (section 438(3) BGB), when it is three years (section 195 BGB). In the Netherlands under its old law, the situation developed in such a way that for commodities the general default provisions were applicable even if the seller had the excuse of force majeure as long as he had the risk, which passed, however, immediately at the time of the sales agreement (even though title only passed upon delivery unless the goods were not properly set aside, when the title and risk only passed upon that event). The more limited rules for hidden defects derived from the French CC were latterly applied only to specialty goods. It was already mentioned that the new Code postpones the transfer of risk until the physical delivery (Article 7.10 CC) and gives the normal rescission facility to the non-defaulting party— particularly relevant if there is non-conform delivery—in all cases in which the seller still has the risk, regardless of any excuse of force majeure: see Articles 6.265 and 7.17 CC. It is an action for the buyer and allows him/her not to pay the price or insist on a reduction. Alternatively, the buyer may insist on full performance through replacement or repair.356 The hidden defects action arises commonly after the passing of risk and upon delivery. Although it presumes that the seller is to blame for the state of goods, the redress is (also in France) still limited to the actio redhibitoria or actio quanti minoris, see Art 1644 (old) CC, and there is also a much shorter prescription period which starts running, however, only from the moment of discovery. Mistake leads, on the other hand, to voidness of the agreement when the transfer of risk does not play a role. Which course of action is best taken depends on the circumstances and probably on the type of information that became or was available at the beginning of the transaction and there is not necessarily a free choice for the buyer. Misinformation or lack of detail may even lead to the remedy of mistake and then affects the existence of the agreement itself, especially if the seller was not volunteering the information and the buyer was not in a position to ask for it because it fell outside a normal enquiry, yet proved to be wholly relevant. The burden of proof remains, however, on the buyer and under modern case law he will in this context have to explain what conformity meant, relying in this respect on intrinsic qualities, qualities of the kind or the contractually agreed quality, and what he did himself in terms of making his own enquiries or conducting his own inspection at the time of the sale and especially at the time of delivery. Only then will it transpire whether there was mistake, default or a relevant hidden defect. 355 See s 434 BGB. 356 The new Dutch Code no longer refers especially to hidden defects and considers them only in the context of the general conformity requirement, which allows the buyer always to invoke his right to rescission of the sales agreement or replacement of the asset upon non-conform delivery or a later discovery of defects that could not be detected before and were not apparent upon inspection following delivery (assuming the buyer did not waive all his rights by failing to inspect): see Art 7.10(3) CC. This may be particularly relevant in the case of hidden defects and additional guarantees, but they do not give rise to a special regime. If there is a fault on the seller’s behalf, the allocation of risk to the buyer after delivery is irrelevant and damages may be claimable by the buyer as well as the rescission which will discharge him from his own payment duty.

212 Volume 3: Contracts for the International Sale of Goods English law, on the other hand, traditionally depends on the contractual terms and their definition of quality and the (implied) designation thereof by the parties as condition or warranty, which determines in the first instance the effects of default in terms of repairs and damages only or in terms of a rescission also. This being said, as we have seen, the Sale of Goods Act also contains statutory provisions concerning quality with implied terms of merchantability and fitness (see sections 13–15) while the objective law provisions concerning mistake or innocent misrepresentation may provide an additional remedy. In the case of non-conform delivery, the passing of the risk as elsewhere plays a role and according to section 20(1) takes place at the moment when ownership passes, which is normally at the moment of the sale agreement, hence caveat emptor, even though the concept of force majeure is not a common law excuse and must be seen as limited to certain acts of god, such as fire, floods, etc, and for the rest depends on whether the quality term must be viewed as a condition or warranty. In the first case there is in principle no force majeure excuse as we have seen in section 1.4.3 above, although this may be balanced by an express force majeure clause or sometimes even implied conditions. If the goods have not yet been set aside to fulfil the contract, the passing of risk is always postponed, however, except where the buyer was dilatory or uncooperative in this process (see section 20(2)).357 Also the insurance duty or possibility increasingly plays a role and, since the shopkeepers or custodians are usually in the best position to insure, it may mean that the risk in undelivered specific goods may still remain with them. The preliminary question whether there was non-conform delivery depends on its definition. It will normally relate back to the contract but, failing this, sections 13–15 of the Sale of Goods Act 1979 give alternative rules implying normal or merchantable quality and fitness for the intended purpose, which in fact also redress the caveat emptor rule by holding a seller liable to these standards whatever happened to the asset. In the nature of a condition, he will not be performing fully without meeting them for whatever reason. Yet it does not discharge the buyer from making proper inquiries at the time of the conclusion of the sale agreement and properly inspecting the goods at his earliest convenience and certainly upon delivery. If the breach is substantial and indeed concerns a condition, the buyer will be able to repudiate the agreement or reject the goods, if not already accepted after full inspection, barring hidden defects; there is also the possibility of rescission for innocent misrepresentation or mistake.358 If there is fault, an action for damages may follow. In the US sections 2-314–2-315 UCC deal with implied warranties of merchantability and fitness and section 2-509(3) with the passing of risk. Section 2-510 makes clear that, where there is a breach, the transfer of the risk is postponed until the breach is cured. It also allows for any revocation of acceptance. Again, the system in the US has clearly moved on from the British notion of caveat emptor and accepts that the risk now passes only upon physical delivery. For sales, the old common law distinction between conditions and warranties is no longer fundamental in the UCC either. It has its own system of actions and concept of force majeure. If the risk has passed to the buyer, s/he is not likely to be able to do a great deal if s/he has accepted the goods,

In the meantime, it could be argued that the EU Consumer Sales Directive 1999/44/EC concerning certain aspects of and guarantees for consumer goods has reintroduced for them a special regime for hidden defects, which again refers to what are effectively the actiones redhibitoria and quanti minoris, although in somewhat different ways. 357 Sterns Ltd v Vickers Ltd [1923] 1 KB 78. 358 See Goldsmith v Rodgers [1962] 2 Lloyd’s Rep 249 and for the various remedies further also PS Atiyah and J Adams, Sale of Goods, 9th ed (Harlow, 1995) 185.

Volume 3: Contracts for the International Sale of Goods 213 except where there are hidden defects which could not be discovered upon acceptance or if there are guarantees outstanding.

2.1.10. Proprietary Sales Price Protection in Civil and Common Law Sales price protection is an important issue in sales, whether of the domestic or international type, and is particularly connected with a buyer’s failure to pay the price. The issue then quickly becomes what rights the seller still has in the goods delivered to the buyer. Where a sales contract attempts to state the manner of termination upon (a significant) default, it is likely to include a rescission of the agreement with a discharge of the non-defaulting party without resort to the courts. It was otherwise still required in some countries such as France (Article 1184 old CC), where as a consequence the rescission of the sales agreement and the discharge of the non-defaulting party may remain dependent upon court approval. The modern trend is, however, to accept rescission (or avoidance) upon mere notice of default by the nondefaulting party. It is confirmed for international sales law in Articles 49 and 64 of the Vienna Convention, provided the default was significant or ‘fundamental’ in the terms of Article 25, cf also Article 6.265 of the new Dutch CC. It makes the sale itself conditional upon substantial performance by the buyer. That is now also the system in France, Articles 1178 and 1226 CC. The precise meaning and effect of this rescission (or avoidance in Vienna Convention terms) upon default is, however, often not immediately clear, even under domestic law, especially as regards the effect on the title of the delivered goods and the (possible) retroactivity of the rescission and its significance. This is also true for the Vienna Convention, which does not cover these aspects, as it does not deal with the proprietary issues of the sale (Article 4(2)). The preliminary question is therefore whether rescission may have proprietary consequences or is merely a contractual issue. A specific clause in the contract may attempt to clarify the situation, but, like the title transfer itself, it depends on the applicable law, which in international sales commonly still results from the applicable private international law rules and is then domestic, or from the objective transnational law (for lex mercatoria supporters), whether these are matters that may be left to the will of the parties or whether mandatory rules must be applied in this connection potentially superseding such a clause. A most important question in all sales is therefore whether any contractual clause trying to clarify and further develop these aspects can have any (proprietary) effect amplifying the applicable (domestic) law (or setting out the lex mercatoria position) if not itself providing such redress. The reservation of title clause is the most important example. More generally, it may then have to be considered whether the rescission of the contract might be retroactive to its beginning and void all transfers. This is less likely. At least in civil law, rescission upon default is not the same as a rescission resulting from lack of intent, as in the case of threat, mistake or fraud.359 359 An important related aspect is whether the automatic return may completely obliterate the transaction and is therefore retroactive or whether the return, even if automatic, only operates for the future. New Dutch law accepts that the lex commissoria tacita, therefore the statutory rescission of the sales agreement upon a significant default, is no longer retroactive: see Arts 6.265 and 6.269 CC, from which it is often concluded that it therefore has no proprietary effect at all, although as a consequence of the rescission the parties must still reimburse each other as far as possible for the adverse effects of the contract while existing. As mentioned before, the express conditionality inserted in a sales agreement still has, in rem or proprietary effect under Dutch law however, leading to a revindication right even in a bankruptcy of the seller (lex commissoria expressa of Art 3.84(4) CC), although this is not considered retroactive either and neither is the title return under a reservation of title upon non-payment by the buyer, see Art 3.38(2) CC.

214 Volume 3: Contracts for the International Sale of Goods The issue of the automatic return of title (or not), at least in respect of the unpaid assets, and the so-called proprietary or in rem effect of the rescission of the sales contract, at least to that extent, arises in all (domestic) sales laws and is particularly important in a bankruptcy of the defaulting buyer, as it may give the seller revindication rights allowing him to ignore the common creditors. Even if the applicable lex situs allows this result in principle, it is still possible, however, that the applicable bankruptcy law may not accept it, like under section 365(e) of the US Bankruptcy Code of 1978 as amended, or maintains exceptions, as traditionally in France under the theory of apparent solvency. It should also be considered in this connection that the applicable bankruptcy law could be different from the lex situs as it will normally be the bankruptcy law of the bankruptcy forum, which, under applicable jurisdiction rules, may be in another country and then pretends extraterritorial effect. This could mean that, if appearance of creditworthiness is created by a creditor/seller leaving the debtor in possession of his assets, other creditors who relied in good faith on the appearance of solvency (so created) may be protected and may as a consequence be able to ignore the seller’s proprietary claims. It is in fact an instance of the protection of bona fide creditors against hidden property interests, as such the equivalent of the bona fide purchaser protection in the case of movables. Yet where it may be said that the bona fide purchaser protection is constantly extended, it seems that the protection of the bona fide creditor in this manner is in decline: see also Volume 5, section 1.1.10. Examples are, in France, the acceptance of the reservation of title in bankruptcy since 1980360 and in England the elimination of the comparable doctrine of reputed ownership

It means that, although title automatically re-transfers, the effects of the earlier transfer cannot be fully negated. A good example is the re-transfer of shares on which the conditional owner exercised his voting rights. The automatic retransfer does not then affect the earlier decisions taken but dividends received will have to be reimbursed as parties must put each other in the position they would have been in if the transfer had never taken place. The reclaiming right of Art 7.39 of the Dutch CC, although often also considered in rem, is not retroactive either. It does not mean, however, that the acquirer of the goods from an interim owner is fully protected and his bona fides is required for the transfer to stand. It suggests that the acquirer should not reasonably have expected that a reclaiming right could be exercised, see also Art 7.42 CC. Only a void agreement, eg for lack of consensus or a defective consensus in the case of fraud or misrepresentation, will lead to a return of title with full retroactivity, see Arts 3.53, 6.203, 3.84(1) and 5.2 CC. See further also the discussion in Vol 5, s 1.2.3. 360 For unpaid sellers in a bankruptcy of the buyer, the inhibiting factor for the actual return of the asset may not be the impossibility of the bankrupt seller to retransfer title itself, which is likely to be automatic in the French system, where title transfer does not depend on delivery (always assuming the goods are not converted or comingled in the meantime). In that country this results logically from its system, which does not require delivery for title transfer but only the conclusion of the sales agreement (Art 1583 Cc) or its rescission, which can be reinforced by a specific rescission clause (clause résolutoire) in the contract under Art 1584 CC, at the same time avoiding any need for judicial intervention and a supporting judgment under Art 1184 old Cc. Rather, the problem is the possession of the goods by the bankrupt debtor as this still inhibits their physical return (delivery), see also Cour de Cass, 17 Mar 1975 [1975] D.S.553. This practical impediment is then used to support their inclusion in the buyer’s bankrupt estate as a way to support any reliance on the appearance of enhanced creditworthiness (solvabilité apparente) of the buyer by other creditors except if the seller has a published security right (nantissement), which will, however, usually require an execution sale and not allow automatic repossession. In France, this approach is only taken in bankruptcy of the buyer and not in individual executions against him, see Cour de Cass, 24 June 1845 [1845] D.1.309. It means on the other hand that even in bankruptcy, goods not in the actual possession of the debtor are returnable, especially those still in transit. They are returnable also if the rescission of the contract took place or the action to this effect was initiated before the bankruptcy or at least if the demand for the return of the assets had been manifested before the bankruptcy decree, cf Cour de Cass, 3 May 1935 [1935] D.H.313 and 7 July 1975 [1976] D.S.70. Similar restrictions apply to the statutory reclaiming rights under Art 2102(4) CC: see also Arts 115, 116 and 118 French Bankruptcy Act 1985 and Vol 5, s 1.1.9. A more general exception is now made in France if these rights were supported by a reservation of title. This results from the 1980 amendment of the French Bankruptcy Act of 1967 in force at the time (Arts 59 and 65),

Volume 3: Contracts for the International Sale of Goods 215 in the Insolvency Acts of 1985 and 1986.361 In Germany particularly, there is the problem of the power of the bankrupt to re-transfer the asset, as in that country all transfers require a special act of (re)delivery. As a consequence, a return of title cannot be automatic (see for its so-called abstract system of title transfer also Volume 4, section 1.4.6 below). This is again particularly important in the bankruptcy of the buyer who is then no longer capable of executing such a re-transfer, even if he would want to co-operate, the exception in Germany being the reservation of title.362 It should be noted that modern reorganisation-oriented bankruptcy laws may postpone any unilateral action of the seller in this regard: see for France Articles 33 and 47 of the Bankruptcy Act 1984, now Articles L 611-1 and L 621-40 Code de Commerce (CdeCom), and further section 362 of the US Bankruptcy Code. The Dutch Bankruptcy Act, even though not so oriented, now allows a two-months delay of all individual execution action upon bankruptcy (Article 63 (a)(1)). The conditionality of the title transfer upon full compliance by the buyer (as distinguished from the implied conditionality of the sales contract itself) does not always depend on a relevant

superseded by Arts 115 and 121 of the French Bankruptcy Act 1985: see also G Ripert and R Roblot (eds), Droit commercial 2, 16th edn (Paris, 1992), nos 3142, 3148ff. The reservation of title was further reinforced by the 1994 amendments to the French Bankruptcy Act (Art 59 of Law 94-475 of 10 June), meaning to preserve and extend the seller’s protection if the assets in which title was reserved are subsequently converted or comingled by the buyer. It allows a revindication for the seller provided the goods are not irreparably damaged thereby. See also ss L 621-117 and L 621-122 CdeCom. 361 England (but not the US) had the similar notion of reputed ownership in personal bankruptcy, especially in respect of commercial property held with the consent of the true owners by a debtor being a natural person who carried on business, see s 38 of the UK Bankruptcy Act 1914; see also Re Sharpe [1980] 1 All ER 198. The notion was abandoned in the Insolvency Act of 1986 (s 283), earlier implicitly by s 235(3) and Sch 10, Pt III of the Insolvency Act 1985, but may continue to be relevant in other common law countries except in the US where it was never relevant. It could be rebutted only by notoriety and defeated any proprietary claim derived from a situation of default and rescission of a sales contract (for breach of a condition) with or without reservation of title, except possibly in the case of fraud or if the reservation of title was registered as a bill of sale, which is often treated as a security instrument, although leading to a form of appropriation in the manner of a conditional sale. See for the effect on the reservation of title, I Fletcher, The Law of Insolvency, 2nd edn (London, 1996) 217. In England, the notion of reputed ownership did not have an application in corporate insolvency, cf for the reservation of title, Vaessen v Romalpa [1976] 1 WLR 677, also not if the goods were converted into others, provided the charge was specifically meant to cover these goods, cf Borden (UK) Ltd v Scottish Timber [1979] 3 WLR 672. For its continued validity, it had to be registered under the Companies Act 1948 for the case of shifting into replacement goods or if intended to attach to a multitude of unspecified goods so that a floating charge could result or when the reservation of title was meant to also protect other debt, cf Independent Automatic Sales v Knowles and Foster [1962] 1 WLR 974 and for more details Vol 5, s 1.5.2. The strong position of the holder of chattels in common law should also be noted in this connection and the lack of proprietary protection for the owner, which still has an effect in the bankruptcy of the holder (bailee) and may thus still affect the effectiveness of the reservation of title in England: see further Vol 4, s 1.3.2 below. The return of chattels under these circumstances is in the discretion of the courts. Damages remain the more normal remedy, which is of little use in a bankruptcy of the defaulting party. 362 In countries like Germany, upon non-payment, even the reservation of title could thus fail to lead to an automatic return of title as it still requires, strictly speaking, a form of re-transfer of possession and there remained as a consequence a risk that the asset could not be returned in an insolvency of the buyer, as the defaulting buyer could be considered to have lost the facility or capacity to do so because of his intervening bankruptcy, see further Vol 5, s 1.4.1. Also in Germany, contractual rescission clauses requiring the return of the goods are indeed denied validity in bankruptcy: see s 26 of the Bankruptcy Act (Konkursordnung 1877) replaced by s 103(2) of the Insolvency Act 1999, introduced at the time as a uniform rule for all of Germany before the new Civil Code in 1900. Reservation of title is, however, exceptionally assumed to be valid in a German bankruptcy and may lead to a revindication against the bankrupt estate on the basis of s 455 BGB and s 43 of the Bankruptcy Act 1877, now s 47 of the Insolvency Act 1999, see also BGH, 1 July 1970, 54 BGHZ 214, 218 (1970).

216 Volume 3: Contracts for the International Sale of Goods clause in the contract (lex commissoria expressa),363 but may sometimes be implicit in the applicable law and then results upon a default under the sales agreement from the operation of that law itself (lex commissoria tacita), as is still the case in France and as used to be the case under the former Dutch Civil Code (Article 1302 CC old, but cf Article 6.269 CC new).364 Even then the true meaning of the proprietary effect of the rescission of the sales agreement (which could also result from other causes such as illegality, mistake, misrepresentation or fraud or from the fulfilment of specific contractual conditions to the effect) could still be in doubt upon a subsequent bankruptcy of the transferee when delivery has already taken place, in France again particularly because of the notion of the enhanced appearance of creditworthiness or reputed ownership of the buyer. Dutch law traditionally went furthest in the protection of the seller under these circumstances, as it rendered the title return automatic. It was a consequence of the causal system of title transfer without any restrictions derived from notions of apparent ownership, but this automaticity following a rescission of the sales agreement upon default, even in a bankruptcy of the buyer in possession, is now superseded by the new Dutch Civil Code (Article 6.269) unless there is a specific contractual clause agreed and inserted to the effect in the sales agreement (see Articles 3.38 and 3.84(4) CC). Only in that case does it now lead to a revindication right of the asset allowing the seller to disregard the interests of other creditors even in a bankruptcy of the buyer.365 It approximates the reservation of title. 363 Even in France and in countries following its lead, there is still a problem in bankruptcy not only with rescission as just mentioned, but more generally with the in rem effect of conditions, although in principle accepted, an acceptance which in bankruptcy may now well be limited to failed sales agreements, however, as under Art 117 of the French Bankruptcy Act 1985 conditions could generally no longer mature after bankruptcy; see also Ripert and Roblot (eds) (n 360) no 3158. Yet the lex commissoria tacita still leads in France to the automatic return of title to the goods upon default, certainly if for its effect no co-operation of the bankrupt is required, although in the case of solvabilité apparente, the reclaiming possibility will be impaired. Another way of looking at contractual conditions of this nature under French law is that the title transfer pursuant to it, rather than being rescinded upon default, is postponed in derogation from the principle of Art 1583 CC, which states the basic French rule that title passes immediately upon the conclusion of the sales contract but pursuant to Art 1138 old CC, now Art 1196 which suggest that a delay can be agreed. This at least appears to be the way the French often look at reservation of title (see also Vol 5, s 1.3.4), leaving the seller with the risk of the loss of the goods in the meantime but probably with a stronger position overall, especially valuable in a bankruptcy of the buyer in possession, see J Ghestin and B Desche, Traité des contrats, la vente (Paris, 1990) No 600 and Cour de Cass, 20 November 1979 [1980] 33 Revue Trimestrielle de Droit Commercial 43, Note Breitenstein. In other words, payment is then a condition precedent for the title transfer rather than non-payment being a condition subsequent under which the title transfer is undone. 364 In a technical legal sense, there are good reasons to consider all contractual rights to an automatic return of title upon a default by the buyer under a sales agreement as an expression or extension of the lex commissoria of D.41.4.2.3 (later forbidden in Roman law, see C.8.34.3 pr, at least if leading to appropriation under a secured transaction) and therefore as an indication of the conditionality of the sale. This is the approach obtaining in many countries, also for a reservation of title, as confirmed by Arts 3.84(4) and 3.92 of the new Dutch CC, cf also s 449 BGB in Germany, although in England and according to some authority in France, the reservation of title is considered a delayed rather than a conditional sale. Under the UCC (Art 9) in the US, the reservation of title is now entirely equated with a security interest (ss 9-102(2) and 9-202), like all conditional sales of movable assets in that country, as is the contractual retention right, see ss 2-401(2) and 2-505 UCC, but not the statutory reclaiming right of s 2-702 UCC. The difference is that if a reservation of title is viewed as a security interest in this manner, there is no longer a right for the seller to reclaim the asset and an execution sale followed by a turnover of any excess value to the buyer must follow upon default (s 9-311). For the reservation of title, French case law seems to go in the same direction, see Vol 5, s 1.3.4. Wherever the reservation of title is considered a security right, any in rem conditionality of the title transfer has disappeared. See for the differences between conditional sales and secured transactions more generally Vol 5, s 2.1. 365 See also n 361 above.

Volume 3: Contracts for the International Sale of Goods 217 Indeed, as we have seen, conditionality with an automatic return of title and revindication right of the asset upon default, even in bankruptcy, may in many countries be more specifically achieved through a contractual reservation of title clause, especially in countries like Germany that do not otherwise accept any automatic return under the lex commissoria, even if specifically inserted in the sales agreement. There is no automatic re-transfer of title upon a major default in England either, where the reservation of title also overcomes this difficulty for the seller who has lost possession, although in that country the reservation of title is mostly seen as a delayed, rather than a conditional title transfer. In France, where the automatic title return upon rescission of the sale agreement because of default may be in doubt in the bankruptcy of a buyer in possession if the creditor has created the appearance of greater creditworthiness in the debtor, the status of the reservation of title was clarified in this respect in an important amendment to the French Bankruptcy Act in 1980, maintained in the new French Bankruptcy Act of 1985 (Articles 115 and 121) and reinforced in 1994 (Article 59 of the Law of 10 June). In the US, where contractual clauses to the effect are unlikely to be effective in bankruptcy (see section 365(e) of the US Bankruptcy Code), the reservation of title is known but no longer treated as a special condition reinforcing the automatic return of full title in the case of default. Like any contractual retention right, it is automatically converted into a security interest requiring an execution sale and the return of any excess value to the buyer, thus excluding any automatic return of title or appropriation right (see section 9-102(2) (old) UCC). In conclusion, the more specialised default remedies either of a statutory or contractual nature aiming at in rem or proprietary protection while leaving the unpaid seller with, and especially without, possession with some power in the sold assets even if title is already transferred, present a number of well-known problems and may not always result in an automatic return of the asset, especially not upon a bankruptcy of the buyer/debtor in possession when it matters most. As has already been mentioned, in international sales, the Vienna Convention does not deal with the proprietary recourse actions of the seller (Articles 62ff) as a consequence of its lack of coverage of proprietary issues (Article 4).

2.1.11. The Retention Right of the Seller The seller may have or create other remedies, especially if still in possession, and may, for example, be able to rely on a statutory lien as retentor, particularly in countries where the transfer of title normally occurs at the time of the conclusion of the sales contract. This is the situation in common law of the English variety where as a consequence the title normally transfers before delivery but the unpaid seller in possession remains protected by a retention right (unless otherwise agreed): see section 41 of the Sale of Goods Act 1979 for the situation in England, cf also section 2-703(a) UCC in the US. In France, where title in tangible movable assets also transfers upon the conclusion of the sales agreement, the unpaid seller still in possession has similar rights and cannot be forced to hand over his assets before payment either, again, unless otherwise agreed: see Articles 1612 and 1613 Cc (old). This statutory retention right is often seen in France as an expression of the exceptio non adimpleti contractus, therefore of the right to withhold performance under a reciprocal agreement if the other party is not performing even though not formulated as a general principle in the French Civil Code, as it is in Germany (section 322 BGB) and now also in the Netherlands (Article 6.262 CC). In these latter two countries, where in any event delivery is required for title transfer, the unpaid seller still in possession may try to rely on his continuing title in the goods

218 Volume 3: Contracts for the International Sale of Goods or on this exception connected with his continuing holdership of the asset if title has already passed through a constructive delivery, then called the delivery constituto possessorio, also in a bankruptcy of the buyer if the bankruptcy trustee does not offer full payment. The retention right may sometimes go further in its impact than a mere exception to the performance duty of the seller as under modern law it may give priority status in any execution proceeds of the asset, as under Article 3.292 of the new Dutch CC. The seller’s lien or retention right in England does not strictly speaking give a similar protection and does not imply a power of sale but, upon notice to the buyer, there is a right to resell the goods to others free and clear under section 48 of the Sale of Goods Act in the UK. In the US, section 2-706 UCC equally allows the resale to a bona fide third party and also makes clear that the defaulting seller is not entitled to any overvalue. The retention right is not otherwise in the nature of re-transferring title, certainly not to the seller, even in countries where title passes immediately upon the mere conclusion of the sales agreement or in countries where delivery is required but this has taken place by the seller (exceptionally) providing constructive delivery only, leaving the seller as the physical holder or custodian of the asset. Even in countries where there is no automatic retention right for the unpaid seller in possession of the goods, it may still be possible to agree in the sales contract to such a retention right. Yet, also here, the status of these contractual retention rights must remain in doubt in these countries especially as to their proprietary and preferential status. It is in any event no foregone conclusion that the rules concerning the statutory retention right automatically apply to any contractual retention right so created as well. In the US, these rights convert automatically into perfected security interests, for example where the bill of lading is retained by the seller (see section 2-505 UCC). Elsewhere they may be considered possessory pledges subject to the formalities applicable to the creation of these rights, especially if an execution facility or power of sale is foreseen. Also, in the case of the (contractual) retention right, there is therefore the question whether it could facilitate the (automatic) return of title upon default and how (as a form of appropriation or otherwise), especially relevant in countries where title re-transfer does not automatically result from the rescission of the failed sales agreement or even from an express contractual clause to the effect. As mentioned above, the statutory retention right is unlikely to imply a re-transfer of title, and any contractual clause to the effect would be unlikely to create an automatic title return in countries which do not commonly allow this pursuant to a contractual term. In the US, there is, however, a statutory reclaiming or appropriation right for 10 days after receipt of the goods if bought on credit while the buyer was insolvent (section 2-702 UCC), a right since 1978 also recognised in bankruptcy (section 546(c) of the US Bankruptcy Code). Another example of a statutory reclaiming right is in section 2-401(4) UCC, under which title re-vests (automatically) in the seller upon a rejection or other refusal by the buyer to receive or retain the goods, whether or not justified, or upon a justified revocation of an acceptance. Cash sales in any event give an implicit lien recognised under section 2-507(2) UCC, which lien is, according to the Official Comment, in the nature of a reclaiming right and not a security. In fact, a special statutory reclaiming right operative during a limited period after title transfer also exists in France under Article 2102(4) CC, although interpreted there not as a revindication right but as a return of the legal retention right of the seller under Articles 1612 and 1613 CC. Unlike the French statutory rescission right (Article 1184 old CC, cf Arts 1178 and 1226 new), this French statutory reclaiming right may exceptionally be exercised upon mere notice, and is especially important if the goods are still in transit, although title remains strictly speaking with the buyer until the official rescission of the sales agreement. In the Netherlands, on the other hand, the

Volume 3: Contracts for the International Sale of Goods 219 brief statutory reclaiming right upon default during six weeks after the due date, referred to in Articles 7.39ff CC, is in the nature of a true revindication right and implies a return of title if this right is invoked. The retention right of the seller is more fully discussed in Volume 4, section 1.4.10 in the context of the discussion of proprietary rights.

2.1.12. Alternatives to the Reclaiming Rights in International Sales. The Letter of Credit Because of the (bankruptcy) complications and potential uncertainties in the case of reclaiming title upon a default in a sales agreement, it has already been said that personal security in the form of letters of credit may be more certain in result than rescission (clauses) or even a reservation of title or statutory reclaiming rights, especially upon shipment of the goods to a new situs. This may in any event change the availability and status of these (proprietary) remedies, which also applies to other types of security interests that may have been created by the seller in the sold assets: see also section 2.1.7 above. Retention rights, be they statutory or merely contractual, by their very nature restrain any subsequent commercial activity in the goods. From a practical point of view, the resulting need for the seller in international sales to retrieve the assets or sell them to alternative buyers in foreign or distant places of destination or conduct an execution sale create their own problems, costs and risks. From the point of view of increasing their effectiveness, creating greater uniformity internationally in the return of title upon rescission because of default or in in rem securities supporting payment may well be desirable and a justified objective of the modern lex mercatoria, but even full harmonisation would not relieve the practical problems and inconveniences associated with the retrieval or execution of assets, especially in foreign destinations. Certainly, in international sales, letters of credit may therefore be more effective, while they leave the benefits of the transaction intact and avoid the problems associated with the actual retrieval, custody and return of the goods after transportation to the buyer in another country. The international sales contract thus often requires some form of bank guarantee instead. Domestic sales contracts may also do so, but as it is more costly, the reservation of title, where accepted, is more normal domestically, as it is cheaper and simpler to arrange, there being no third party such as a bank involved. Where in international sales personal guarantees are preferred, the most common type of these bank guarantees is the modern letter of credit. Through the Uniform Customs and Practice for Documentary Credits formulated by the International Chamber of Commerce (ICC) in Paris, it received uniform use and application worldwide, also reflected in Article 5 UCC: see further Volume 5, section 3.3.17.

2.2. Ancillary Arrangements in International Sales. The Role of Intermediaries and Documents 2.2.1. The Safe Harbour Function: Agents and Documents of Title The fact that international sales take some time to complete and often involve intermediaries unavoidably creates special complications, dangers and costs, but also opportunities. As it often requires the goods to be shipped and handled by third parties as agents who have no other interest

220 Volume 3: Contracts for the International Sale of Goods than being compensated for their services, this results at the same time in some safe harbour for the goods while in transit and provides a safeguard against manipulation by either party during the period between the conclusion of the sale and the ultimate delivery of the goods. More importantly, it may also introduce flexibility in the resale possibilities and payment arrangements, as we have already seen. Particularly bills of lading or warehouse receipts traditionally allow for an easy transfer possibility of the rights in the underlying goods with reasonable certainty that delivery would not be complicated by retention or other rights of the original seller who has lost physical possession or control. The bill of lading itself and its proprietary function will be discussed more extensively in Volume 4, Part II. Bills of lading also allow for an early, simple and safe payment facility tied to the mere presentation of these documents by the seller, certifying the handing over of the goods to a carrier as an independent agent. It gives buyers reasonable certainty that they will receive the goods without complication upon presentation of the bill to the carrier, which will give them the confidence to pay immediately when the bill is presented to them, even if the goods are effectively delivered later by the carrier. Any disputes on quality and safe arrival are then separately and independently argued out. Indeed ‘pay first, argue later’ is rightly the underlying maxim of all effective payment schemes based on presentation of shipping documents, and was used long before the development of the letter of credit which, as we shall see in Volume 5, section 3.3.12, also operates on this basis. This framework of basic and practical protections still remains in place today and banks traditionally facilitated the process further by providing so-called collection facilities under which they received the documents for the buyer while at the same time making the payment to the seller; see for these arrangements further Volume 5, section 3.3.7. The problem was that this payment could be made at the bank in the country of the buyer so that there could still be problems for the seller in receiving this money in its own country as will normally be the objective. This problem was subsequently substantially solved through the development of documentary letters of credit tied to the bill of lading where transportation by ship takes place. Under it, an intermediary bank will accept the payment obligation and make payment, usually in the country of the seller upon presentation of the documents, that is normally upon proof of loading. In this manner, the credit, quality and political risk may all be mitigated for the seller, who may be assured of the sale price, whatever occurs during transportation to the country of the buyer and whatever payment restrictions may be imposed on the buyer there, as long as the seller has properly delivered the goods at the loading point and handed over the documents. As a consequence, the risk of safe arrival and the political risk will in the first instance be for the buyer, but this is always subject to any later recovery by the latter on the basis of contractual remedies (such as those for non-conform delivery, potentially subject, however, to pleas of force majeure or hardship). If, on the other hand, a buyer has been able to insert a condition into the payment arrangement to the effect that it or its bank need not pay until a proper certificate of arrival and/or quality has been presented, the seller will in the first instance remain liable for the quality and political risk affecting any arrival of the goods. The payment protection will then be much less effective and valuable to the seller even under a documentary letter of credit, as one of the documents that must then be presented for payment is precisely the certificate of arrival and/or the quality certificate. Whatever arrangement is chosen in this connection, the key is that it will be free from the complications of actual or physical possession of the goods by either party and any possibility of manipulation of the goods on the basis of such possession, for example by a seller who may want to hide the poor original quality of the goods, or by a buyer who, upon a change in market price,

Volume 3: Contracts for the International Sale of Goods 221 would prefer not to receive the goods and might wish to take advantage of any political or other outside interference with the assets or the payment arrangements to that effect. It must be assumed that in the meantime the intermediary will independently do whatever it can to protect and save the assets in its possession from whatever risk may occur and not use these risks and their management to the advantage of either party to the sale and handle, protect and deliver the goods as best as it can in accordance with the prearranged instructions. Under letters of credit, banks will equally have an interest in making proper payment regardless of the circumstances concerning the buyer. There is thus a measure of neutrality as well as simultaneity in performance (delivery of the bill against payment) inserted in the handling of the assets and the payment in this manner on which parties often depend. In this way, liquidity risk may also be reduced. Through negotiating the bill of lading, the goods may pass safely through further sales without the possibility of the seller or buyer holding the goods back for reasons of their own, as the matter is in the first instance between the carrier or the warehouse and the last holder of the bill. This provides liquidity for whomever has the documents, including seller or buyer: the seller in possession of the documents in order to obtain early payment upon presentation, the buyer upon gaining possession of them to resell or pledge the documents and receive payment or an advance in this manner. This flexibility makes the parties at the same time less vulnerable to price and currency changes during transportation and may reduce their funding costs.

2.2.2. The Use of Agents: Their Position The basic pattern of international sales just described based on extensive use of intermediaries, although expensive, has served international commerce for a long time and still provides the basic framework. The position of these intermediaries is in the first instance determined by the contractual arrangements under which they operate, for example a warehousing or transportation agreement or a letter of credit. However, these contracts may also confer or imply further powers: the warehousing or transportation agreement gives the warehouse or the carrier the right to hand over the goods to a third party/buyer upon mere presentation of the warehouse receipt or bill of lading, thus at the same time completing the delivery duty of the seller. Alternatively, the warehouse or carrier may be seen as the agent of the buyer so that the delivery and title transfer are completed when the goods are handed over to them. Under a letter of credit, the payment by the bank is likely to discharge the buyer’s payment obligation under the sale agreement at the same time. What happens here is that intermediaries effect legal acts or obtain discharges for either seller or buyer as the case may be (under the contract between them to which the intermediary is not itself a party) to complete a sale without achieving any benefit or incurring any duties of their own. This is the essence of (contractual) agency, see also Part III below, and is supplemental to and needs to be well distinguished from the underlying contract obligations between the seller and the buyer (in which the intermediary, although not a party, may play a role as representative of either of them). The principle of independence or abstraction operates here as the effects of the agency are determined by principles of the objective law rather than by the underlying sales contract or even the contract between principal and agent. Although this latter contract sets the agency in motion, the effect on others may be different from what this contract envisages or prescribes. There is here a risk for the party making use of an agent as others may rely on it and need not check the underlying arrangements and may not be affected by them. Thus, a warehouse owner may not be

222 Volume 3: Contracts for the International Sale of Goods empowered to hand over the goods to the buyer before payment, but, if he does, the buyer may retain possession, certainly if he did not know of the condition (nor that warehouse receipts were involved). It is clear that not every intermediary is an agent in this sense, although the term ‘agent’ is often so used. Again, in a legal sense, the key is that the agent initiates or completes a legal act or obtains a discharge for others. There is here an internal and external relationship: a relationship between principal and agent and one between the agent and a third party; see more particularly section 3.1.3 below. The contract of carriage between the seller and the carrier is in principle limited to the relationship between both of them and is therefore internal. Yet it may have an external effect, in that the carrier operating for the seller may effect a legal act with the buyer on behalf of the seller under the original sales agreement between both of them, for example the act of delivery achieving at the same time the title transfer. That is the external aspect. If there was a bill of lading or a warehouse receipt, however, the buyer in acquiring the bill or receipt may already have this title as the delivery of the bill of lading or receipt to him under applicable law may substitute for the delivery of the goods. In that case the carrier or warehouse is unlikely to operate as agent in the transfer of title. They will only provide the buyer with the physical possession of the goods, which may not itself be considered a legal act. Yet by delivering the goods in this sense, they still perform a contractual duty for the seller, effect a discharge for him, and may in this aspect still be considered an agent. Agency relationships may also allow intermediaries to choose a counterparty and contract with it on its principal’s behalf. In this way, selling or buying agents may be appointed to find buyers or sellers. In shipping, a shipping agent may thus be asked to make the necessary shipping arrangements with whomever and on the terms he thinks best. The del credere agent may have a function in the arrangement while accepting the credit or payment risk in connection with the counterparties this agent chooses.

2.2.3. The Use of Negotiable Documents of Title in International Sales: Bills of Lading and Warehouse Receipts As there are likely to be intermediaries in the shipping and warehousing arrangements concerning international sales, it has already been said that some document may emerge, if only as receipts, as the bill of lading or warehouse receipt originally were, when a seller physically delivered its goods at the appointed place, such as the ship’s rail or the warehouse, and received these documents in return. These documents subsequently developed into so-called documents of title, from a legal point of view incorporating the goods into the document. This allowed full use to be made of the intermediaries’ safe harbour function and these documents subsequently started to provide great flexibility in any resale and payment arrangements if they became negotiable. This is done by expressing them to bearer or order. Regardless of the whereabouts of the goods and their ultimate arrival in the place of destination, the issue of this type of document thus creates a simple method of handing over the (rights to the) goods to third parties who may claim these assets as owners upon their arrival against presentations of the documents. It promotes liquidity in international sales. See for the details of bills of lading and their development as negotiable documents of title, Volume 4, section 2.1 below. It also allows them to be handed over to the buyer against payment as we have seen. This re-establishes a simultaneity in the performance of both parties (allowing payment to be made against delivery of the document), which is otherwise lost when the goods are shipped for delivery (seller’s performance) while payment is in principle only upon arrival (buyer’s

Volume 3: Contracts for the International Sale of Goods 223 performance). It provides protection for either party in a sale: upon tendering the documents the seller receives (immediate or early) payment and the buyer, now in possession of the bill of lading (either directly or through his bank) will collect the goods upon arrival and is no longer dependent on the co-operation of the buyer in this aspect. They can argue over the details, especially the safe arrival, quality and its effect on the price later. It was said before that ‘pay first, argue later’ is the underlying principle of most effective payment schemes. Technically it puts the buyer in the weaker position as the latter does not know whether the goods will arrive in good condition, but at least he can be sure that the goods are in independent professional hands and are not likely to be manipulated or held back as they are already with independent third parties. As already mentioned, intermediary banks may here provide further services, either in a collection arrangement in which they receive the documents and pay the seller on the buyer’s behalf or, as in letters of credit, by accepting a payment obligation of their own in this respect, often in the country of the seller.

2.2.4. Documents of Title in Payment Schemes in International Sales. Collection and Letters of Credit On the payment side, the intervention of intermediaries holding the goods against the issue of documents of title such as bills of lading may thus give the seller additional security as the seller is unlikely to hand over the documents issued by these intermediaries to the buyer or its agent before proper payment arrangements are made. This is so even under FOB or CIF terms, which will be discussed below in section 2.3.9, in the first case because, even though the buyer arranges the transportation, the seller when receiving the bill of lading upon loading is here the buyer’s agent; in the second case it is because the CIF term itself requires the documents to be handed over to the seller as part of the transaction, the seller being in charge of the transportation. Especially in legal systems requiring a form of delivery for title to pass, title in the assets may thus effectively be reserved in an indirect manner366 by a seller retaining the bill of lading as the goods cannot be handed over by the carrier to the buyer without the relevant documents being produced by him. Even if delivery is not required for title transfer, which in such systems usually follows immediately, the sale is agreed and a contractual requirement that a bill of lading be issued is usually explained as meaning to postpone the title transfer until that moment; see further Volume 4, sections 2.1.2ff. In the US, the UCC explicitly recognises that the seller retains a proprietary interest in the goods if the latter retains the bill for payment (section 2-401). In this system, if payment against documents is agreed, the bill of lading issued to the seller gives him a perfected security right in the underlying assets. The issue of the document nevertheless allows the sale itself to go forward and the goods to sail (and even title itself to be transferred when the bill of lading is given to the seller as agent for the buyer) regardless of these seller protection aspects and the use that is made of the bill in this connection. Again, the existence of the bill of lading also allows for variation in the sense that it may be placed in the hands of further intermediaries, notably banks, especially in collection schemes under which banks achieve as agents the direct exchange of the bill against the purchase money which they will collect: see more particularly Volume 5, section 3.3.7. Under these schemes, the banks may also assume an autonomous function and guarantee payment upon presentation to

366 Explicitly so s 2-505 UCC in the US.

224 Volume 3: Contracts for the International Sale of Goods them of the documents by the seller (therefore regardless of the creditworthiness of the buyer and always independent of the safe arrival and proper quality of the goods). This is the essence of the documentary letter of credit, already mentioned too; see for the details also Volume 5, sections 3.3.8ff. Upon such payment, the paying bank may itself acquire vis-à-vis the buyer a retention or security right in the bill of lading to achieve reimbursement by the buyer if no other arrangements are in place (for example, the buyer may have put the bank in funds or his current account may be debited or if necessary, may be allowed to operate with a deficit for the time being). The bank may then be considered a bona fide holder of the bill of lading in its own right, and the bill then acquires the status of a negotiated document of title under which the bank is the presumed owner or pledgee of the goods. Retaining the bill of lading under these circumstances has a significance in the possessory aspect as delivery of the goods to the buyer cannot take place before the latter has received the bill of lading from his bank.

2.2.5. The Use of Negotiable Instruments in International Sales: Bills of Exchange Documents of title in the payment circuit may not only concern the safety and liquidity aspects in the underlying assets, but the payment itself may also be incorporated in a document of title. When concerning money, they are usually called instruments, which, like bills of lading (see Volume 4, section 2.2), may also become negotiable by adding the words ‘to order’ to the beneficiary/payee367 or by making the instrument payable to bearer, hence the term: ‘negotiable instruments. They are mostly of two types: they may contain an instruction from the creditor to the debtor as in the case of a bill of exchange to pay to a named person (payee) or his order or to bearer, or they may contain a payment promise by the debtor himself, as in the case of a promissory note, in which the debtor promises to pay to someone named in the note or his order or to bearer: see for bills of exchange more particularly Volume 4, section 2.1. Promissory notes therefore circulate at the initiative of the debtor, bills of exchange at the initiative of the creditor. Although both types of instruments are in principle to order or bearer, bearer bills of exchange are uncommon on the European Continent (see, for example, section 1 of the German Bills of Exchange Act 1933 (Wechselgesetz), and are even declared void under the Geneva Convention of 1930. Order paper may, however, be converted into bearer paper by an endorsement in blank by the holder.368 Conversely, bearer paper can be made into order paper through endorsement to an identified person by the holder. We shall be concerned here only with bills of exchange, often also called drafts, which are or used to be the more important in international trade; promissory notes remain particularly common within the US. They are discussed more extensively in Volume 4, section 2.2. Under bills of exchange, the creditor or drawer giving the payment instruction to a third-party beneficiary or payee is likely also to incur a liability towards him/her. The beneficiary/payee is likely to be a third party to whom the creditor owes something, and issuing a bill of exchange

367 In the UK under the Bills of Exchange Act 1882, even if the words ‘to order’ are missing, the bill is so interpreted, see s 8(4), but not so in the US or on the European Continent. 368 This used not to be possible in France before the law of 8 February 1922.

Volume 3: Contracts for the International Sale of Goods 225 and handing it to the payee then becomes another way of paying this party and amounts to a form of assignment of the claim. The payee may, however, also be the seller’s own bank, which then collects in this manner as agent for the drawer. The payee may even be the seller/drawer himself. When negotiated to bona fide third parties, these instruments acquire, like bills of lading, a status independent of the underlying claim and its validity and in fact render (unlike bills of lading) all signatories, including endorsers, liable for payment to the holder in the manner of the guarantor’s note marked to him/herself as beneficiary/payee, by discounting the bill of exchange or selling the promissory note to a bank. It will normally be the buyer’s bank, which is the only one familiar with the latter’s credit, unless the bill of exchange is avalised, that is (in civil law terms) guaranteed by another bank. Discounting (time) bills of exchange is a traditional way of obtaining early cash regardless of the arrival of the goods or their quality upon arrival and the agreed sales credit period. It means in fact that the drawer, if marked him/herself as the payee/ beneficiary on the bill of exchange and after having obtained acceptance of the bill by the drawee, sells it to a bank who then becomes the holder and will present the bill of exchange to the drawee/debtor on the due date. It will apply a discount for the loss of interest until the due date, taking into account also the creditworthiness of the drawee/debtor. It may also charge an additional fee for the service. The drawback of this substitute form of payment in international commerce is that since normally only a bank which knows the drawee/debtor under a bill of exchange will discount it, the discounting normally leads to payment in the country of the buyer upon the presentation of the bill of exchange to him (except if it specifies payment in the country of the seller, which is exceptional, or if it is avalised by a bank in the country of the seller). As we have seen, the letter of credit, on the other hand, normally achieves payment upon presentation of the documents by the seller to a paying bank in its own country. It has as a consequence become more common. It may be combined, however, with a bill of exchange, which allows the beneficiary of the letter of credit to draw a bill of exchange on the bank liable to pay under the letter of credit and, in the acceptance credit, even demand acceptance of the bill in order to create an early discount facility if the letter of credit is not immediately payable upon presentation of the documents. The bill of lading and the bill of exchange may also be connected more directly, in the sense that the bill of lading may be surrendered by the seller to the buyer against the latter’s acceptance of a bill of exchange drawn on him, which may subsequently be discounted by the seller. This is the documentary bill of exchange—see further also Volume 5, section 3.3.6. In collection arrangements a bank collecting for the seller may also be required to draw (as agent for the seller) a bill of exchange on the buyer and obtain acceptance by the latter before the documents are released—see further Volume 5, section 3.3.7. The importance of bills of exchange has declined in modern times, largely because of the direct involvement of guaranteeing and collecting banks in the payment circuit. These banks effectively make the payment directly to the seller through the banking system. As an assignment substitute, instructing the drawee to pay a third-party payee, bills of exchange have been eclipsed by the assignment, now facilitated in most modern countries by the abolition of the notice requirement to the debtor for the assignment to be effective. This facilitates at the same time more flexible forms of receivable financing (see Volume 5, section 2.3) and has rendered the discounting of bills of exchange to raise finance less efficient. There is also the drawback of the physical element. Modern business has problems with paper that must be stored and remain accessible which is costly and hardly allows for an electronic system.

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2.3. The Uniform International Sales Laws. The Vienna Convention or CISG 2.3.1. Origin and Scope International sales have been the subject of uniform treaty law, first in the Hague Conventions of 1964, which separated the formation of the contract from the more substantive parts of the law of sales, and subsequently in the already much mentioned CISG of 1980. It is practically speaking the successor to the Hague Conventions and combines both areas in one document. It may be helpful at this stage to relate some of the history of the Vienna Convention. It was prepared by UNCITRAL, the UN Commission on International Trade Law established on 17 December 1966, operating from Vienna since 1969; see also Volume 1, section 1.4.20. But the idea of a uniform sales law originally emerged in UNIDROIT (Institut International pour l’Unification du Droit Privé or The International Institute for the Unification of Private Law) set up in Rome in 1926 under the authority of the League of Nations see again Volume 1, section 1.4.20. In 1928 Professor Ernst Rabel from Berlin, later at the University of Michigan in Ann Arbor, proposed a project on international sales. It led to a first draft in 1935, while his own book, Das Recht des Warenkaufs, first appeared in 1936. The project met considerable opposition, especially in the field of offer and acceptance (where common law maintained a more formal but also incidental structure). After 1939, there were as a consequence two projects, one on formation: Loi Uniforme sur la Formation des Contrats de Vente Internationale des Objets Mobiliers Corporels (LUF) or the Uniform Law on the Formation of Contracts for the International Sale of Goods (ULFIS); and another on the international sale itself: Loi Uniforme sur la Vente Internationale des Objets Mobiliers Corporels (LUVI) or the Uniform Law on the International Sale of Goods (ULIS). UNIDROIT being in a period of suspension after World War II, these projects were agreed in special Diplomatic Conferences at the Hague in 1951 and 1964, which, however, were attended by only a small number of countries. They were ratified by only a few states, often with reservations (the UK, for example, required that the parties themselves made the Conventions applicable to their contract, which was never done).369 Because of their limited acceptance, the Hague Conventions were increasingly seen as not representative of the views of the world community at large and especially not of the needs of lesser developed countries. Once UNCITRAL adopted the project, it moved quickly and with a much broader range of participants. It presented a first draft in 1978, which tracked much of the language of the Hague Conventions, and was able to conclude the matter at a Diplomatic Conference in Vienna in 1980 attended by 62 countries. They approved the final text after five weeks of deliberations. In the Hague Conventions of 1964, there was no definition of what an international sale was. They limited themselves, however, to the sale of goods as tangible, movable objects. The Vienna Convention does not contain a definition either but notably does not apply to the sale of consumer

369 The International Sales of Goods Convention had been UNIDROIT’s major project. The tribulations of UNIDROIT after World War II have already been mentioned in Vol 1, s 1.4.20. Although created under the League of Nations, it is not now a UN body but rather a private think tank. When it was re-established, the sales project was in the hands of an independent Hague Diplomatic Conference, which completed the project after conferences in 1951 and 1964. From there it moved to UNCITRAL which, as a UN agency, was thought to be the more proper forum likely to obtain the most ratifications. After UNIDROIT was restarted, it diversified into other areas: see also Vol 1, s 1.4.20.

Volume 3: Contracts for the International Sale of Goods 227 goods, auctions, execution sales, sales of investment securities and other negotiable instruments or money market transactions, sales of ships or aircraft and sales of electricity (Article 2). The civil or commercial nature of the sale is otherwise not considered (Article 1(3)). It has already been mentioned in section 2.1.5 above that the international setting itself and the additional services an international sale often requires in terms of transportation, insurance, handling and payment are not considered in this definitional context either. For the Convention to apply, parties must have their place of business in different Contracting States or the applicable private international law should point to the law of a Contracting State for the Convention to apply (Article 1(1)), always assuming that both parties come from different states, which in that case need not be Contracting States. If a party has more than one place of business, for example if it operates through branches in different countries, the place of business with the closest relationship to the contract and its performance counts. If a party has no place of business, the habitual residence will be taken as relevant (Article 10). The inference is that only cross-border sales between professionals are considered. It was already said that he Hague Conventions indeed required cross-border movement of goods, but this criterion is now abandoned. It may be more appropriate where proprietary aspects are also considered, which has not so far been the case in the sales conventions. The Vienna Convention is as a consequence applicable even if no assets cross borders as long as the contracting parties are from different countries. This is in line with its purely contractual scope. One thus sees a number of elements of international sales implied—cf more particularly section 2.1.2 above—without (for purposes of the uniform law) any single determining factor, although the emphasis is (for contractual purposes) on the different location of the parties, while as to substance, the emphasis is on the one-time sale of individualised tangible movable assets between professionals, which assets or parties need not themselves move cross-border. The system of the Vienna Convention is still based on delivery ‘ex works’ (cf Article 31(c)), so that again from a proprietary point of view, there may not be any international (cross-border) aspect or movement at all. Another main difference between the Hague and Vienna Conventions are in a narrower concept of uniform law under the latter. It notably allows the application of conflicts rules in the areas it covers where the Convention itself has remained silent (but only after applying its general principles, Article 7(2)): see also section 2.3.7 below. Here the internationalist approach of the Hague Conventions is abandoned (see more particularly section 2.3.5 below). The Vienna Convention in its Article 9 is also more restrictive in its recognition of (international) custom as source of law, apparently in order better to protect the unwary (professional!) in international trade. The Vienna Convention generally appears to protect the buyer better—often considered the weaker party when it comes to buyers in developing countries—as compared to the Hague Conventions and therefore never accepts automatic termination upon breach, even if fundamental (Articles 61 and 64); gives the defaulter some possibilities to remedy any failure of performance even after delivery (Article 48), especially if the price is paid (Articles 63 and 64(2)); only accepts suspension (and no avoidance) of the contract if there are good reasons for fearing that the buyer will not pay (Article 71); allows avoidance in the case of anticipatory breach only upon notice of the intention to invoke this remedy (Article 72(2)); enhances the buyer’s rights unilaterally to reduce the price upon (alleged) non-conform delivery (Article 50, often seen as excessive); allows inspection by the buyer within a short period after delivery rather than promptly (Article 38(1)), and refers in the absence of a price to the market conditions rather than to prices generally charged by the seller (Article 55). The notice periods are generally more flexible than in the Hague Conventions and the Vienna Convention never requires prompt answers.

228 Volume 3: Contracts for the International Sale of Goods Finally, there were a number of important simplifications, especially in the remedies. The Hague Sales Conventions had distinguished between five categories of performance, each with its own type of remedy in the case of default. It resulted in artificial distinctions and unnecessary complications. Also, the concept of delivery was simplified and reduced to its physical aspects and to a number of obligations of buyer and seller in this respect (Articles 31 and 60), while the passing of risk was no longer immediately tied to it (Articles 66ff), although the principle that the risk passes upon physical delivery remains unchanged.

2.3.2. The Coverage of the Vienna Convention As already mentioned above, the Vienna Convention does not apply to consumer sales, the supply of services, auctions, the sale of securities, and ships or aircraft (Articles 2 and 3). It has problems with the protection of services and technology or other information directly connected with the goods supplied. Even then, the Vienna Convention contains only a partial codification of the law of sales as it relates to the formation of the sale contract and the rights and obligations of parties thereunder (Article 4, although this is a very broad formula), but notably not to questions of validity of the contract (therefore in questions of sufficient consensus and the defects therein) and to the impact of custom, nor to the property aspect of sold goods, including the title transfer. In fact, from the subjects covered it is clear that the scope is even more limited as it avoids all general contractual aspects except for offer and acceptance or formation (in Part II). Areas notably not covered by the Vienna Convention (and earlier the Hague Conventions) are: (a) consent or lack thereof or the usual defences against binding force in the case of fraud, coercion or duress, abuse of power or undue influence at the time of formation, mistake or misrepresentation and its consequences, in civil law often referred to as matters of validity, which then also cover questions of avoidance and nullity for other reasons such as illegal purposes; (b) capacity and proper authority, including agency, or the consequences of lack thereof; (c) pre-contractual rights and duties; (d) interpretation, supplementation and enforcement or abuse of rights obtained under the contract including any renegotiation duties in the case of hardship or gross imbalances; (e) the transfer of title, its manner and time and the property rights created thereby; (f) issues of transactional and payment finality, and (g) prescription (the UNCITRAL Convention of 1974 on the Limitation Period in the International Sale of Goods suggests a period of four years). By special provision (Article 5), the Vienna Convention does not apply to a seller’s liability for death or personal injury caused by the goods either. It has already been said that the areas not covered by the Convention largely relate to the general part of the law of contract (except for offer and acceptance in the area of formation) or to property aspects, especially the transfer of title pursuant to the contract. What is therefore excluded is the typical contractual infrastructure, such as questions of capacity, binding force or consensus, and the interpretation of the contract, defences, pre- and post-contractual duties, but also the proprietary and finality consequences of a sale and any payment thereunder. These aspects are not likely to be coverable by the contract itself either, certainly not if not themselves of a contractual nature, like notably the transfer and ownership aspects. A Convention also covering these areas would have been much more important. As for the contractual infrastructure, the UNIDROIT and EU Principles attempt to cover some of this (see section 1.6 above) and may, whatever their strengths or weaknesses, from that point of view become more important, although so far, they are not meant as a binding set of rules (but could, as was argued above, still figure as general principle under the modern lex mercatoria). The 2008–09 DCFR, which is an academic effort in Europe to come to a full codification of

Volume 3: Contracts for the International Sale of Goods 229 private law within the EU, has both a general part of contract and a special chapter on sales. It also deals with title transfer: see Volume 4, section 1.11. It was followed by the CESL as an official EU proposal and DCFR carve-out, already discussed in section 1.6.13 above, but it did not cover title and transactional and payment finality issues either. In fact, the Vienna Convention (with the important exception of its provisions on formation relating largely to offer and acceptance) covers particularly those aspects of international sales which parties are themselves likely to cover in the contract, such as: (a) quality, quantity, price, place and time of delivery; (b) default; and (c) the in personam remedies, including the concept of force majeure and the passing of risk. In fact, the Convention only concentrates on some aspects of offer and acceptance (Part II), on the time and place of delivery (Articles 31 and 33), conform (physical) delivery (Article 35), transfer of risk (Article 69(1)), payment (Article 57), default (Articles 45 and 61), damages (Article 74), force majeure (Article 79), and a duty of care for seller or buyer if something goes wrong in the implementation of the contract in order to protect the goods (Articles 85 and 86). Parties may certainly also continue to cover these aspects in the contract itself (Article 6). The Vienna Convention is as a consequence of modest help and primarily meant to provide solutions when the contract, standard terms, or industry usages (see Article 9) do not provide sufficient guidance themselves, which is usually only the case in oral contracts. They must be considered rare in international sales. This all obviously reduces the importance of the Convention, but there are more deepseated problems, which have led to many standard industry contracts excluding its application altogether. Above, the problems were identified as the subjective or anthropomorphic notion of contract, suggesting the old intent- and will-based model, associated with consumer law thinking, and a concept of sales that remains tied to an individual asset rather than to a repeat sale of a whole class of commoditised assets in transformation as part of international production and supply chains, which may also include a significant service element and technology or software features. Goods then cover much more than simply physical assets properly set aside. The subjective notion of fundamental breach (Article 25) and force majeure (Article 79), if at all appropriate as a risk distribution device of the objective law in in professional dealings, as well as the unilateral right of the buyer to reduce the price (Article 50), are further significant drawbacks that undermined confidence in the Convention as we have already seen and as will be discussed further below. The US and most EU countries, with the notable exceptions of the UK and Portugal, have ratified the Vienna Convention. The UK was represented on the UNCITRAL working group at the time but remains one of the most important commercial nations not so far to have accepted the Convention, although it ratified the earlier Hague Sales Conventions (but with the reservation that parties had to make a reference to them in their contract or opt-in). Rather than the drawbacks just mentioned, the principal reason for the UK’s abstention so far may be that given by the Law Society of England and Wales. It is concerned about the diminishing role of English law within the international trade arena that might result.370 This argument is an odd one. It could be argued with equal force that any form of transnationalisation of English commercial law would enhance its status and attraction, assuming of course that the text had sufficient merit, although accepting the full force of the various sources of law in the modern

370 See the Law Society of England and Wales, Law Reform Committee of the Council, 1980, Convention on Contracts for the International Sale of Goods (1981). The Department of Trade and Industry, United Nations Convention on Contracts for the International Sale of Goods: A Consultative Document (June 1989) was more neutral and did not express a clear preference.

230 Volume 3: Contracts for the International Sale of Goods lex mercatoria would, in the view of this book, be even more effective and place England at the centre of this development from which its practitioners would profit more than most others. See also the discussion on this point in Volume 1, section 1.1.3 in fine. The real problem is the Convention’s anthropomorphic nineteenth-century will and fault bias, which in more modern times is associated with consumer law. In the meantime, the present English sales law for goods or movable tangible assets remains basically the one of 1893 updated in 1979 and may be doubted ever to have set a worldwide pattern in international sales except within the British Commonwealth. Article 2 of the UCC is now more influential and emerged in draft very much at the same time as the Hague Conventions. Like these earlier Conventions, the succeeding Vienna Convention is different from the English approach in a number of important aspects, notably in the absence of the concept of consideration but unlike the Hague Conventions also in the acceptance of good faith notions in the interpretation and of general principles in the supplementation of the Convention itself, which may suggest a more normative interpretation of the legal text, see section 2.3.7 below. These would certainly be new features in countries like England, although perhaps less so in commercial law in the US (see section 1-103 UCC, which in any event allows a liberal interpretation of the statutory text). In its detail, the US in Article 2 UCC may be somewhat closer to the Convention. Perhaps for this reason, the US has not shown a similar resistance and has ratified. Unification makes some sense as a system of different domestic sales laws increases cost in terms legal advice, creates some risks on its own, and may well slow down transactions. It is a matter of information and transaction costs. Moreover, considerable uncertainties and undesirable consequences may result from the applicable choice of law rules or even from a contractual choice of domestic notions: see further Volume 1, section 2.2.9. Most importantly, domestic laws whose application is likely to follow, tend to ignore the character and dynamics of international sales: see more particularly Volume 1, section 1.1.6 and sections 1.4 and 1.5 for the development of a transnational legal order and lex mercatoria and its dynamics to accommodate modern needs. Yet it has already been said that the Vienna Convention remains largely based on domestic notions and hardly represents a transnationalised model for international sales. It ignores especially the importance of the ancillary arrangements in transportation, insurance, and payment which make the international sale more typical. Moreover, it is only a very partial codification and may as such raise as many questions as it solves especially in the area of the transfer of title and transactional and payment finality. There will also remain diversity in its interpretation and certainly in its supplementation where, on the one hand, reference may be made to widely varying good faith notions and, on the other, even to private international law rules: see more particularly sections 2.3.6 and 2.3.7 below. Transaction costs thus appear hardly reduced. But overriding this is the fact that international commercial practice is not happy with the text for the reasons stated. It does not sufficiently recognise itself in it and never asked for it. It was an academic initiative and model, that, in the German manner, was primarily intellectual and never much concerned with practical realities. In section 2.3.7 it will be argued that uniform treaty law can only flourish and its true meaning can only become apparent within the context of the hierarchy of norms of the whole lex mercatoria: see for its sources and their hierarchy Volume 1, sections 1.4.14 and 3.1.2. It renders the Convention when applicable subject to higher fundamental principle, established custom and practice, and general principles, which at the same time would allow for a more natural evolution of its text and meaning.

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2.3.3. The System of the Vienna Convention: Directory or Mandatory Rules? The question was raised at the time whether provisions of the Hague Sales Conventions could or should be of a mandatory instead of a directory nature, especially important as to whether they could be set aside in whole or in part by the parties. Article 6 of the Vienna Convention, following Article 3 of the Hague Sales Convention (ULIS), is unambiguous on the subject and allows parties to deviate from any of its terms (except where the domestic law of a party with its place of business in a Contracting State requires a written form for the contract of sale, its modification or termination, provided that the relevant Contracting State has insisted on maintaining this principle in international sales upon a special declaration to the effect (Articles 12 and 96) as the US has done). Note however that to deviate, both parties must be in agreement even though it may be implied, for example, by deviating in the contract from the main provisions. In this connection, it may be noted that the provisions of the Convention are hardly sufficiently related to fundamental values or public order to be mandatory. They are not redistributive either, but it may still be asked whether parties may change the rules of contract formation (offer and acceptance) thus indirectly determining the conditions for validity of their agreement and may also change the rules on interpretation and supplementation of the Convention itself, short of the parties eliminating the application of the entire Convention under Article 6. Earlier, an important argument developed at the Hague Diplomatic Conference of 1951 to the effect that international trade required some basic mandatory rules on the structure of the international sales agreement, notably to avoid improper practices. It potentially meant a form of control of the content of these agreements. This never became the accepted view, which remains based on the classical notion of contracts, in essence therefore on party autonomy in formation, coverage and interpretation. Corrections could, however, still be conceivable on the basis of fundamental legal principles or mandatory custom and public order notions. They could indeed be identified as overriding in the context of the lex mercatoria approach—see Volume 1, sections 1.4.13 and 3.1.2—but this idea found expression in neither the Hague nor Vienna Conventions, which did not cover this ground, unless one considers the interpretation and supplementation language in Article 7 of the Vienna Convention a move in that direction, especially the requirement that the Convention be interpreted in the light of ‘the observance of good faith in international trade’; see further section 2.3.7 below. In international sales, any overriding principles of this nature should be of an international character unless of a domestic regulatory or public order nature (see Volume 1, sections 2.2.6ff) assuming always there is, in such situations, in terms of conduct and effect, a sufficient domestic contact with the case. Thus, domestic considerations still enter the picture and could also be a bar to enforcement of any adverse foreign or arbitral decisions in domestic recognition and execution proceedings in the country in question. It was earlier said that overriding principles may sometimes also be covered by the concept of good faith or abuse of rights. Domestically this is known especially in legal systems such as those of the German and Dutch where in pressing cases they may even lead to amendment of the contract and its implementation (see more particularly section 1.3.1 above). Again, in international transactions, the likely reason is the appeal to fundamental legal notions or public order requirements of a transnational nature. It is inconceivable that they play no role at all in the application of the Vienna Convention, which again does not stand alone and must in terms of the international lex mercatoria find its place among the other applicable sources of law and

232 Volume 3: Contracts for the International Sale of Goods their hierarchy, and may also be corrected by relevant public order considerations, either at the national or transnational level. All the same, in the end, the liberal attitude of the Hague Conventions and implicitly also of the Vienna Convention towards party autonomy was made uncontroversial, probably helped by its limited scope. As just mentioned, in the Convention good faith is only referred to in connection with the interpretation of the Convention itself and is then promoted for international trade: see Article 7(1), although its meaning in treaty rather than contract interpretation may remain obscure, see section 2.3.7 below where the emphasis is rather on liberal interpretation, it was submitted, and the revival in that context of the traditional sources of law, therefore on an interpretation technique rather than on some absolute standard of behaviour on its own, at least in professional dealings. It is not clear how mandatory the concept is; again, under Article 6, it can conceivably be eliminated or the standards defined. The Convention does not deal with the interpretation and/or adaptation of the sales contracts concluded under it, so the issue is not considered in that context and it is not clear. The UNIDROIT Principles and the Principles of European Contract Law (PECL), which cover contract law more generally and also the matter of contractual interpretation, seem here to adopt a different attitude to good faith, in any event not limited to acceptance of overriding international fundamental principles and public order requirements alone. Rather, as noted before in section 1.6.5, good faith, although in essence undefined, came to be seen as a higher behavioural standard, to opposite of bad faith, absolutely mandatory under these Principles and introduces a generally censorious attitude to contract and party autonomy derived from consumer law, transposed also to the professional sphere, and may then even go beyond fundamental principle and public order requirements. So it is in the DCFR. The CESL, as we have seen in section 1.6.13 above, was basically made for consumer sales, although B2B dealings with SMEs were also covered, and followed this approach then also. It contrasts notably with section 1-302 UCC, which allows professionals to set good faith standards between themselves unless becoming manifestly unreasonable. Indeed, the approach adopted in both sets of Principles, the DCFR, and also the CESL or indeed the CISG itself, was identified earlier as largely the result of a personal-dealing and consumer-oriented attitude, even where these Principles (especially the UNIDROIT ones) or DCFR mean to operate also in the international business sphere. This was always bound seriously to undermine the credibility of these various sets of rules in international trade even if mainly taking place within the EU. One may in particular have thought of the operation of the international marketplace in London before Brexit.

2.3.4. Applicability of the Vienna Convention The Vienna Convention only applies to the sale of goods or chattels as tangible movable assets between parties whose places of business are in different countries. According to Article 1(1), for the Convention to apply, the further requirement is that either the parties must have their places of business in Contracting States or the applicable private international law must point to the law of a Contracting State, although Contracting States may opt out of this latter provision (Article 95), as the US has done. For the application of the Convention, it is thus not necessary, at least for courts in Contracting States, first to determine which law is applicable in order subsequently to determine whether that law has incorporated the Convention for sales of the types covered by it. This is the approach only in the courts of non-Contracting States. Courts in Contracting States must apply the Convention

Volume 3: Contracts for the International Sale of Goods 233 as lex fori if the conditions of Article 1 are fulfilled, that is particularly when the parties come from two Contracting States. The appropriateness of applying the international sales law is then automatically assumed, see further the discussion in Volume 1, section 2.3.1. Thus, only if the parties are not both from Contracting States is there the operation of more traditional conflicts rules and the Convention then only applies if the forum’s conflicts rules lead to the applicability of the law of a Contracting State (again, under Article 95 Contracting States may opt out of this provision). In finding that the law of a Contracting State is applicable, courts would only subsequently apply the other applicability tests of the Convention, that is that parties came at least from different states (which need not then be Contracting States) and that in essence only non-consumer sales are covered (unless these conditions are waived by the parties). It follows that the Convention may under its applicability rules affect residents from nonContracting States. A contractual choice of law referring to the law of a Contracting State may in this way also achieve applicability of the Convention as a matter of the conflict laws of the forum in or outside Contracting States. It may be safer in such a case, however, to refer to the Convention explicitly, certainly if the law of the country chosen has itself opted to exclude Article 1(1)(b), as the US has done. Article 6, on the other hand, allows the parties expressly to exclude application of the Convention as we have seen in the previous section, even if they both come from a Contracting State, or risk the applicability of the Convention under the prevailing conflicts rules. A choice of law in favour of a country that has not ratified the Convention must mean its exclusion. On the other hand, a contractual choice of law-making reference to the Convention would mean its applicability even if the parties came from the same state. In that case the diversity requirement of Article 1(1) must be deemed waived. This may make sense if the goods are to be shipped from other countries and the parties, although from the same country, wish the provisions of the Convention concerning quality, quantity, price, allocation of risk and default still to apply. As has already been mentioned, total exclusion of the Convention is still quite common between commercial parties because of some of the vagaries and eccentricities of the Convention or general unfamiliarity with it. The result of the application provisions of the Convention is that a German and a Dutch resident, both coming from Contracting States, but the latter being on a visit to Germany, would be selling to and buying from each other under the Vienna Convention, except if the goods were bought for personal, family or household use (unless the seller did not realise that this was the case: see Article 2(2)). According to Article 1(2), this is also not so if the fact that the parties have their places of business in different countries does not appear from the contract or from any dealings between them. This could more particularly be the case if there was an undisclosed foreign principal represented by an agent resident, or with his place of residence, in the same country as the other party. In any event, the buying of a loaf of bread by the Dutchman while on holiday in Germany would, as a consumer transaction, not be covered by the Vienna Convention, although according to Article 1(3) neither the nationality of the parties nor the civil or commercial nature of the contract is relevant in this connection. The buying of a combi-car thus probably would be. If, on the other hand, the buyer were an Englishman (therefore someone from a non-Contracting State) on a visit to Germany, the Convention would still be applied by the German courts if called upon to decide any litigation arising from the sale (assuming they had jurisdiction) as the parties would have their habitual residences in different states (although not Contracting States) while under Article 1.1(b) the Convention would apply as a matter of German law, this being the law of the seller who, under Article 4 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, performs the most characteristic obligation.

234 Volume 3: Contracts for the International Sale of Goods Should a case arise in England, then the Vienna Convention might still apply if German law were considered applicable to the transaction by the English courts, which would have been likely in the circumstances as the UK was covered by the Regulation and would therefore be likely to apply German contract law and might after Brexit still do so. In that case the English courts would not apply the Convention as part of their lex fori but only as a matter of German law under the applicable conflicts rule. In this system, the location of the asset or any requirement of delivery in another country is irrelevant. This is a consequence of the property aspects and the transfer of title itself not being covered by the Convention (see Article 4). As we have seen, the earlier Hague Conventions still required this cross-border movement of the asset even though they did not cover proprietary aspects either, but this approach is now abandoned.

2.3.5. The Sales Law of the Vienna Convention. Formation Issues: Offer and Acceptance and the Issue of Intent As already mentioned several times before, the Vienna Convention contains only a partial codification of the international sales law. In the following, its major topics, most of which were already highlighted before, will be briefly revisited and summarised. As regards formation, the focus is on offer and acceptance. Why that was selected may be less clear and was criticised from the beginning leading to a separate Hague Convention, only combined with the rest in the Vienna Convention. The result is the determination of a fixed moment of contract formation and therefore in the more traditional view a clear moment as of which contractual rights and duties arise. Here the Convention largely adopts common law terminology, concepts and practices, even though it may be argued that the concept of offer and acceptance came late to the common law and sits uneasily with the more fitting modern notion of conduct and (detrimental) reliance, also with the non-consensual pre-contractual and contractual or post-contractual disclosure and (re)negotiations duties or duties of care. In any event, one should not be misled. The direction of the Convention is towards the more subjective consensus approach of civil law and its intent- and nineteenth-century anthropomorphic will-based notion of contracting (see also its Article 8), not the more objective consideration or detrimental reliance approach of common law to contract formation.371 As to the details, the acceptance (if not by conduct or in the manner indicated by established practice between the parties) is effective upon receipt only, even if by mail, rather than upon dispatch, as is the normal common law rule (Article 18(2)). On the other hand, unlike the situation in civil law, offers are not binding per se, even for a reasonable time (Article 16). Here traditional common law continues to prevail, except where the offer states otherwise (which was not even then binding under common law without consideration, but between merchants now also possible under the UCC in the US (section 2-205)) or has been reasonably relied upon (as for subcontractors’ quotations enabling a main contractor to make a final offer). In the way of the consideration requirement, common law requires detrimental reliance, which may be a

371 Like the UCC in the US, the Convention dispenses with the common law distinction between unilateral and bilateral contracts, the former under traditional common law being dependent on full performance for their effect (and notice thereof to the other party, instead of mere acceptance), as in offers to the public (if not an invitation to treat) and normally in offers for services, which are not relevant here.

Volume 3: Contracts for the International Sale of Goods 235 stricter requirement. Offers must be sufficiently definite, but they are considered to be so if they fix or make provision for the determination of quantity and price (see Article 14(1)) although strictly speaking even that much is not necessary if the offer is otherwise sufficiently definite. Article 55 makes further provisions for price so that in fact quantity is the only term parties must at least generally agree on. This is also the approach of the UCC in the US, more understandable if there is no written text. It requires as the minimum for validity of a sales contract the agreement on quantity. It need not be accurately stated either, although recovery is limited by what is said, while the price, time and place of payment or delivery, the general quality of the goods or any particular warranties may all be omitted (see Official Comment at section 2-201). Under the Convention, additional terms that do not materially change the offer do not result in a rejection or counter-offer, but if bearing on price, payments, quality, quantity, place and time of delivery, party’s liability or settlement of disputes, they are considered material per se (Article 19(3)). It was already noted several times that the Convention did away not only with the common law requirement of consideration (and detriment in terms of reliance) but also with the civil law one of causa (cf Articles 14 and 29(1)), see also section 1.2.3 above. In this respect it also follows the earlier Hague Sales Conventions. Thus, under the Vienna Convention, there is no search for a more objective criterion to make promises legally binding besides the mere intention of the parties. In the continental European tradition, any excesses would then likely be curbed by notions of good faith or public policy, although these notions remain underdeveloped in the Vienna Convention. As we have seen, good faith is only mentioned in Article 7(1) in the context of the interpretation of the Convention itself and may have a different meaning here. It may more properly stand for normative interpretation of the text: see further the discussion in section 2.3.7 below. It is notable that other aspects of formation remain underdeveloped, like defects in the intent in civil law or equitable defences or the notion of rescission in common law or notions of mistake. Issues of validity were exempted in Article 4. It might also be noted that the absence in the Convention of the common law requirement of consideration or civil law requirement of causa (also in the UNIDROIT Principles) does not appear to mean that they may be reintroduced through application of a national law pursuant to applicable conflicts rules under Article 7(2) as a matter of gap filling in the area of formation or outright as a matter not covered by the Convention at all. It is more likely that in international transactions these requirements (of consideration or causa) have lapsed altogether: see also section 1.2.6 above, although that would not necessarily be so in the modern lex mercatoria as it is perceived in this book where at least detrimental reliance or a beginning of performance may be deemed necessary for a cause action against the counterparty to arise.

2.3.6. The Sales Law of the Vienna Convention. Substance, Default, and Remedies, the Issue of Fault or Blame Articles 31 and 33 CISG deal with the time and place of the delivery. The normal delivery place remains ‘ex works’, that is, at the seller’s place of business, as we have seen, except where the sales contract involves a carriage of goods, therefore a transportation arrangement, when the seller must hand over the goods to the first carrier. If the goods are known to be in a warehouse or particular place of manufacture, they must be put at the buyer’s disposal at that place. The time is a reasonable time after conclusion of the contract, which means in fact that the ground rule is immediate delivery at the option of the buyer to be reasonably exercised.

236 Volume 3: Contracts for the International Sale of Goods The importance is that the Convention only concerns itself with delivery in a physical and not a legal sense. In essence goods are still put at the disposal of the buyer ‘ex works’. The transfer of risk normally occurs at the same time although strictly speaking it is at the moment the buyer takes over the goods (Article 69(1)), which could be later. In trade terms, like FOB and CIF, parties often agree to a different regime concerning risk transfer altogether: see section 2.3.11 below. Under them, the risk passes when the goods pass the ship’s rail and is entirely independent of the transfer of title or possession. In any event, as proprietary aspects are not dealt with in the Convention, delivery must not be considered here in terms of transferring legal or constructive possession as a precondition for the passing of title in countries which require delivery for title transfer. They may in any event sometimes require mere legal or constructive delivery and therefore use a different concept of possession in that connection: see more particularly Volume 4, section 1.4. As regards price and payment, although Article 14 of the Vienna Convention requires the price to be sufficiently definite, according to Article 55, the price if not established in the contract is the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances. Payment must take place at the place of seller (Article 57), unlike notably under French law (insisting on the place of the debtor, Article 1247(3) CC) and the time is upon physical delivery (Article 58), all unless agreed otherwise.372 The European and UNIDROIT Principles also require payment at the place of the creditor. In Articles 28, 46 and 62, the Vienna Convention deals with specific performance; see also section 1.4.1 above. Subject to the provisions of the lex fori in this manner, the Convention in Article 46 allows the buyer specific performance unless it has resorted to another remedy. In the case of non-conform delivery, substitute goods may only be claimed if there has been a fundamental breach, otherwise the normal remedy is repair. Article 62 gives the seller a more unrestrained right to request payment or force the buyer to take delivery or perform his other duties unless he has chosen another remedy. As regards other remedies, under the Vienna Convention, Article 47 gives the buyer the facility to set extra time (Nachfrist) for performance by the seller and Article 63 gives a similar facility to the seller to solicit performance by the buyer. The importance of this facility is in its consequences: if the defaulting party does not use the facility, the other party has a right to avoid the contract and thereby terminate its own performance whether or not the breach was itself fundamental. It is then treated as such: see Articles 49(1)(b) and 64(1)(b). As regards the default remedies of rescission and damages, the key is that, under Articles 49 and 64, a party can ask for a rescission of the contract upon default by the other party, but in the case of fundamental breach only (see for the definition Articles 25 and 26) or if that party has set an additional time for performance and the other party has not taken advantage of it. See for the subjectivity of this notion of fundamental breach and the problems it causes in professional dealings also section 1.6.9 above.373 The basic idea is that a fundamental breach

372 It is clear that the Vienna Convention does not adhere to the principle of a price certain for the validity of the contract, as Roman law had required (the pretium certum, also of importance for the transfer of risk) and as French law in its wake still did, see Art 1591 CC, but the Cour de Cassation in a decision of 1 December 1995 [1996] JCP 22.565, allowed the price to be unilaterally established if subject to objective criteria, as for telephone companies a generally applicable telephone charging scale. Art 1591 CC is now merely seen as a protection against abuse by the seller. German and new Dutch law do not retain the idea of a fixed price and, like the Vienna Convention, allow the determination of the price later with reference to objective, often market-related standards. 373 See in particular M Bridge, ‘Avoidance for Fundamental Breach under The UN Convention on Contracts for the International Sale of Goods’ (2010) ICLQ 911.

Volume 3: Contracts for the International Sale of Goods 237 results if one of the parties is substantially deprived of what it is entitled to expect under the contract, but anyone can claim this, thus putting the other party on the defensive. As far as the text is concerned, reasonable expectation does not enter here. There is some objectivation later and a reference is made to the reasonable person of the same kind in the same circumstances not having been able to foresee it, but the burden of proof then readily falls on the defending party accused of a breach. It is one of the main criticisms of the Convention as we have seen. There is no need for judicial intervention and it discharges the other party (either seller or buyer as the case may be) from its own obligations although it does not rule out any claim for damages under Articles 74–77. These may include a loss of profit or incidental (for example, enforcement cost) and even consequential damages, but they cannot exceed the loss foreseeable by the defaulting party at the time of the conclusion of the contract. This is the common law approach. It maintains a more diffuse criterion than civil law, which commonly ties foreseeability to the moment the default occurs. Article 50 contains a special and much criticised remedy in the case of non-conform delivery and allows the buyer unilaterally to reduce the price with the reduction in value of the asset. It does not require judicial intervention either to establish whether the delivery was indeed nonconform and what the appropriate reduction is. Article 50 is a combination of the actio quanti minoris and the exceptio non adimpleti contractus except that there is neither an action nor an exception but rather an independent right on the part of the buyer unilaterally to reduce the price upon his allegation of non-conform delivery. It shifts the burden of litigation to the seller, one other reason why the Convention is often considered unsuitable for professional dealings. It did not figure in the Hague Conventions but was asked for by developing countries, which felt that their buyers were better protected in this manner. It is another important reason, however, why the application of the Vienna Convention is often excluded by contract. Where the non-conform delivery was due to force majeure while the seller was still at risk, s/he will be excused from paying damages (see Article 79). As to default, under the Convention, parties may also act in anticipation of a breach to preserve their positions (the anticipatory breach of Articles 71–73) and it is possible to suspend their own performance by giving notice thereof to the other party, provided the deficiency in the ability to perform or in the creditworthiness of the other party is serious or is in preparation for performance or in the performance itself. This is the common law rule in respect of contractual conditions or the exceptio non adimpleti contractus of civil law, there for all obligations. If it results in adequate reassurances of performance, the party giving the notice must continue its own performance. Technically speaking, the Vienna Convention, like the UCC, abandoned the common law notion of (express or constructive) ‘conditions’, traditionally distinguished from warranties as a matter of interpretation. The express conditions could be related to the occurrence of an outside event or be a specific term of the deal, for example the specified quality or delivery date. Constructive conditions were those implied, for example a substantial default by the one party, which would condition the performance of the other and release him. As explained in section 1.4.3 above, in common law, technically conditions were considered so material that when remaining unsatisfied, the contractual obligation of the other party did not ripen unless there was a failure to co-operate or a waiver. In this way common law created a method of releasing the non-defaulting party without rescinding the agreement, which it found difficult to do. In common law, conditions thus automatically discharged a promisor without resort to the notion of breach proper and any right to cure, while there could still be a right to damages. Warranties did not have the same status, although they naturally could also be breached. The Vienna Convention adopts instead the concept of fundamental breach and speaks of the possibility to avoid or rescind the contract in that case (only): see Articles 49 and 64. Fundamental

238 Volume 3: Contracts for the International Sale of Goods breach is only loosely defined (Article 25) and remains, like negligence, a matter of determination per case in view of all the circumstances. It has already been said that the international business community finds this concept too subjective to be workable in professional dealings, an important reason why it usually excludes the application of the Convention. The Vienna Convention deals with performance and default only in their in personam consequences, that is to say it deals neither with the transfer of title nor its return upon default or upon rescission or avoidance: see for the various options under domestic laws in this latter respect and for retention rights, sections 2.1.10 and 2.1.11 above. The remedies under the Convention are basically specific performance or avoidance of the contract (if the breach is fundamental) with the possibility of claiming damages depending on the circumstances. As we have seen, by way of preventive remedies, the Convention also allows preventive action if a breach is expected (anticipatory breach). It may also mean not performing any further oneself. This is particularly relevant in bilateral contracts of which the sales contract is a prime example. The subject of force majeure is always a difficult one and concerns first its definition but also its consequences in terms of a temporary or permanent release of the party required to perform, adaptation of the contract or allocation of the risk: see also section 1.4.5 above. The Vienna Convention in Article 79 states that a party is not liable for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. This is the issue of fault or blame, innate in the civil law approach to risk and its statutory redistribution where the common law at least in business never accepted that concept and left excuses of this nature, also in cases of hardship, to the contract and party autonomy as we have seen. If the parties could not agree but signed the contract all the same, the chips would fall where they fell except perhaps in extreme cases, when, in a severe change of circumstances, the contract could terminate because it did no longer make objective sense. This broad and subjective definition is disliked by professionals. Although the Convention does not contain any special provisions allowing for an adaptation of the contractual terms in the case of hardship due to change of circumstances or otherwise, the text may even be broad enough to cover it also and the excuse of change of circumstances could be read into Article 79. There is, however, no procedure indicated here to deal with the effects in terms of renegotiation or adjustment of the contractual terms Article 79(5) says that nothing in Article 79 prevents either party from exercising any rights under the Convention other than claiming damages. Rights to avoid the contract as a result of fundamental breach or to ask for repairs are thus not impaired while avoidance may lead to restitution but only if that is still possible (if not, avoidance may no longer result but other remedies are retained, Article 82). It may mean the return of all that has been supplied under the contract, although not as a proprietary remedy, with which the Convention does not deal. As regards the passing of risk of deteriorating or lost goods and its relationship to the concept of force majeure, the basic rules were explained above in sections 2.1.8 and 2.1.9.374

374 In summary these were the following: In a sale, it is the legal owner or, more recently, the physical holder of the goods who must accept whatever happens to the goods in his possession after the conclusion of the sales agreement and before delivery if damage or loss is not caused by anyone in particular. If he is the seller, he is not therefore discharged from his conform delivery duty by force majeure (but he might be from other ancillary obligations such as servicing the goods).

Volume 3: Contracts for the International Sale of Goods 239 Under the modern law of sales, unless the contract states otherwise, the risk in this sense normally passes between seller and buyer when the buyer takes over the goods, or if he does not do so in good time, from the moment the goods were put at his disposal. This is also the approach of the Vienna Convention, cf Article 69. If intermediaries are used, for example in a FOB or CIF sale, the risk usually passes on loading to the first carrier: see also Article 67 Vienna Convention. For goods in transit, the risk passes upon conclusion of the contract (Article 68). Carrier and transit risk is thus now normally for the buyer. The Convention does not, however, deal directly with the other subtleties of the passing of risk, as just summarised, nor with its fluid character, but many of the exceptions and refinements may result under its other provisions. As the Convention does not consider the question of the passing of title and whether or when it has passed, the passing of risk (Articles 66ff) acquires a more particular significance for goods. As the ownership question often takes care of itself (resulting under the applicable domestic laws either from the contract or from any subsequent delivery, which will in any event be required as a matter of contract performance) and is mostly settled under the applicable law and not by contract, in international sales the passing of the risk is often of more immediate concern to the parties (as is its physical delivery) and can be determined by contract. As already mentioned in section 2.1.8 above, in international sales under the Vienna Convention, the concept of non-conformity might itself include the concept of mistake (not itself covered by the Convention) as to the qualities of a sold good (Article 35(2)), so that the non-conformity remedies of the Convention apply throughout, including the rule concerning the passing of risk, rather than domestic notions of mistake or misrepresentation, which, in the absence of the coverage of these subjects in the Convention, might otherwise supplement it under applicable rules of private international law (therefore without regard to Article 7(2)).

On the other hand, the seller, if no longer the holder, is no longer liable for any damage subsequently affecting the goods without his fault and is entitled to full payment. He is also excused from any remaining duties in respect of the goods, such as a service obligation, in the case of force majeure on his part but might not be able to request payment for the performance of these duties either. This is only different if guarantees of performance have been given. The seller’s own knowledge of dangers or investigation duties in the quality, especially of goods which he did not himself manufacture, may undermine his claims to force majeure concerning the state of the goods and therefore his reliance on the passing of the risk upon delivery. Defences of the buyer based on mistake or misrepresentation may then also be valid. The buyer upon delivery may still be protected even if the seller is not to blame for the deterioration in quality, if the buyer did not have a chance to inspect the goods properly, if there were hidden defects, or if he benefited from an express or implied guarantee (which may also imply a lesser investigation duty upon receipt) so that the risk is still not for him and has therefore not passed. If goods (as well as the payments made) may be returned upon non-conformity, not discoverable at the time of delivery (even if due to force majeure but also for other reasons like mistake, illegality, etc.), the seller may have to accept the goods in the state in which they then are (except if grossly mishandled by the buyer) and still may have the duty to provide new ones at his own expense, repair the old ones to their specified quality, reduce the price or abandon a claim for payment altogether and return all payments already made. So his risk may be increased by the ordinary wear and tear or any (complete) loss of the goods in the meantime (for reasons of force majeure affecting the buyer in possession). The seller, while having the risk but not being able to perform the quality requirements due to force majeure and therefore still being liable for repair or replacement or the loss of the sale price or for a price reduction, does not need to reimburse the buyer for the loss of the bargain or consequential damages except if he did not disclose known dangers while not insuring them properly either.

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2.3.7. Supplementation and Interpretation of the Vienna Convention The Vienna Convention goes into the interpretation and supplementation of its own text but not of the sales contracts concluded under it. The relevant language is as follows: (1) In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade. (2) Questions concerning matters governed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law. It may be observed first that a provision on interpretation and supplementation of the Convention rather than of contracts concluded thereunder is less usual or may even be inconvenient and, in any event, not absolutely dispositive, if not also confusing. It may suggest that this interpretation and supplementation foremost concerns the Contracting States. The Vienna Convention on Treaty Law of 1961 deals with treaty interpretation in that sense. The effect and impact of other sources of public international law, as mentioned in Article 38(1) of the Statute of the International Court of Justice should then also be considered, treaty law being only one of them. This is not the idea behind Article 7, however, which only appears to address the private sales law implications between parties covered by this Convention and the status of the Convention as treaty law binding on Contracting States and their duties of implementation (for example, under state law in the US) are not considered further in the text. It may be noted in this connection that in the proposals for an EU Regulation concerning a CESL (see section 1.6.13 above), these two aspects of Conventions or similar instruments of this type were separated. As far as its substance is concerned, it has already been noted that the Convention is written in the civil law codification mode, therefore as a text produced by government and meant to be the only or decisive source of private law in the area it covers unless it specifically allows other sources of law to operate. The effect and impact of these sources of private law are thus ignored but can probably not be side-lined by a Convention of this nature; strictly speaking, the Convention cannot decide its own place among these other sources of private law operating at the transnational level and, in the view presented in this book, they may be higher (or mandatory). To believe otherwise suggests a superior rule giving treaty law of this nature absolute priority in this regard but no such rule would appear to exist in international law, except perhaps in ratifying countries that adhere to the exclusive codification ethos in this regard. Article 4 seems to recognise this for customary law, whilst leaving it alone, even though Article 7 may be confused as we shall see whilst Articles 8 and 9 may add to this confusion. The separation of interpretation and supplementation itself may also be subject to criticism. In a more. normative approach, this would not seem to be necessary or even desirable. In the traditional attitude to code interpretation in civil law, the distinction was uncommon and is for contract interpretation not maintained in the PECL and CESL. Applying on its face greatly differing criteria to interpretation and supplementation, as Article 7 does, is in any event puzzling. This was also not the approach in the earlier Hague Conventions and is in this way not even maintained by the DCFR in respect of its own interpretation and supplementation (Article I-1:102). To start with supplementation, questions concerning matters governed by the Convention which are not expressly settled in it must be settled in conformity with the general principles on which the Convention is based and only in the absence thereof pursuant to the national law resulting from the applicable private international law rules. At least so says Article 7(2). The

Volume 3: Contracts for the International Sale of Goods 241 matters expressly covered, in essence, concern then the rights and obligations arising from the sales agreement, cf Article 4, including the in personam remedies and excuses, but notably not matters of validity of the contract or of any custom and the proprietary, finality and enforcement aspects of the sales agreement.375 The reference in Article 7(2) concerning contract supplementation to private international law as the last resort was notably absent from the Hague Conventions, cf Article 2 of the Hague Sales Convention, which only accepted conflict references in specific cases (Articles 16, 38(4) and 89). It has already been noted that the Hague Conventions also did not distinguish between interpretation and supplementation and Article 17 of the Sales Convention required all matters in principle covered by the Convention to be decided in conformity with the general principles on which it was based, thus the first part of the Vienna formula, for both supplementation and interpretation. This reference to general principles is in accordance with the civil law attitude to codification and its system thinking, which assumes consistency and completeness in the areas of the law it covers. Gap filling or supplementation then become a matter of interpretation of its system if the text required clarification. In the area of uniform law, which remained incidental and did not aspire to completeness, this reference would foremost appear to allow for a more liberal interpretation of that law and of its scope. The Hague Conventions were in essence uniform law friendly and internationalist. All the same, they were not specific as to the applicability of other sources of law, such as fundamental or general principle and customs or practices, which, however, could be assumed to have remained unaffected and relevant. That is what a liberal interpretation technique would have meant here. In areas not covered by the Hague Sales Conventions at all, conflict of laws notions remained naturally applicable, but it was even then often felt that also in areas that the Conventions did cover, this was unavoidable when its general principles were not sufficiently developed, never mind the other sources of private law. This became the accepted view in the Vienna Convention, at least in the case of supplementation or gap filling of the Convention. But the reference to private international law in matters in principle covered by the Convention may weaken the reference to general principles itself and also the idea of any liberal interpretation. It is submitted that it signified an important shift in the nature of the argument and in the Vienna Convention the uniform-law-friendly attitude of the Hague Conventions seems to have been abandoned. In this environment, the general principles to which reference is made in Article 7(2) may now probably only be the general principles on which the Convention is based in a narrower, more technical sense. They would not then include fundamental principles or general principles in the trade and its custom or practices. As regards these general principles, in this narrower systemic sense, it is generally unclear, however, what they are and any party invoking them must then prove them on the basis of its own analysis.376 In any event, there is now a great deal of scope for the application of domestic laws

375 It is an important issue in this connection what the matters governed by the Convention truly are. Although in general the excluded areas are clear from Art 4, and the coverage as a partial codification is quite limited (see s 2.1.1 above), it must be assumed that in cases of amplification of the Convention, eg, in the area of the passing of risk, underlying principles of liability must still be distilled first and expanded to cover any gap pursuant to Art 7(2) before a domestic law can be invoked. But it may leave great areas of doubt as to coverage of the Convention proper. 376 These principles must be distilled from the underlying approach of the Convention in its material provisions, which is not easy. J Honnold, Uniform Law for International Sales, 2nd edn (Deventer, 1990) 129ff saw a general principle of reliance (on conduct), eg on oral representations made after the contract was concluded (Arts 16(2)(b), 29(2) and 47), disclosure (Arts 19(2), 21(2), 26, 39(1), 48(2), 65, 68, 71(3), 72(2), 79(4) and 88), and of mitigation

242 Volume 3: Contracts for the International Sale of Goods even in definitional matters, with which the Convention does not greatly concern itself. Again, these general principles are not or no longer the fundamental principles of the law, customary practices or even general principles common to most commercial legal systems discussed earlier in Volume 1, section 1.4 as part of the hierarchy of the modern lex mercatoria. Any impact of the fundamental or more general principles of the lex mercatoria is not thereby automatically excluded however. As was noted in section 2.3.3 above, their effect depends on the applicability of other sources of the law which the Vienna Convention (and earlier the Hague Conventions) cannot truly regulate or control, again more fully discussed in Volume 1, section 1.4.5 as there is no superior rule to that effect. It was already noted that the Convention itself recognises in its Article 4 that at least the validity of custom or usages is not ultimately governed by the Convention itself. The exclusion of usage in Article 4 has been explained, however, as leaving the determination of this issue (as one not covered by the Convention and therefore not subject to its Article 7(2) on supplementation) also to applicable domestic law including the validity of these usages itself. It follows that all usages or custom is then still seen as essentially a domestic law phenomenon and that considerations of domestic public policy of the country of the applicable law (and good faith in the Netherlands) always prevails over them. This would be a strange and undesirable result in international sales law, at least if it is meant to be made uniform or transnationalised by treaty or otherwise. It is of interest in this connection that Article 7(2) of the Convention does not itself make a reference to (international) custom or usage in terms of its own supplementation, as one would have expected and Article 4 may suggest. This is then reserved at best for the supplementation of the parties’ agreement (and not of the Convention itself). It has already been noted that it is indeed more normal to talk about supplementation (and interpretation) in the context of the sales agreement itself, with which the Convention does not generally deal and it is only more indirectly covered by the Convention as the reference to the rights and duties of the parties in Article 4 makes clear. Articles 8 and 9, limited to the meaning of statements, conduct and usages, are relevant in that context (see more particularly section 2.3.8 below) but would appear only partly to cover contract interpretation.377 As already mentioned, the result may be further confusion in the Convention, not only therefore between Convention and contract interpretation as there is in the distinction between interpretation and supplementation. Generally, a Convention of this nature aims at a more objective legal regime or policy objective overall while the contracts concluded under it are based in principle on party autonomy. This may suggest some differences in interpretation and supplementation techniques but the Convention is not clear on what its aims are in this regard. In any event it only covers default rules (except for Article 12), which can be superseded by the contractual text signalling that policy was not the issue. One must conclude that these issues were never properly considered and the methodology and policies or choices behind the text ignored.

of damages (Arts 77, 85 and 86). He nevertheless suggested caution and restraint in invoking these general principles now that the reference to private international law has been added and that matters of pure interpretation have been separated out in Art 7(1). Case law so far collected by UNCITRAL and regularly published in their Case Law on UNCITRAL Texts has not shed a great deal of light on these general principles either. 377 For contract interpretation, the text is as follows: Art 8: ‘(1) For the purposes of the Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was’. It confirms the intent- or will-based approach to contract formation and interpretation. Art 9 states: ‘(1) The parties are bound by any usage to which they have agreed and by any practices they have established between themselves’. See further the comment in the next section.

Volume 3: Contracts for the International Sale of Goods 243 One would at least have expected Article 7(2) of the Convention to refer (before the rules of private international law) to its international character (and in that manner perhaps implicitly also to the international commercial and financial legal order and its custom and usages) and to the need for uniformity, as the Convention does in Article 7(1) in the context of interpretation, where therefore (correctly, it is submitted) a distinct international legal order is suggested. However, this omission may have no ultimate relevance as these considerations, it was argued, may intervene anyway at the transnational level and operate besides treaty texts, also therefore Article 7(2). As a minimum they would suggest at that level the continuing relevance of sources of private law extraneous to the Convention to which it may still be subordinated (both in supplementation and interpretation of its international sales provisions). To repeat, upon a proper analysis, in international business dealings, these sources (as well as the Convention) can only be given their proper place within the hierarchy of norms of the lex mercatoria as explained in Volume 1, section 1.4.14, in which, therefore, the uniform sales laws must also find their place. In this hierarchy, even party autonomy figures above the Convention to the extent the latter is only directory (default) law, as indirectly recognised indeed in Article 6. The omission of a reference to these other norms or legal sources in the Convention leaves it substantially incomplete in its supplementation language. Again, it may be noted in this respect that section 1-103 UCC in the US is much clearer. It demands a liberal interpretation so as to leave as much room as possible for the common law, equity and custom (except where the UCC is mandatory) and even the law merchant, therefore for fact-based law. The attitudes of the Vienna Convention might only be understood from the point of view of a general wariness among the drafters of general principle in common law, of custom in civil law, and more generally by an unclear view of the transnational law merchant and its operation. In this connection, it may also be considered that when it comes to supplementation or gap filling, in the internationalist lex mercatoria approach, transnationalised notions of good faith play a role, even if in the Convention only mentioned in Article 7(1) in connection with its interpretation and is not defined. In the approach of this book, this confirms the reintroduction of these sources of law in that context, therefore behind the notion of good faith. This is certainly so where good faith appeals to fundamental principle but also if appealing only to more common or general legal principle and even custom or practices. Again, in a lex mercatoria approach based on a hierarchy of norms, this would be clear. Good faith is here an interpretation technique, not an independent source of law. In any event, in respect of the Convention more narrowly, the reference to good faith in Article 7(1) dealing with the Convention’s interpretation (which again is differently handled from gap filling for no obvious reason) is still likely to have a distinct meaning overall and may refer foremost to a normative interpretation (and then also supplementation) of the text. Thus, the Vienna Convention would not deny the relevance and operation of other sources of law, at least in interpretation and, it would appear, then also not in respect of supplementation of the Convention itself. At least fundamental or general principle and custom cannot then simply be ignored. In the context of supplementation of the Convention, the reference to private international law after the reference to the general principles on which the Convention is based is, as already suggested above, careless even though there is nothing wrong in principle with domestic law remaining the residual rule among the sources of law and rules of the modern lex mercatoria. But in giving it a special place in supplementation of the terms of the Convention itself, therefore even in the areas covered by it, it easily destroys what little progress is made through the Convention in terms of international uniformity. In any event it narrows the scope of the uniform law. It has already been said that it then also applies to the terminology used in the Convention,

244 Volume 3: Contracts for the International Sale of Goods which on the whole lacks definitional clarity.378 Even the use of the good faith concept of section 7(1) could then be controlled by it. Again, any reference to private international law and therefore to domestic law to supplement the Convention can only be properly understood in the context of the hierarchy of norms within the law merchant or modern lex mercatoria concerning international sales, where it has the lowest rank and its application is a discretionary element (see Volume 1, section 1.4.14). The key is that domestic law so applied then functions in the international law merchant, becomes transnationalised, and is adjusted and reinterpreted in order to make sense in that order, shedding any typical local features. To summarise, in a proper transnationalist approach, the appropriate reference for both supplementation and interpretation of the Convention, if it needs to be covered, should have been to the text of the Convention itself, its international character, its general principles, and to the need for uniformity in its application. The references to internationality and uniformity, then suggest indeed that the Convention operates in a distinct legal order or universe and that its provisions operate at that level, amongst the other sources of law, being fundamental and general principle, customary law and practices in the trade concerned, and an enhanced form of party autonomy. It does not prevent consultation of domestic legislation, case law and doctrine by way of guidance and domestic law may remain the residual rule if all else fails. Public policy and order requirements are further to be considered. Guidance may of course also be obtained from the history of the Hague and Vienna Conventions and their application and supplementation now perhaps also from the EU and UNIDROIT Principles, or DCFR. This being the starting point, it follows and should have been made clear that other sources of law remain unimpeded in the transnational commercial and financial legal order so that fundamental principle, customs as they develop therein as well as general principles common to most modern commercial and financial law remain unaffected (besides party autonomy, which is clearly respected in the Convention and supersedes it (see Article 6)). In a proper analysis, they are all transnationalised and present a hierarchy, subject to public order considerations of a domestic nature when there is demonstrable conduct and effect of an international transaction in a particular country even though public order requirements themselves may increasingly also acquire an international character as transnational minimum standards in international commerce and finance. The observance of good faith could be added—as it was for interpretation in Article 7(1)379—but, in the view of this book then primarily confirms the operation of these multiple sources of law. Again, it is more properly an issue of interpretation (and supplementation) of the contracts concluded under the Convention, not another source of law or higher standard of conduct, but primarily an issue of party autonomy, its operation, its meaning and extent.380

378 Where the Convention relies on the rules of private international law, as it does also in determining its scope in Art 1.1(b), for international sales cases pending in EU courts, this now means for EU courts the rules of the 2008 EU Regulation on the Law Applicable to Contractual Obligations, see s 2.3.7 below. 379 The reference to good faith interpretation of this international Convention may well have been a somewhat strange compromise with its origin in the Vienna Convention on the Law of Treaties of 1969, Art 31, but as already mentioned above in the text, it concerns here the regime of agreements between states (and not their interpretation in respect of private parties), in which connection the reference to good faith seems much more traditional. 380 Whatever we make of the use of good faith in this connection, because of the vagaries of the notion, its true significance under the Convention could, technically speaking, ultimately still remain a question of determination under a national law pursuant to Art 7(2), notwithstanding the reference to the requirement of uniformity in the application of the Convention under Art 7(1) and the reference to ‘international trade’, which indeed suggest a distinct set of norms. Wildly different good faith notions from domestic law could still be introduced in this manner through the conflicts rules.

Volume 3: Contracts for the International Sale of Goods 245 This suggests indeed a normative interpretation method and in that context more particularly a reference to fundamental legal principle381 and related public order requirements as well as to custom and practices and general principles, notwithstanding the intent-based tenor of the Convention; see further also the discussion in the next section. Private international law would then only come in if no objective legal regime could otherwise be found in the hierarchy of norms, assuming always that the resulting domestic law is residual and itself then part of the transnational law. Again, the better view is that good faith here is a liberal interpretation technique and not itself a source of law proper. In this connection, it has been observed several times before and may be repeated that the issue of public order or public policy under state law and its prevalence in international transactions is another issue that cannot, strictly speaking, be settled by traditional private international law either and is normally also outside the reach of the modern transnational law merchant (see Volume 1, section 2.2.6). Although it may (sometimes) enter the modern lex mercatoria

This route should not be chosen and good faith should indeed be seen here as a distinct internationalised concept, in the context of the interpretation (and supplementation) of the Convention itself referring to the traditional sources law, perhaps also to a teleological and then perhaps to also a normative interpretation method and in that context therefore to fundamental and general principle, and custom and practices or even public order, although in civil litigation domestic interpretations are still likely to impact because of the general outlook and attitudes of judges groomed in their national systems of law. Again, it may be different and easier to plead in international arbitrations. 381 In Vol 1, s 3.1.2 fundamental principles were (without limitation) summarised as follows (and may in contract indeed often be cast in terms of good faith): (a) pacta sunt servanda as the essence of contract law and party autonomy; (b) the recognition, transferability and substantial protection of the notion of ownership as the essence of all property law, to be respected by all; (c) the liability for own action, especially (i) if wrongful (certainly if the wrong is of a major nature) as the essence of tort law, (ii) if leading to detrimental reliance on such action by others as another fundamental source of contract law, (iii) if creating the appearance of authority in others as an essential of the law of (indirect) agency, or (iv) if resulting in owners creating an appearance of ownership in others as an additional fundamental principal in the law of property and at the heart of the protection of the bona fide purchaser (setting aside the more traditional nemo dat principle). There are other fundamental principles in terms of: (d) apparent authority and fiduciary principles in contract and in agency leading to special protections of counterparties, notably if weaker or in a position of dependence (including consumers against wholesalers, workers against employers, individuals against the state, smaller investors against brokers), and to duties of disclosure and faithful implementation of one’s contractual and other obligations; (e) notions of unjust enrichment; (f) respect for acquired or similar rights, traditionally particularly relevant to outlaw retroactive government intervention, but also used to support owners of proprietary rights in assets that move to other countries; (g) equality of treatment between creditors, shareholders and other classes of interested parties with similar rights unless they have postponed themselves. Then there are the: (h) fundamental procedural protections in terms of impartiality, proper jurisdiction, proper hearings and the possibility to mount an adequate defence, now often related to the more recent (and also internationalised) standards of human rights and basic protections (see Art 6 of the 1950 ECHR); (i) fundamental protections against fraud, abuse, sharp practices, excessive power, cartels, bribery and insider dealings or other forms of manipulation in market-related assets (also in their civil and commercial aspects) and against money laundering; (j) issues of finality; and finally (k) also fundamental principles of environmental protection developing. As these are also public order or some even human rights related, they are as such not less mandatory.

246 Volume 3: Contracts for the International Sale of Goods as fundamental principle, for example in the protection of weaker parties or the prevention of market abuse, it is more properly a matter of competency and competition between the international commercial and financial legal order and domestic legal orders to be determined upon an assessment of the legitimacy and pressing nature of a domestic governmental regulatory interest in a particular international transaction. Again, it often amounts to a factual assessment of the nature of the parties’ action in terms of conduct and effect on the territory of the relevant state, although it was noted throughout that in particular in regulatory action concerning competition, the environment, and financial stability, in order to be effective these public policy considerations may become increasingly transnationalised as international minimum standards. This may even be more obvious in environmental and public health issues. It follows that while it is likely that the Vienna Convention itself, in its approach to interpretation and supplementation, certainly also of the sales agreements concluded thereunder, assumes its own superiority and may even impose a psychological attitude to contractual intent, borne out in the interpretation provision of Article 8 in respect of statements by the parties, this is not necessarily the end of the story.382 It might merely reflect the prevailing attitudes during the formative period of the Convention, which was largely in the first half of the twentieth century when the relationship of the professional contract and the nation of intent was insufficiently understood as it still may be in civil law in professional dealings today. The formula of Article 7 of the Vienna Convention may (unfortunately) now be found in all UNCITRAL Conventions, albeit with some variations: see further Volume 1, section 1.4.15. It may also be found in the PECL (Article 1.106) and even in the UNIDROIT Leasing and Factoring Conventions of 1988, in the 2001 UNIDROIT Mobile Equipment Convention and in the UNCITRAL Assignment of Receivables in International Trade Convention of the same year, where the reference to good faith in the more traditional sense may be entirely inappropriate as they cover mainly proprietary issues. It is not, however, the approach of the UNIDROIT Principles (Article 1.6), which revert here to the more sober approach of the Hague Sales Conventions. They seem, therefore, more favourably disposed towards transnationalisation, without, however, drawing the logical conclusions in terms of the modern lex mercatoria and its operation as we have seen in section 1.6.6 above. Unlike the Convention, both sets of Contract Principles also contain elaborate sections on the interpretation of contracts (see section 1.6.3 above) followed in this regard by the DCFR and CESL, all in a manner critiqued above.

2.3.8. The Interpretation of International Sales Contracts under the Vienna Convention: Meaning of Conduct and Custom in Terms of Contract Interpretation In the previous section it was noted that the Vienna Convention does not deal in any general manner with the interpretation (and supplementation) of the sales contracts governed by it. In Article 7 it only deals with interpretation and supplementation of the Convention itself. Nevertheless, the contractual interpretation and supplementation are issues that in principle are covered by the Convention in view of the reference in Article 4 to it covering the rights 382 See for the English literal and purposive approaches to statutory interpretation, Vol 1, s 1.3.3. It can only be repeated that the use of anthropomorphic civil law will theories in Art 8 of the Vienna Convention goes against modern contract theory; see also s 1.4.4 above for a summary.

Volume 3: Contracts for the International Sale of Goods 247 and obligations of the parties arising from the sales contracts. The coverage of these rights and obligations by the Convention must imply interpretation and supplementation of the contractual terms, if at all distinguishable. This is supported by the fact that in Articles 8 and 9 there follow some more precise interpretation rules, albeit only limited to parties’ statements and conduct and to the impact of usages, as was mentioned in the previous section. As a matter covered by the Convention, the contract interpretation rules must for the rest be found through the supplementation rule of Article 7(2) with its reference to the general principles on which the Convention is based, which are few in this connection as we have seen, and otherwise to the law applicable by virtue of private international law. It was already noted in this connection that somewhat surprisingly, there is in Article 7(2) no reference to good faith. There is in any event no concept of good faith defined at the Convention level; it is not a general principle on which the Convention is based either. It is thus likely that, short of accepting that the concept is itself transnationalised as suggested in the previous section, the reference to national laws may lead to major variations even in the applicable good faith notions when used to interpret and supplement contracts concluded under the Convention or to any other sources of law or relationship thinking which might (or might not) be introduced in this manner.383 As already mentioned, Article 8384 contains a contract interpretation provision of some sort. Under it, the parties’ statements and conduct are to be interpreted according to their true intent, at least to the extent that the other party knew or could not have been unaware of what it was. Again, this is old-fashioned anthropomorphic contract law language of the civil law variety. It ties interpretation principally to the parties’ will or to intent; if it cannot be determined whether the other party knew or could have known of the true intent, it allows a reasonable understanding. Rather than referring here to good faith, in determining intent or reasonable understanding in this context, due consideration is to be given to all relevant circumstances of the case, including the negotiations, practices and usages and any subsequent conduct of the parties, taking into account perhaps also the internationality and commerciality of the transaction, and their professionality. Relationship thinking might thus still be introduced but is likely to look very different in different Contracting States. It is clear that Article 8 does do away with the common law parol evidence rule, and implicitly thus also with a generally more objective approach to contract interpretation, which did not allow any contradictory contemporary or earlier evidence against any writing intended by the parties as a final expression of their agreement; cf also section 2-202 UCC and section 1.2.4 above. A similar rule also existed in France for non-commercial contracts in excess of 50 francs: see Article 1341 CC. It reconfirms a more subjective approach all round. In this vein, only an express statement that earlier evidence is not to be used would have such an effect and would be upheld under Article 6. Article 9 deals more particularly with usages in terms of contract interpretation. It has been mentioned before that the Convention remains ambivalent on the issue of custom, more so than

383 Although even under Art 7(1) the meaning of good faith as an undefined term could still be subject to the supplementation language of Art 7(2) and its reference to domestic law, as discussed in the previous section with respect to the interpretation and supplementation of the Convention itself, this problem might be alleviated if it is seen as a liberal interpretation technique within the lex mercatoria, confirming the revival of other sources of law and their hierarchy, including notably fundamental and general principle, custom and practice. However, there could still be more doubt with respect to the interpretation and supplementation of contracts concluded under the Convention, although the lex mercatoria and its hierarchy of all relevant legal sources should apply, here as well, in terms of the objective law applicable to the contract. 384 See n 364 for the texts of Arts 8 and 9.

248 Volume 3: Contracts for the International Sale of Goods Article 9 of the earlier Hague Sales Conventions; see also its Article 4. Sensitivity to accepted practices and custom was earlier identified as being particularly important in international trade; see also Volume 1, section 1.4.7. The smooth operation of international trade depends on routines and much international trade law developed on the basis of them. As such, custom is a major cornerstone of the notion and operation of the lex mercatoria although by no means the only one. Strictly speaking, in its operative articles the Vienna Convention avoids any reference to custom but uses the terms ‘usages’ and ‘practices’ instead (Articles 4, 8 and 9). This is in the civil law tradition of suspicion of custom as an independent source of law, to some extent now even shared in England although for very different reasons as we have seen. Thus, according to Article 9(1), the parties are bound by any usage to which they have agreed and by any practices which they have established between themselves. This is simply an extension of the contract and intent principles at the expense of custom as an autonomous source of law. It implies a subjective approach to custom. Article 9(2) tries to soften some of the impact by accepting as an implied condition all usages of which the parties knew or ought to have known and which in international trade are widely known or regularly observed (but not merely widely operative) between the parties to contracts of the type involved in the particular trade concerned. The UNIDROIT Principles maintain only the latter requirement (Article 1.8) and do not therefore require that the usages were known or should have been known by the parties concerned, as long as they are widely known and regularly observed. This is closer to the earlier Article 9(2) of the Hague Sales Convention. The UNIDROIT Principles are thus somewhat less restrictive (although they superimpose a reasonableness test). Article 1.105(2) of the European Principles may even go a little further in stating that parties are bound by any usage which would be considered generally applicable by persons in the same position as the parties (also subject to a reasonableness test), cf for the DCFR its Article II-1:104. Article 9 of the Vienna Convention was meant to protect unsuspecting parties, although the need for it appears less obvious in the professional sphere in which international sales as defined in the Convention usually operate. Yet as already submitted several times before, it is not strictly speaking possible for the Convention to be conclusive in this matter as the force of international usages and practices may derive from other sources or from custom itself. This was in fact recognised in Article 4(a), which excludes the matter of validity of any usage from the scope of the Convention. Nevertheless, to the extent custom is viewed as a contractual term, as it essentially is in the Vienna Convention rather than objective law, local considerations may be able to override it all the more. Where, however, it is agreed that the force of usage cannot be fully determined by the Convention itself, nor indeed the impact of the lex mercatoria more generally, it is likely that there is not only custom outside Article 9 but also that this custom could be transnational and prevail over the Convention terms. To repeat, this could be so especially where within the context of the lex mercatoria, custom impacts on international sales. It would as such only be subject to fundamental principle or public order imperatives operating in the international legal order itself of which there are few. It may also be repeated in this respect that in the US under section 1-103 UCC international custom is in pertinent cases generally accepted as binding in commercial matters. Nothing of this denies that domestic policy considerations (governmental interests and local public order imperatives) may still find respect in the international legal order if there is material conduct and effect of the international transaction on the territory of the relevant state: see more particularly Volume 1, sections 2.2.6ff, although transnational minimum standards may increasingly take over in the international flow of goods where the international sale of goods is an important operational facility and may then correct the application of the modern lex mercatoria in appropriate cases.

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2.3.9. Supplementation of the Vienna Convention: Private International Law and the EU Regulation on the Law Applicable to Contractual Obligations As mentioned before, in international sales, the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I) replacing the earlier 1980 EU Rome Convention on the same subject385 must, now the Vienna Convention is widely accepted (although not in the UK and Portugal), increasingly be seen as a sequel to it within the EU in areas of the law of the sale of goods which the Vienna Convention does not cover (Article 4) or, as a matter of supplementation or gap filling even in those aspects that it does cover, but in that case only after the general principles on which the Convention is based have been considered (Article 7(2)). It should be realised of course that the scope of the EU Regulation is much wider than sales and embraces all situations where judges (but not international arbitrators) in the EU are confronted with a choice between the contractual obligation laws of different countries (also if non-EU). The Regulation may also play a preliminary function in the context of the Vienna Convention in that under Article 1(1)(b) of the latter, its applicability may result from choice of law rules pointing to the law of a Contracting State. Under the European Principles, but not the UNIDROIT Principles, it also may play a role in the supplementation of these Principles (Article 1.106). However, as posited all along, it should always be borne in mind that in the view presented in this book, in professional dealings, the application of the Vienna Convention and even the Regulation

385 The earlier Rome Convention, which dated from 1980, coincidentally from the same year as the Vienna Convention, was ratified by all older EU Member States but operated for a period of 10 years only, although it was renewed tacitly for five-year periods thereafter if there had been no denunciation (Art 30). Although often viewed as an EU Convention, this was strictly speaking not the case as it was not based on the EEC founding treaty. Even though concluded between Member States, only a limited number needed to ratify for the Convention to become effective. New EU Members did not need to accede to the Convention, although in 1980 the view was expressed in a Joint Declaration that they should be encouraged to do so. This situation was very different from the (unrelated) Brussels Convention of 1968 on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters, now replaced by the Regulation of 2002 on the same subject, amended in 2014, which was based on Art 220 of the EEC Treaty and was in force between all Members for an unlimited duration and had to be accepted by any new Member State. The further consequence of the Rome Convention not being based on the EEC Treaty was that conflicts rules more directly based on the Treaty prevailed (Art 20). They particularly existed in the area of insurance under the Insurance Directives, but there was no conflict here as the Rome Convention did not apply in insurance matters when the insured risk was in the EU. At one stage, EU private international law rules were also contemplated in the area of employment which could have caused a more acute conflict. Another consequence of the Rome Convention not being an EU Convention was that matters of interpretation were not referable to the European Court of Justice in Luxembourg (in fact even the Brussels Convention only made this possible by a special Protocol of 1971). Although two Protocols to the Rome Convention were signed in 1988 to allow an appeal from the highest courts in each Member State to the European Court in order to obtain the necessary prejudicial decisions in interpretation matters (without a duty as there is in the 1971 Protocol), ratification by all parties seemed unlikely as some, like the UK, did not see interpretation of the Convention as a European Court matter. The 2008 Regulation did do away with most of these problems and differences of opinion. Only Denmark made use of its option to opt out. The Rome Convention, according to Art 21, also did not prejudice any other conflict Conventions to which Contracting States were already or may become a party. In the latter case consultation with the other Contracting States was necessary however (Art 24). This was maintained in the Regulation (Art 25). The most important examples are the Hague Private International Law Conventions like those on the Law Applicable to the International Sale of Goods of 1955 and its successor of 1986 (not to be confused with the Hague Uniform Sales laws of 1964). One could also think of the Hague Conventions on the Law Applicable to Agency of 1978 and on the Law Applicable to Trusts and their Recognition of 1985. However, the Rome Convention and the 2008 Regulation themselves excluded the coverage of agency and trusts.

250 Volume 3: Contracts for the International Sale of Goods must be seen in the context of the application of the lex mercatoria as a whole with its own hierarchy of norms in which fundamental principle, international custom, uniform treaty law, and common legal notions are likely to precede the search for a domestic law through conflicts rules (see for a summary section 2.3.14 below).386 The applicability of the Regulation is dependent on a forum in a Member State being faced with a choice between the laws of different countries, which need not be EU Member States (Article 1), although the Convention does not spell out when such a choice may legitimately have to be made. It is left to the forum seised to decide. The Convention may apply even within one country with different legal systems such as the UK. It is important to realise from the way the Regulation (and earlier the Rome Convention) is structured that it does not apply by virtue of the law of a Member State being made applicable to the underlying contract. For example, if French law is made applicable to a contract between two Swiss parties, the conflicts rules of the Regulation do not automatically apply (as Article 15, which excludes renvoi, confirms). Rather, its application depends on a case being brought before a court in a Member State. This being the case, the Regulation does not apply in an international arbitration, also not one with its seat in a Member State. More generally, international arbitrations are now mostly thought subject to their own conflict rules, which are not necessarily derived from the seat of the tribunal. That would not prevent the application of the rules of the Regulation as a model or as general principles of conflicts laws, which may be thought to apply in international cases, but that would not then be a consequence of the applicability of the Regulation itself. When properly pleaded by one of the parties (or where international arbitrators have autonomous law finding powers as in procedural matters), international arbitrators may accept the application of the modern lex mercatoria instead: see Volume 2, section 1.2.2. The Preamble of the Convention may even allow courts in Member States to do the same. The Regulation does not apply in status matters, family matters (relationship and property aspects), negotiable instruments, typical company matters (such as creation, capacity, organisation and winding up), arbitration, agency, and trust matters and in matters of evidence and procedure (Article 1(2)). Again, the lex fori determines the true meaning of these exceptions. Proprietary matters are not covered either, even if they follow from a contractual disposition as in the case of sales. This also applies to the proprietary aspects of sales and would also appear to apply to assignments, although Article 14, especially in its second paragraph, still left some considerable doubt in the matter. It depends very much on whether one considers the transfer of claims to be a proprietary matter. The ECJ thinks so and does not apply the Regulation in these aspects; see more particularly Volume 4, section 1.9.6.387 There is a special rule for insurance in that the Regulation applies to reinsurance but not to ordinary insurance policies if the risk covered is located in a Member State.388 If the risk is 386 Other more specific conflicts rules appeared in the 1998 Settlement Finality Directive 98/26/EC [1998] OJ L166/45 (Art 9(2)) and in the 2002 Financial Collateral Directive 2002/47/EC with respect to security interests in securities that are recorded in a book-entry system [2002] OJ L168/43 (Art 9), and in the 2000 Directive 2000/35/ EC combating late payment in commercial transactions [2000] OJ L200 (Art 4) with respect to reservations of title. All are, however, in the proprietary area and therefore beyond the scope of the Rome Convention proper. 387 Also, Art 12(1)(c) suggests that the consequences of any breach are covered by the law resulting as applicable under the Regulation but, in the case of a sale or exchange, that would be unlikely in the proprietary effects of an avoidance of the contract or in any enforcement aspects. 388 Each judge must use his own internal law to determine where the insured risk is located: Art 1(3). The Second EU Non-Life Directive of 1988 (Art 7) and the Second Life Directive of 1990 (Art 4), maintain distinct systems when the risk is within the EU. They are inspired by respect for the mandatory contract rules of the Member States where the risk is situated for (mass) non-life policies and of the Member States of the commitment for life policies. These rules were explicitly not harmonised so as to protect the beneficiaries of mass non-life and life policies under their own law.

Volume 3: Contracts for the International Sale of Goods 251 outside the EU, the policy may indicate the applicable law subject always to an appreciation of the foreign mandatory rules (if any) under Article 9, especially in consumer cases when there is the added protection of Article 5.389 It is potentially relevant for insurance contracts accompanying international sales.

2.3.10. The Main Rules of the 2008 EU Regulation on the Law Applicable to Contractual Obligations. International Sales There are two basic rules in the EU 2008 Regulation (Rome I). First, there is the law chosen by the parties, for the whole or part of the contract (Article 3). This choice must be expressed or appear with reasonable certainty from the terms of the contract or the circumstances and can thus not be purely implied as is possible under German conflicts law. The Regulation does not specifically limit this contractual choice of law to situations at the free disposition of the parties but provides only that if all the elements relevant to the situation at the time of choice are connected with one country, the contractual choice of law may not prejudice the application of the mandatory rules of that country (Article 3(3)). What is to be considered mandatory in this regard remains undefined. There may be considerable differences of view (even within the country concerned) on this point and on the true relevance of such rules in international cases in respect of conduct and effect outside the affected state. The second rule is that in the absence of a contractual choice of law clause, the law of the country with the closest connection to the contract applies. Article 4 allows in this respect different applicable laws for severable parts of the contract. In the Rome Convention, there was a rebuttable presumption that the law with the closest connection was the law of the place of the residence of the party390 which had to perform the most characteristic obligation under the contract (or, if severable, under the part of the contract in question), provided that this characteristic obligation could be determined (Article 4(2) and (5)). This is now more precisely expressed and the rebuttable presumption is deleted. Clearly, the reference to the characteristic obligation itself introduced an aspect of uncertainty and it is for this reason that the new Article 4(1) contains some more specific rules, or a list approach. Importantly, it also mentions the sale of goods where the applicable law is the law of the habitual residence of the seller. For services, it is the law of the service provider; for a franchise the law of the franchisee. In real estate matters, in the contractual aspects, it is the law of the place

The importance of the conflicts rules of the Insurance Directives is that the insurance policy may set aside these rules only if the applicable law allows it, which for this purpose is itself tied to the habitual residence of the beneficiary. If there is no chosen law in the policy, it is this law which is in any event presumed to apply. It means that only insurance products allowed in the country of the beneficiary may be sold into that country and are to be structured in accordance with that law. From this point of view there is no free circulation of insurance products even though the rendering of insurance services has been liberated in the EU. 389 If there is no such choice of law, the Regulation relies, under its general rule of the characteristic obligations, on the law of the place of the insurer rather than of the place of the risk, which is the more traditional approach. There is no rule for a situation in which the policy covers risks in and outside the EU at the same time, eg, in the case of a fire insurance in respect of premises of a single party insured in the US and the UK. 390 The residence in this sense was the habitual one for individuals and the place of the central administration for bodies corporate, except if the contract was entered into in the course of that party’s trade or profession, when residence for this purpose was connected to the principal place of business of the party performing the characteristic obligation (Arts 4(2) and 19).

252 Volume 3: Contracts for the International Sale of Goods where the property is located. For the carriage of goods, it is the law of the country of the carrier, at least if this is also the country of the place of loading or discharge or of the principal place of business of the consignor (shipper): see Article 5. Special rules apply to consumer contracts (Article 6), which are contracts regarding the supply of goods or products to a person outside his trade or profession, cf also Article 2(a) of the Vienna Convention and Article 15 of the 2002 EU Regulation on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters. The consumer retains the protection of the mandatory rules of the country of his/her habitual residence in the case of cold calling by the (foreign) seller in that country or when the latter induces the consumer to travel to the country of the seller for the purpose of making him/her buy. It means that if a consumer knowingly concludes a contract outside his own country without any special inducement by the seller, he loses the protection of his own mandatory consumer protection rules. A contractual choice of law is not effective against these principles, nor is the general rule referring to the law of the closest connection (Article 6(2) and (3)). For individual employment contracts, the law of the country in which the employee habitually carries out his work is believed to be the proper one and a contractual choice of law cannot be effective against the mandatory rules of the country protecting him either (Article 8). It will normally lead to applicability of the law of the place of residence of the employee or alternatively to that of the place where he was engaged if he does not habitually carry out his work in any one country; cf also Articles 5(1) and 19 in fine of the EU Regulation of 2002, just mentioned, for the assumption of jurisdiction in employment matters.391 One may thus see that through a contractual choice of law clause, through the references to the circumstances as a whole in determining the applicable law under Article 4, and through the special protections for consumers and employees, the traditional conflicts approach of hard and fast rules determining the applicability of a legal system regardless of effect and consequence is in a number of aspects softened or amended (see also Volume 1, section 2.2.1), although the traditional basic concepts largely remain intact and national law is still assumed to provide an answer to all internationalised contract problems (although a non-statist law may now probably also be chosen, see Preamble 13), always subject to the general escape of the public order of the forum, provided there is manifest incompatibility with the law resulting under the Regulation, cf Article 21. It still introduces a subjective element however.392 There are a number of specific references to mandatory rules in the Regulation, also important for sales: see Articles 3(3), 6(2), 8(1) and 11(5). Article 9(3) contains a special rule on the treatment of a specific type of mandatory rule, which could be defined as governmental intervention in the law formation process, which cannot be displaced by parties subject to this intervention, even by choosing another law. Article 9(1) refers here to political, social and economic issues, normally therefore regulation or competition issues: see for the discussion of Article 9 more particularly Volume 1, section 2.2.6. When application of the law of one country results under the Regulation, effect may be given (this is thus discretionary) to this type of mandatory rule of another with which the situation has a close connection in so far as these rules must be applied to the contract under the laws of this latter country (rendering performance of the contract therein unlawful). This does not prevent there being varying views in that country itself on the mandatory nature of these laws.

391 See for a comment also CGJ Morse, ‘Consumer Contracts, Employment Contracts and the Rome Convention’ (1992) 41 ICLQ 1. 392 See further the discussion in Vol 1, ss 1.4.14/15.

Volume 3: Contracts for the International Sale of Goods 253 The appropriateness of applying these rules in international situations is a different matter altogether and may depend also on proportionality and legitimacy seen from an international perspective. Article 9(3) only states that regard must be had to the nature and purpose of these rules and to the consequences of their application or non-application. Note that even under Article 9(3) as now drafted, the interests of other parties and countries are not necessarily considered, nor is the question whether the foreign rule, internationally speaking, might be exorbitant in the light of more general basic principles. The Regulation remains purely rule oriented here. There is no balancing of different governmental interests when conflicting. These matters are also not considered under Article 9(2), which allows the forum always to apply its own mandatory rules and in all circumstances, apparently no matter whether the case in hand has any connection with them. The language of Article 3(3), that all elements of the case must be connected with the country of the forum, is not repeated. No special interest of the forum state is apparently required at all for the application of its mandatory rules. As mentioned before, the application of the rules of any other country may always be refused on the basis of public policy (Article 21) if there is manifest incompatibility. In fact, it is rare for courts to give precedence to foreign mandatory rules. In modern times this facility was particularly formulated in the Netherlands.393 It suggested an informal bilateralism which, even in the Netherlands, in practice did not result in much precedence being given to foreign mandatory rules. There is apparently a clear bias for a legal system and its courts not to be unduly disrupted by foreign political imperatives and for mandatory rules of the forum commonly to prevail in the case of conflict. It underlines the importance of the rules of jurisdiction and of any obligatory recognition and enforcement of the ensuing judgment elsewhere, as earlier under the EU Brussels Convention of 1968, now superseded by the EU Regulation of 2002 (Brussels I amended in 2014). It makes the non-application of the Regulation to arbitrations conducted in the EU all the more relevant as international arbitration may present a more objective forum in these matters. In this connection, special problems associated with a contractual choice of law must also be considered. First, in some countries like France there is still a need for some contact between the law chosen and the contract, a concern on the whole more common in the case of a contractual choice of jurisdiction. In any event, the legal aspect concerned must be at the free disposition of the parties, and thus the rule otherwise applicable must be purely directory. Indeed, the facility to choose the applicable law is traditionally marred by the operation of mandatory rules, either of the law one attempts to opt out of or of the law one opts into (see Volume 1, sections 2.2.6, 2.2.7 and 2.2.8). Under a contractual choice of law clause, there is bound to remain uncertainty on both accounts, and it is often unclear what the choice of law intends or can achieve in this respect and what its true effect may be, the more so as the definition and intended impact of national mandatory rules may themselves be uncertain and vary from situation to situation. Within one country’s ordre public rules, regulatory provisions are normally considered absolutely mandatory (unless they say otherwise), but this is less clear, for example, in property and conveyancing law, status, capacity and other family law matters, company law, bankruptcy and attachments, prescription or procedural laws and concepts. Consequently, it is not always clear which, if any, of these rules are at the free disposition of the parties enabling the latter to substitute

393 See the Alnati case, HR, 13 May 1966 [1967] NJ 3 in which it was said that ‘in respect of a contract … it is possible that a foreign state has such an interest in the application of its own mandatory rules … that Dutch courts must consider this interest and may have to give precedence to such rules and ignore the law chosen by the parties in their contract’.

254 Volume 3: Contracts for the International Sale of Goods another rule in their contract and when they may be discarded or opted out of by consent. The opting-in equally presents uncertainties. It is, nevertheless, common to establish the contractual legal framework through a choice of law clause, notably with regard to formation (offer and acceptance) and validity (consensus and its defects), all matters that can hardly be covered in the contract itself and are therefore in that sense not at the free disposition of the parties either. A contractual choice of law may in these areas thus also be ineffective, although that is now not the general opinion. There remain in fact large areas of doubt. Thus foreigners opting for the application of English law to their contract may not mean to opt for the English rules of consideration or exemption (exoneration) clauses or other instances of investor or consumer protection or generally into any rule deeming the contract itself void or against public policy and health, safety or environmental demands unless there are other contacts with the UK, as application of such rules may never have been in the contemplation of the professional parties and do not follow otherwise.394 It was mooted above that in international contracts, the restrictions flowing from the consideration requirement may have lapsed altogether.395 Under the circumstances, a contractual election of English law may also not include the parol evidence rule. One could argue in this connection that the consideration and parol evidence rules have no mandatory impact as part of a chosen contract law, at least if the case itself has no other major contacts with the law so chosen. Again, it should also be considered that a contractual choice of law normally does not have an effect on the proprietary objectives or consequences of a contract either. Thus, in a sales contract, it is unlikely to determine the law under which the title will transfer. Here the lex situs of the asset acquires mandatory overtones barring transnationalisation. Yet especially where assets move between countries and in receivable financing, a choice of law by the parties may increasingly be accepted in the transfer or proprietary and finality aspects of the transaction as we shall see in Volume 4, section 1. In financial instruments such as Eurobonds, the choice of law by issuers made and reflected on the document is sometimes thought also to govern these aspects, therefore the mode of transfer of ownership, protection of bona fide purchasers, and the types of security interests that can be created in them and the formalities to be observed in this connection, but again the final word is here more likely to be with transnational custom or market practices, therefore with transnationalisation (see also Volume 1, section 3.2.3).396 Although in the absence of a contractual choice of law rule, the 2008 EU Regulation is unlikely to apply in the proprietary aspects of international transactions as it only seeks out the Law Applicable to Contractual Obligations, it was already noted that especially in the case of assignments (Article 14), there is much different opinion now resolved by the ECJ limiting

394 See Vol 1, s 2.2.9 and JH Dalhuisen, ‘What Could the Selection by Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law: A Liber Amicorum (Oxford, 2009) 619. 395 This ignores for the moment the fact that in this book the contract law of the modern lex mercatoria is likely to require detrimental reliance or a commencing of performance by the party invoking the contract, see ss 1.1.5 and 1.2.3 above, but it does not accept the typical consideration complications and limitations, see also s 1.2.5 above. 396 It is also true that the lack of clarity as to the precise whereabouts of these instruments may make the lex situs notion unworkable (as it may be in the case of transient assets such as ships and aeroplanes). The consequence is then rather the application of transnational concepts instead of those of a chosen domestic legal system. Because of their third-party impact, proprietary rights seem to need an objective basis in law, which is unlikely to be provided by the choice of parties to a sales contract or of issuers of securities. Modern custodial systems creating security entitlements may deem the situs for these purposes to be at the place of the entitlements or rather the relevant custodian or intermediary (see also Vol 4, s 3.2.2). Here again, transnationalisation of the applicable proprietary regime may recommend itself, as customs of the international marketplace, much like negotiable instruments originally, evolved under the older transnational lex mercatoria.

Volume 3: Contracts for the International Sale of Goods 255 the Regulation to the contractual aspects (see Volume 4, section 1.9.6). Here again, contractual freedom to appoint the relevant (domestic) property law is often advocated (see also Volume 5, section 2.3.5), now, it would appear, considerably curtailed by the ECJ. The contractual choice of law is also not normally meant to include the private international law rules of the law of the country so chosen, cf also Article 20 of the Regulation. It has already been said that international arbitrations have no lex fori per se and are not normally thought to be bound by any particular conflicts rule, no matter what law is chosen by the parties to cover the contract or in which country the panel sits. As mentioned in the previous section, this also applies to the rules of the EU Regulation (Rome I) which may, however, still serve as a model for international arbitrators in terms of general principle. The ultimate danger is of course that the selection of a domestic law may prove to have been entirely unsuitable or does not lead to a proper solution at all, not only in proprietary matters. In terms of the lex mercatoria, the domestic law so chosen would, however, like any other domestic law resulting from conflicts rules, come low in the hierarchy of norms, transnational custom and practices and transnational general principles if developed in the relevant area in the international marketplace being higher (see Volume 1, section 1.4.13), so that its possible harm might be more limited. Where in international cases the lex mercatoria concept and its hierarchy of norms from different legal sources may increasingly be relied upon, at least in international commercial arbitrations, a good case may be made for not making any domestic law applicable to any disputes at all. It could easily be a confusing and disturbing factor; see also Volume 1, section 2.2.9. Another traditional complication of a contractual choice of law is the treatment of any changes in the law so chosen. If such changes signify the normal progression in that law, they may apply, but if there is a clear deviation of the chosen pattern, the changes in the directory rules of the legal system made applicable might not.

2.3.11. The Vienna Convention and the Different Trade Terms in International Sales As mentioned before, important derogation from the Vienna Convention or even its total exclusion and also from national sales law where applicable (leaving aside the problem of the application of national mandatory rules, for example in currency and money transfer matters or in trade restrictions), may result from contract or established trade practices (Articles 6 and 9). They may also supplement the regime of the Vienna Convention and any other applicable sales law. Wherever such terms derogate or supplement, it is posited that the Convention and its supplementation provision of Article 7(2) no longer automatically apply, for example under trade terms in the area of the passing of risk (Articles 66ff). There are, in particular, some established trade terms in this respect. Of these, the FOB (free on board port of shipment or loading), F&S (free alongside), CIF (cost insurance freight port of destination or unloading) and C&F (cost and freight) are the most important. What they all have in common is that they divide the responsibilities for the handling of the goods and allocate certain costs and risks between seller and buyer differently according to the means of transportation used and according to the stage of the transfer or delivery process. Thus, at one end of the spectrum is the term ‘ex works’, under which the only responsibility of the seller is to hand over the goods to the buyer or his agent at his own place of business, while all risks and expenses connected with the goods and their handling are thereafter for the account of the buyer, who must get himself properly organised. At the other end is the term ‘free delivered’, under

256 Volume 3: Contracts for the International Sale of Goods which the seller must make and pay for all arrangements necessary to get the goods to the buyer and has all the risks connected with the goods and their transportation in the meantime. The FOB term dates from the early eighteenth century and the CIF term from the late eighteenth century, each the product of their own situation: the FOB term was logical when the buyer or its agent sailed with the ship or sent its own and concluded sales contracts on the way and supervised the loading of the goods. Even now FOB means that the buyer nominates the ship and makes all necessary arrangements for transportation and insurance. The CIF condition, on the other hand, resulted when regular shipping lines were established and the buyer either depended on the seller to make the necessary transportation arrangement or, more likely, the seller availed itself of the opportunity to ship its own goods before any sale and received a bill of lading which the seller could negotiate later once a proper buyer was found. This gave sellers a great advantage as they could thus sell their goods CIF, while they were already sailing or even upon their arrival, directly in the international markets, in this manner eliminating their dependence on the visiting buyer and its ship. CIF is now by far the most important trade term. Even where goods are already sold, the CIF term means that the seller is still in charge of the transportation and insurance arrangements. It is often thought that the FOB term is appropriate both in purely domestic and international sales and does not produce a bill of lading, while the CIF term is international and denotes an export transaction with carriage to an overseas destination and always produces a bill of lading. But there may also be a bill of lading under FOB terms. The difference is that under the FOB term the seller will collect it upon loading as receipt on behalf of the buyer, who is in charge of the transportation arrangements. The seller must as soon as possible send it to the buyer and is here subject to the latter’s instruction. Under the CIF term, on the other hand, the seller collects the bill for itself and is under a duty to tender the documents to the buyer only as part of the sale. This buyer may in any event emerge later. In either case, the handing over of the documents may be affected and delayed as part of the payment arrangements (see more particularly section 2.2.4 above), which is likely also to affect the transfer of title in the underlying goods. This is especially relevant in countries like France and England, where in a sale of goods title normally passes upon the conclusion of the sales agreement. In these countries, use of FOB or CIF terms may itself indicate postponement and make the transfer dependent on the handing over of the bill of lading. There is a modern variant of the FOB term under which the seller undertakes to arrange the shipment on the buyer’s behalf and at its cost. In fact, this variant is so widely used that it is sometimes thought to be the more normal FOB arrangement. Under it, it in essence remains the buyer’s duty to nominate the vessel, but the seller may be given full powers to do so as an agent acting for the buyer while providing additional services to the buyer in terms of collecting the shipping documents and putting these at the buyer’s disposal. As the seller will not pay for the freight, the bill of lading will reflect this and state ‘freight collect’ (instead of the more usual ‘freight paid’ under CIF). The sales contract will specify these services as it is clear that they will not result from the use of the FOB trade term itself. This type of FOB deal is particularly common in established relationships, where it is often standard practice, but less prudent in incidental arrangements as the seller/debtor remains in possession of the shipping documents and therefore remains in a very strong position vis-à-vis its buyer, especially if a bearer bill of lading is issued, which is a negotiable document of title. A CIF sale is sometimes considered a sale of documents rather than a sale of the underlying goods.397 Tendering documents is then the essential duty of the seller. If so tendered (together 397 Arnhold Karberg & Co v Blythe, Green, Jourdain & Co [1915] 2 KB 379, 388.

Volume 3: Contracts for the International Sale of Goods 257 with the insurance policy and invoice), the buyer must pay (if it was agreed to take place upon tendering), regardless of the situation concerning the underlying goods. They may even be lost or may never have been properly loaded. For the payment obligation to mature upon the tender of the bill of lading, the bill of lading itself should therefore be an on-board bill of lading (see also Volume 4, section 2.1.1). It means that the goods must have passed the ship’s rail and mere delivery of the goods by the seller at a dock warehouse of the carrier or even at its rail is not sufficient for this type of bill of lading to be issued. However, even with an on-board bill, the goods, if shipped in bulk, may not yet have been appropriated to the contract, so that title in them cannot strictly speaking pass despite the existence of a negotiable bill of lading. This may give rise to all kinds of complications and actions but it does not excuse the buyer from payment upon the tendering of the documents. In this arrangement, the documents may be rejected upon tendering for payment if inaccurate on their face (especially relevant under letters of credit). This right must be clearly distinguished from the right to reject the goods, which is unconnected and can only be exercised after landing, claiming and examining them when they are found not to be in conformity with the contract. If the bill is used to obtain early payment, for example upon tendering of the documents, any rejection of the goods later may of course still give rise to an adjustment of the sales price and reimbursements but does not affect the original payment and its validity. In this connection, the situation concerning the transfer of title, although not covered by the trade terms themselves, is of interest especially in systems which require delivery for title transfer. The reason for the trade terms not traditionally covering the title and its transfer is the considerable differences in the various laws on when title may pass and the mandatory rules in this respect in many legal systems. In systems passing title upon the mere conclusion of the sales agreement (unless postponed), such as the English and French, title passes immediately as we saw. In systems that require delivery for title transfer, such as the German and Dutch, the seller must as a minimum put the goods at the disposal of the carrier: see for these different systems and the consequences Volume 4, section 2.1.3. Under an FOB clause, it is common to view the carrier as the agent for the buyer who nominated the vessel and in systems requiring delivery, the title therefore normally passes at the ship’s rail. If a bill of lading is also issued, title may only pass upon the handing over of the bill, relevant especially if used in the context of a letter of credit. Under a CIF clause, it is also conceivable to view the carrier as an agent for the buyer, even though the buyer strictly speaking does not nominate the vessel and may not yet exist. In this approach, the delivery to the buyer may also be considered to have taken place at the ship’s rail, which may complete the title transfer at the same time, provided always that the goods are identifiable (the more likely civil law approach) or have been properly appropriated to the contract (the more likely common law approach). It is, however, more likely that under a CIF sale, title is considered passed only if the documents have been tendered to the buyer and, upon any negotiation of the bill, title will only be considered to have passed further when the bill is handed over (plus endorsement if to order). Intent acquires a special meaning here. Indeed, in systems in which title transfers upon the mere conclusion of the sales agreement, the bill of lading only has significance if the title transfer is deemed to be postponed until tendering or delivering the bill of lading and this then depends entirely on the intent of the original parties. Under FOB and CIF terms, this intent may, however, be deemed implied, at least if the bill of lading is intended also to play a role in payment protection schemes. Otherwise, especially under FOB terms, the title is usually considered passed when the goods pass the ship’s rail, as we have seen. This may even be the case in France under the CIF term, although in England the tendering of the documents seems to be the moment: see Volume 4, section 2.1.4 below.

258 Volume 3: Contracts for the International Sale of Goods Further delay will result, however, if the underlying goods have not yet been identified or set aside to the contract or if title in them has been reserved pending payment, no matter the tendering, delivering or negotiating of the bill of lading. If the goods have not yet been sold, but are simply shipped by the owner with a view to a later sale, the seller/shipper naturally remains the owner and also has the bill of lading. That sale may still be CIF (and this is normal for shipped goods) even though the loading has already taken place (on a ship nominated and paid for by the seller as in an ordinary CIF sale). It is also common to on-sell goods CIF even though in that case shipped by a previous seller who paid for the transportation. As regards the passing of risk, the trade terms tend to be specific on the subject and especially in FOB and CIF terms the passing of the risk always takes place at the moment the goods pass the ship’s rail and is thus entirely independent of the transfer of title or of legal possession. Thus, the physical act terminating the seller’s control of the goods constitutes at the same time the moment the risk in the goods passes: see for the concept of the passing of risk further section 2.1.9 above. If under a CIF contract the sale happens after the goods are already afloat, the passing of risk will be retroactive to the moment of loading.

2.3.12. Incoterms: Their Status and Relation to the UCC and Vienna Convention The most important trade terms, such as the FOB and CIF terms, have been compiled and restated by the International Chamber of Commerce since 1936, in the so-called Incoterms, the last edition being of 1 January 2020 (9th edition). They also cover a considerable number of other trade terms such as ‘ex works’, ‘free on rail’, ‘free on truck’, ‘arrival or ex ship’, ‘ex quay’, ‘delivered at frontier’ or ‘delivered duty paid’ (DDP), etc. In the 2010 version they were reduced in number from 13 to 11, with four deleted altogether and two new ones added. It shows that they are not entirely stable although the main ones are: ex works, FOB, C&F, CIF, free alongside ship (FAS), and DDP. There are others: free carrier (FCA), carriage paid to (CPT), carriage and insurance paid to (CIP), delivered at terminal (DAT which became DPU in 2020), and delivered at place (DAP). The Incoterms are sometimes still thought not to have the force of law by themselves. They may, however, have acquired the status of industry custom although not necessarily in all circumstances and detail, as may be seen shortly. At an early stage it was proposed to add them to the Hague Sales Conventions but this idea was not pursued. It would have made sales under these Conventions more international. It was said earlier that positioning the international sale of goods together with the transport, insurance and payment condition components is the key to its proper understanding but is much missed, also in the Vienna Convention. In the US, the FOB, FAS, CIF, C&F and ‘Free Delivery, Ex Ship’ terms have been codified under domestic law in Article 2 UCC, but not the others. The trade terms are seldom codified in other domestic laws. One has to be aware of some differences between the US and European practices in this area, even where these terms are codified—especially relevant for the FOB term, which in the US allows reference to a destination rather than to a port of loading, a practice now also seen in Europe, for example where pipelines are used, and then implies free delivery to the designated destination point, although the risk may pass sooner. As already mentioned, in essence these terms all aim at a certain division of labour and costs in terms of physical delivery, transportation and insurance. They also have a bearing on the place of the transfer of risk (normally at the port of loading) in situations where none of the parties can be blamed for lack of performance, and insist on notice (including procurement of the invoice),

Volume 3: Contracts for the International Sale of Goods 259 require the parties to keep each other properly advised on what is happening and, under the CIF terms, demand tender of a transportation document (bill of lading) and insurance policy to the buyer. It is not uncommon in this connection to refer to ‘C’ terms, ‘F’ terms and ‘D’ terms. In ‘C’ or ‘F’ terms, risk passes at loading, in ‘D’ terms (such as DDP) upon unloading, while the difference between ‘C’ and ‘F’ terms is in the liability for the cost of transport and insurance. Also, under the Incoterms, the proprietary consequences remain an area for the applicable national law, if not of some advanced notion of the lex mercatoria, under which one must normally assume that after delivery to the ship’s rail, the buyer is owner, the carrier its agent and the possession of the bill of lading the proof. It acquires then the status of transnational paper operating under its own rules just as negotiable instruments of title largely do. Whenever specifically referred to in a contract, the Incoterms are automatically incorporated and may then derogate from the Vienna Convention or from national law where otherwise applicable. But it is still necessary in this respect to determine their precise meaning where they lack detail. This may be decided on the basis of general principles. At the beginning of the previous section, it was already doubted whether the interpretation and supplementation provisions of Article 7 of the Vienna Convention still apply, including the reference to a national law under the private international law supplementation language of Article 7(2). This may be all the more problematic where the Incoterms have not been made explicitly applicable to the contract. The question has arisen whether in this context the Incoterms, if not expressly made applicable to FOB and CIF references, at least in Europe, may be deemed to apply customarily, at least therefore in respect of these two most common trade terms. The Incoterms themselves (since their 1990 Foreword) suggest that they must be included in the contract to apply, but this cannot be decisive as to their status as custom or usage. As already discussed in section 2.3.8 above, the Vienna Convention in Article 9 requires that a usage is, or ought to have been known to the parties and must also be widely known in the trade concerned.398 Even though this can also not be ultimately decisive as to the true impact of international custom, it may well apply to the Incoterms in the commodity trade in Europe. In any event, one may expect the courts and commercial arbitrators to look to the Incoterms for lack of any better guide when the relevant sales terms are used in a contract without definition or reference to the Incoterms, even if they are not considered customary. As a minimum, the Incoterms may thus have some explanatory, supporting or persuasive effect and serve as a guide, especially when there is no substantial statutory or case law explaining these trade terms in the jurisdiction identified by the conflicts rules as providing the applicable national law. In the UK in particular, such a body of case law exists but that remains exceptional.399 Even then, it is likely that the (English) courts will have regard to the need for uniformity in the interpretation of these terms and domestic precedent may not determine all issues, which in the UK is also the approach taken to the interpretation of the Hague-Visby Rules.400 Where the law of a State of the US would be applicable under the pertinent conflict rules, the UCC would be applied instead, at least to the extent that it covers the relevant terms and even though only written for domestic transactions. Again, the interpretation elsewhere cannot even

398 Under the Hague Sales Convention Art 9(3), the interpretation of terms was to conform to their usual meaning in the trade concerned. This is now less clear as this particular sub-section was not retained in the Vienna Convention. 399 See C Schmitthoff, The Law and Practice of International Trade, 10th edn (London, 2000) 7ff. 400 See Stag Line v Foscolo Mango & Co Ltd [1932] AC 328.

260 Volume 3: Contracts for the International Sale of Goods then be fully ignored and international practice remains relevant, all the more so for the terms not defined in the UCC, in which connection the Incoterms may be of prime importance also in the US. The question is finally left as to whether conflicts may arise between the established trade terms, whether or not supported by the Incoterms, and the Vienna Convention, in which case the trade terms prevail, assuming their meaning is clear. The Incoterms then figure either if explicitly made applicable or as custom/trade practice. Yet conflict will be rare. As a start, the need to deliver the goods to the carrier under both FOB and CIF terms is fully compatible with the provisions of Articles 30 and 31 of the Vienna Convention. Article 34 requires documents to be tendered at the time and place and in the form required by the contract. The trade terms will be specific in these aspects and then supplement this provision. As regards the passing of risk, the Vienna Convention (Article 67(1)) again accepts the established trade term practice of the risk passing when the goods are handed over to the carrier (except in ‘D’ terms). Where the trade terms (indirectly) have a bearing on or refer to other aspects of substantive law, they should prevail as contractual terms but may still be amplified by the precise wording of the Vienna Convention, unless clearly meant to operate otherwise. An example may exist in Article 67(2) requiring clear identification of the goods for the passing of risk, which may not strictly be necessary under the trade terms. They would then prevail. There may also be some doubts: for example, the FOB terms do not involve a carriage of goods proper so that the references to the handing-over point and the passing of risk in Articles 31 and 67 of the Convention may not, strictly speaking, apply. Even so, the Incoterms themselves clarify these aspects as if there was a carriage of goods. Earlier, the packaging duty under FOB terms, to which Article 35(1) of the Vienna Convention makes a reference, existed probably only until the place of loading was reached in derogation of Article 35(2)(d), but a further duty now appears implied under the FOB terms (as restated at the time in the 1990 Incoterms version, Comment 9).

2.3.13. The Vienna Convention and the ICC Model International Sale Contract. The 2004 European Civil Law Project: Sales As has been pointed out many times before, the Vienna Convention is only a partial codification of the international sales law. As we have seen, it has its own rules of supplementation in the areas it covers but it does not deal with the law applicable in the areas it does not cover. In the traditional view, the additional law is then to be found through the application of the relevant conflicts of law rules leading to the application of some national law. It was submitted instead that the applicable rules are best found and explained in the context of the modern transnational lex mercatoria with its different legal sources and hierarchy of norms (see sections 2.3.7 and 2.3.8 above). Also, the UNIDROIT and European Principles and now perhaps even the DCFR may supplement the applicable rules within that context as some general principle or prevailing practice. Within the ICC, an effort has been made to produce a Model International Sale Contract which is divided into two parts: (a) specific conditions setting out terms that are special to particular contracts of sale; and (b) general conditions setting out standard terms common to all contracts incorporating the ICC General Conditions of Sale. Both the special and general conditions concern manufactured goods intended for resale when the purchaser is not a consumer and the contract is an independent transaction rather than part of a long-term supply arrangement. The model contract is subject to the Vienna Convention (if not excluded) but its general conditions serve in practice as an amplification of the rules of the Vienna Convention. The specific

Volume 3: Contracts for the International Sale of Goods 261 conditions, on the other hand, contain an easy checklist of the basic deal terms. The trade terms used are as defined in the Incoterms (except as otherwise agreed). There are also ‘Principles of European Law: Sales’, assembled at the University of Utrecht as part of the larger European Civil Law project aiming at Restatements in various areas of private law in Europe.

2.3.14. The Law Merchant Concerning International Sales As explained more fully in Volume 1, section 1.4.15 and in sections 2.3.7 and 2.3.8 above, within the international law merchant or modern lex mercatoria and its hierarchy of norms, the Vienna Convention has its own place as written uniform law, always subject to its rules of application,401 and does not stand alone. In this hierarchy of norms affecting international sales, the Convention and the general principles on which it is based are not of the highest order and may be eclipsed by fundamental international mandatory principle402 and even by customary law, certainly if mandatory, which in sales may be rare, but it may also be so in its directory provisions if customary law maintains itself regardless of the impact of the Convention. These directory provisions of the Convention may of course also be overridden by the contractual terms as a matter of party autonomy. This is important especially in the context of the Convention’s interpretation or supplementation, regardless of its more muddled Article 7, and is relevant also in determining the rights and duties of the parties under their sales agreement: see more particularly section 2.2.8 above. Thus, the terms of the contract itself will precede the terms of the default rules of the Convention, but the Convention itself precedes the application of common legal principles (not of a fundamental nature), which. in the lex mercatoria approach, may, however, still supplement it even if not directly underlying the Convention itself. Again, fundamental principle and mandatory custom will prevail over it, as will be all other custom that maintains itself regardless of the Convention. Where the Convention does not apply under its own terms, it may still figure as a model as part of the general principles of the modern lex mercatoria. These general principles may even be found in international sets of Principles such as the UNIDROIT and the European Principles (PECL) in so far as they are properly focused on professional dealings, and now perhaps in the DCFR and even CESL. It has already been noted that on the whole they do not whatever they say. They could, however, also express accepted practice or custom, although it was submitted before that their true problem is their subjective approach to contract formation and implementation and the absence in them of modern contract theory and proper relationship thinking. The ICC Model and the Principles of European Law: Sales, referred to in the previous section, may also play a role within the modern lex mercatoria, again either as accepted practices/custom or general principle. It has been pointed out that in the transnational legal order, the conflict of laws rules and the ensuing application of a domestic law come as the lowest set of rules, which only apply when no solution is found under all higher norms, regardless therefore of what Article 7(2) of the Vienna Convention says. Even then, the conflicts rules may be so subsidiary that judges or arbitrators have discretion as to the fitting in of the domestic laws so becoming applicable. In any event, they

401 It was pointed out in Vol 1, s 1.4.10 that the operation of uniform treaty law in the transnational lex mercatoria is to some extent incongruous as, in the opinion of most, it remains national and territorial law upon ratification. 402 See for a collection of these principles n 382 above.

262 Volume 3: Contracts for the International Sale of Goods figure then as transnational law in the international commercial and financial legal order, become part of the modern lex mercatoria and are adjusted to make sense in that context. As we have seen, there may also be a form of discretion in balancing conflicting mandatory domestic rules and in determining especially the impact of domestic regulation on international sales contracts (règles d’application immédiate, see further Volume 1, sections 2.2.6, 2.2.7 and 2.2.8). Local public order requirements may have to be dealt with in a similar manner. They may increasingly be replaced by international minimum standards. Again, this may all be clearer in international commercial arbitrations, especially if these issues are properly raised and pleaded by one of the parties or arbitrators have autonomous powers to invoke them: see Volume 2, sections 1.1.10 and 1.2.5. In this approach, the sales contract itself, its interpretation and supplementation and the determination of the rights and duties thereunder are thus subject to a range of norms with their own hierarchy: fundamental principle as ius cogens, mandatory custom (if existing), mandatory treaty law (if existing), the terms of the contract, directory custom, directory treaty law, general legal principles, and finally domestic laws appointed under the prevailing conflicts rules. Regardless of the precise wording of its Articles 7 and 9 (see sections 2.3.7–2.3.8 above), in this hierarchy (which in terms of sources of law cannot be predetermined by the Convention), the Vienna Convention, the Incoterms, the UNIDROIT and European Principles and others, and the EU Regulation on the Law Applicable to Contractual Obligations (Rome I) each play a role in their allotted places as written norms. They will be subject to their own applicability rules and their own provisions concerning their interpretation and implementation except that the norms from other layers of the modern law merchant or lex mercatoria override their effect if higher. Unless fundamental principle or public order or public policy requirements, the relevant rules cannot say much about their own ranking. All are a source of law in their own right whose relationship is given by the dictates of the legal order in which they operate. For the modern lex mercatoria and its hierarchy of sources of law this is the transnational commercial and financial legal order. In it, rules may postpone themselves explicitly, for example, by making them subject to custom and party autonomy. It has already been said that in this connection, a reference to good faith and usage in the contractual interpretation of international (sales) agreements might also mean a reference and form of postponement to these other extra-contractual norms (which probably would apply anyway) when higher. Besides the internal contractual elements such as the wording of the agreement, the intent of the parties, when they have made clear choices, their conduct, the nature and purpose of their contract, and the nature of their relationship, they co-determine the contractual rights and duties under which the partiers operate vis-à-vis each other. The details of this approach were explained in Volume 1 and need not be repeated here. The key is the decentralisation in law formation and the diversity in the sources of the applicable law and their hierarchy, perceived in this book as the essence of the modern lex mercatoria covering the private law aspects of all international professional dealings.

2.3.15. The EU Efforts in the Area of the Law Concerning the Sale of Goods In October 2011, the EU entered the field of the sale of goods as a carve-out from the DCFR, earlier presented as a kind of draft for a European Civil Code. This EU project, usually referred to as the CESL, had taken the form of a proposal for an EU Regulation and was limited to cross-border sales within the EU. It mainly applied to consumer sales in the EU and has been

Volume 3: Contracts for the International Sale of Goods 263 discussed in section 1.6.13 above to which reference is made. It met with much criticism and was withdrawn in December 2014. In essence, it had all the flaws of the Vienna Convention, including a generally subjective intent- and will-based anthropomorphic approach to contract formation and interpretation coupled with an extra layer of consumer protection. Its effect would have been to create two types of sales laws in the EU: one for purely domestic sales and another (only partially codified) for cross-border sales within the EU (which would need to be opted into by parties to operate) which are then seen as another form of domestic sale, now at EU level. Proprietary and finality issues were not covered. The typical problems connected with cross-border sales, particularly, but not only, in terms of transportation and payment risk, were also not further considered. They may, however, be the subject of other consumer Directives, such as Directive 2011/83/EU on Consumer Rights, which also covers some aspects of transportation services for goods (but only to guard against excessive fees and hidden costs).

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Part III Contractual Agency 3.1. The General Notion of Agency 3.1.1. The Use of Agents: Their Position The basic pattern of international sales, as explained in the previous part of this Volume, is based on an extensive use of intermediaries. Although expensive, this has served international commerce well for a long time and still provides the basic framework for international sales. In fact, it was shown that the use of third parties handling the goods and payments as independent and professional intermediaries was a key element in making s sales possible on any kind of scale. It was shown also that these intermediaries may act as mere service providers but also as true agents, which means that in the exercise of their function as intermediary they fulfil legal acts for the persons or entities engaging them. This is the legal meaning of agency and has a long history in international sales where it is very common, but agency also has an important application in other areas. The position of intermediaries of this nature is primarily determined by the contractual arrangements under which they operate, which are different, for example, in a warehousing or transportation agreement concerned with the handling of goods by others or in a letter of credit concerned with the handling of payments by banks. These contracts might indeed imply or explicitly confer special powers, which may lead to agency, which then supplements these contracts. Thus, the warehousing or transportation agreement may give the warehouse or the carrier the right to hand over the goods to a buyer, which may complete the delivery of the seller at the same time in systems requiring delivery for the transfer of title to pass full ownership. Thus, the warehouse may become an agent for the seller in that it accomplishes this legal act of delivery. Alternatively, the warehouse or carrier may operate as the agent of the buyer so that the delivery and title transfer are completed when the goods are handed over by the seller to them. If a warehouse receipt or bill of lading is issued, however, it should be noted that the transfer of the warehouse receipt or bill of lading to the buyer may itself pass title and the warehouse or carrier do not then fulfil this intermediary role in the delivery process and will not be agents in that aspect. Under a letter of credit, the bank has an independent payment obligation but the payment by the bank will discharge the buyer’s payment obligation under the sales agreement at the same time and the seller will have no further claim for payment on the buyer. Here again, there is an intermediary who completes performance for someone else, in this case the buyer, who will have arranged this facility as part of his performance under the original sales agreement requiring the letter of credit. Again, the paying bank may be seen as the agent for the buyer in fulfilling and extinguishing the latter’s payment obligation to the seller.

266 Volume 3: Contractual Agency What happens in these cases is therefore that intermediaries effect legal acts or obtain discharges for others, here either seller or buyer as the case may be, to complete the sale or payment without achieving any benefit themselves (except a right to be paid for their services) or incurring any duties of their own under the original contract, although they may incur rights and obligations under the supplementary agency agreement (but only as agents), which may be embedded in the first one but are legally quite distinct. In its effects, the agency even needs to be separated, as we shall see, from the agency agreement under which it was created, the true reason being that the agent so appointed, while committing, benefiting, or releasing its client (or principal) under the relevant agreement, transacts with a party under that agreement who may not be a party to the agency. This is also referred to as the issue of independence or abstraction. An important theoretical issue in this connection is whether agency must always be considered unilateral or is still considered bilateral. Between agent and principal, this may be relevant as to the special duties that the agent may owe the principal and which may not derive from the agency agreement (the internal relationship) alone. This is clear for the fiduciary duties under common law, which seek to avoid any conflict of interest between principal and agent, as we shall see, this being important especially when the agent has some discretion in choosing counterparties or in undisclosed agencies. The agency is more likely to be truly unilateral as far as the third party is concerned when the appearance of agency may imply more rights than the internal relationship between principal and agent would suggest. Especially the third-party effect may be different from what the agency agreement envisaged or prescribed. This is a very important issue in agency. There is thus a risk for the party making use of an agent (the principal) as others (‘third parties’) may rely on this agency and need not check the underlying agency arrangements (the internal relationship) and are not necessarily affected by them. In other words, in modern agency, independence means that the third party may assume apparent authority of the agent. The principal takes that risk although there is an element of good faith in the sense of reasonable reliance as far as the third party is concerned. As may be seen, the issue of independence is thus directly related to that of the authority of the agent and its possible extension under the notion of apparent authority. Not all legal systems take the same view here, however, and especially in Germany it is more common to distinguish depending on how much the third party could know of the agency. It is indeed useful in this connection to consider that the independence affects the principal while the appearance of authority relates to the third party’s perception, although it may also be said that the one (apparent authority) presupposes the other (independence). To repeat, in a legal sense, the key to agency is always that an agent initiates or completes a legal act or obtains a discharge for others and does not (normally) incur liabilities or acquire rights unless there is an indirect or undisclosed agency as we shall see. In summary, there are three relationships which require attention in this connection: (a) the one between principal and agent, which is at the same time at the origin of the ensuing transaction or legal act (such as delivery) with a third party—this is the agency agreement or internal relationship; (b) the relationship between the agent and the third party which achieves the transaction or other legal act (this relationship is likely to have no independent meaning, at least in disclosed agencies as the agent has no own position or rights and duties and will fall out of the transaction, but it also means that this relationship has a meaning if the agency is undisclosed to the third party or indirect as we shall see; and (c) the relationship between the principal and the third party which results from the transaction or other legal act, or the external relationship, and which in a fully disclosed agency is likely to be the same as the one between the agent and the third party (but again not necessarily in an undisclosed agency).

Volume 3: Contractual Agency 267 Looking back over the examples already given, they may serve to show the internal and e xternal relationship in a disclosed (embedded) agency: the contract of carriage between the seller and the carrier is purely limited to the relationship between both of them and is therefore internal. Yet it may have an external effect in that the carrier operating for the seller may effect a legal act with the buyer on behalf of the seller, such as the act of delivery achieving the title transfer between seller and buyer (under laws which require delivery as a condition). That is the external aspect leading in the end to a direct delivery between the seller (principal) and the buyer (third party). The disclosed agent falls out of this aspect of the transaction. In brokerage functions, the contract between the broker and his client is the internal relationship. The relationship which the broker creates between his client and the counterparty is the external relationship. The broker does not create his own contractual relationship with that counterparty unless, in civil law, the broker acts in his own name (also called indirect agency) or, in common law, the broker does not disclose the agency. At least in common law, disclosure will create the external relationship automatically. In that case, the broker is in principle discharged. As just mentioned, the situation may be different if the agent acts in his own name (in civil law: indirect agency) or when the agency is not disclosed (in common law: undisclosed agency). In that case, the third party may not know of the agency and sees the undisclosed agent as his true counterparty with fullest authority. In such cases, the agent is likely to acquire his own liability for performance vis-à-vis the third party and may even become jointly and severally liable with his principal vis-à-vis the third party in respect of performance upon disclosure of the agency later, as will be discussed more extensively in section 3.1.5 below. Another issue is here what rights the undisclosed or indirect principal obtains in the assets which the agent may so acquire in his own name and what the effect is of a later disclosure of the agency on these proprietary rights. Particularly in this area (as in the area of fiduciary duties), there may still be important conceptual differences between civil and common law. With this background in mind, it may first be obvious that agency functions are often embedded in or result from other relationships as in carrier agreements or in letters of credit, as we have already seen, or in service agreements, but they may of course also be more direct and figure as the main objective of a contractual relationship, then called a mandate in civil law. This is likely to happen when a power of attorney is given, which could even be unilaterally arranged so that there may not be any underlying contractual relationship with the agent proper, and therefore no duties of the latter either but only a right to act as agent. If the agent (or attorney) acts, however, there are likely also to be duties and there may then be an implied acceptance. In brokerage, on the other hand, there may be a clear contractual agency: the broker is required to buy or sell assets, especially commodities or investment securities on behalf of his client, often on specified conditions in terms of volume, quality, time and price. Even so, agency is here only the result of the brokerage arrangement, and legally quite separate—as already mentioned—which may also produce other rights and duties, but unlike in the embedded cases of agency, it is more at the centre of it. Instead of the term ‘agent’ or ‘agency’, under civil law the term ‘representative’ with ‘power of representation’ or ‘authority’ is also used. These types of agents, operating as pure middlemen earning a commission but not incurring their own liability or taking any risk, must in turn be clearly distinguished from those who are sometimes also called agents but in fact deal for their own account, such as sole distributors, some franchising agents and licensees. Securities brokers, if dealing from their own inventories, are no longer pure agents for their clients either. It is thus clear that not every intermediary is an agent in the sense of achieving legal acts or obtaining a discharge for someone else, although the term ‘agent’ is often used for all intermediaries. Legally this is not appropriate and proper distinctions need to be made.

268 Volume 3: Contractual Agency Agency relationships, even fully disclosed ones, often allow intermediaries to choose a counterparty. In this way, selling or buying agents may be appointed to find buyers or sellers and contract with them on their principal’s behalf. In shipping, a shipping agent may thus be asked to make the necessary shipping arrangements for his principal with whomever and on the terms the agent thinks best. Investment securities brokers are usually given similar facilities while in discretionary accounts they may also decide on the investment transactions and price. In commercial trade it is even possible for a less sophisticated or infrequent international seller or buyer to leave the selling or buying of its goods and all supplementary arrangements to agents. These agents may (for an additional fee) even take all the risks and become legal owners of the goods for the time being (in common law perhaps in the nature of constructive trustees only). It is the traditional function of the so-called confirming house. There are also so-called del credere agents who accept at least the credit or payment risk in their transactions, incurring thereby individual liability under the agency, usually in respect of customers they themselves choose. In this way, businesses may also appoint general agents or representatives to conduct their entire business in other countries even by way of establishments. They may appear to act in their own name, thus as indirect agents, but doing so internally only for the account and risk of the principal. The contract or applicable law may curtail these general agencies or powers, however, to acts of general management only and exclude from them any powers to dispose of the principal’s assets except in the ordinary course of the business considering the purpose for which the powers were given (cf also Article 3.62 of the Dutch CC) unless of course specifically provided otherwise. Dutch law is used here as being to some extent representative of the modern civil law thinking on agency since it is the most recent statutory expression of agency law on the European Continent, although not necessarily the most enlightened. In its earlier drafts, it had some influence on the UNIDROIT Agency Convention of 1983 and through it also on the European Contract Principles (PECL), which now have a special section on agency (Articles 3.301ff). As we shall see, these texts tend to prolong the possibility of misuse that is inherent notably in the civil law concept of indirect or undisclosed agency where the agent acts in his own name even though for the risk of his principal. In civil law, it tends to give the agent too much of an independent position and power, not (yet) sufficiently balanced by fiduciary duties towards the principal and by tracing powers of the latter in the underlying assets. This may still be the cause of serious abuse.

3.1.2. The Role of the Agent: Explicit or Apparent Authority The position of the agent and his contractual or other rights and duties, including his fi duciary duties vis-à-vis his principal or client, first under common law, need to be considered in more detail. While dealing with third parties on his client’s behalf, in common law the agent must particularly avoid conflicts of interest between him and his client: see more particularly section 3.1.4 below. Also, the contractual rights and duties of the principal and of any third party with whom the principal deals through agents must be considered. Finally, the proprietary rights created through an agent need further investigation, especially if the agent is undisclosed or deals in his own name. The law in this respect is better developed in common law than it is in civil law, especially so in the fiduciary duties of the agent and the protection of his client against him and in the contractual and proprietary aspects (see section 3.1.6). This is a particular contribution of the law of ‘equity’ in common law legal systems as we shall see. As may already be clear from what was said in the previous section, the first observation to make is that the term ‘agent’ is often very loosely used in this connection. In commercial terms, it

Volume 3: Contractual Agency 269 may be no more than a person who renders certain services for someone else. In a legal sense, the term has a specific meaning, however, and assumes that this person acquires and exercises power or authority or obtains sufficient control to represent and, if necessary, to bind the principal visà-vis third parties and vice versa in the arrangements the agent makes on the principal’s behalf. In these arrangements, the agent may have been given greater or lesser powers and freedom by the principal or client (in the internal relationship). Particularly in the choice of the third party and sometimes even in the types of deals to be concluded, the agent may be allowed (and may have been particularly chosen) to exercise a certain discretion depending on his expertise for which the agent will be rewarded accordingly. An investment securities broker will indeed normally have freedom to choose the counterparty in a traditional investment securities transaction. This type of agent is unlikely to ever disclose this counterparty as there is no need. While acting with the broker of the counterparty the agent may not know who the latter is and may even have been given the right to initiate these deals in a discretionary account, so that the agent is free to engage in continuous transactions, which he finds of benefit for the principal. As expert the agent may also acquire a position as protector of the principal whom the agent may have to guide through complicated transactions and must warn against the consequences of what he (the agent) may be doing. Whatever the amount of discretion, the essence of agency may be considered the following: (a) The agent creates direct legal relationships between the principal and the third party while not normally incurring any liability himself although doing so jointly with the principal or even severally does not need to distract from the existence of an agency. In fact, in common law the separate liability of the agent may be a question of the internal relationship between principal and agent and the arrangements they have made between themselves in this connection. On the other hand, the agent’s liability vis-à-vis the third party may also arise from the circumstances, particularly in the operation of an undisclosed agent on whom the third party relied as counterparty. (b) The rights the agent obtains, duties the agent performs or liabilities the agent incurs for his principal may be of any nature: they can be contractual or pre-contractual (if the agent negotiates) but may also involve the transfer of title or the creation of other proprietary rights. Even tortious behaviour of an agent may so be attributed to a principal. (c) Under the notion of abstraction or independence, the agent’s powers are not necessarily limited by the terms of his arrangements with the principal (the internal relationship) but the third party may be able to rely on the appearance of authority or on apparent authority and need not check into the underlying relationship and any restrictions in it on the agency. As already noted, that is the risk of the principal who uses agents although the third party must show a measure of good faith in his reliance. (d) Although the principal has this risk, special protections are developed to avoid conflicts of interest between the agent and the principal, particularly relevant in undisclosed or indirect agencies but also in direct agencies where the agent is given a measure of discretion. Problems may easily arise when the agent also operates for his own account in the same goods when only a limited number of them are available to buy at lower prices. Here enters the idea of postponement of the agent, a notion particularly alive in common law and part of the fiduciary duties developed under that law. Thus, although the principal sets the agency in motion and controls it to that extent, he must accept what the third party makes of it and the principal relies in this respect on the agent’s loyalty and care. There may be other duties. In common law, they are well developed and imply substantial safeguards, also for investors who use brokers.

270 Volume 3: Contractual Agency The broad facility to use intermediaries as agents in this way was developed in medieval law but faced problems as late as the nineteenth century, even in England. Roman law had disallowed the concept in contractual matters as it generally considered contractual ties highly personal and not capable of being created through agents, certainly if counterparties were chosen by the agent at will,403 a notion only abandoned by the natural law school of Grotius and his followers.404 Under Roman law it was, however, possible to use intermediaries to acquire property.405 It suggests that the underlying contract could also be concluded by the agent, who was, however, thought in that case only to render a service (mandatum) and was not allowed any discretion. More problematic was the position of the undisclosed agent acquiring property, cf D.41.1.59 under which the decisive point was considered to be the animus domini (intent) or lack thereof in the agent, of which there had to be some manifestation. The result was that in case of doubt, the agent would acquire the property for himself. This at least was the interpretation of Bartolus.406 Agency or the power of representation or authority to bind a principal can now derive from or be implicit or embedded in many types of contracts, as we have already seen. It can also derive from the mere operation of the law as in corporate, matrimonial and parental matters and in the vicarious liability under tort law, although common law does not operate a generalised agency concept as civil law is more apt to do in its notion of representation. Thus, parents are not automatically the representatives of their children under common law. The most obvious contract giving rise to agency is the pure (commercial) agency agreement or mandate in civil law. But it may no less result from an employment or service contract or from any other contract meant to transfer this kind of facility or authority. In international sales it may, as mentioned before, be implicit in a transportation agreement pursuant to which the carrier is allowed to hand the goods over to a buyer, thus completing the delivery, and in the arrangements concerning the documentary letter of credit under which a bank operates as an independent payor but also as agent for both parties, liberating them under the contract by receiving the shipping document (for the buyer) in exchange for payment (to the seller). To repeat, the internal relationship is not decisive for the extent of the agency. For a direct agency to operate, the perception of the third party is of the essence and there need be no more than the appearance of an agency through declarations or conduct of the principal allowing third parties reasonably to rely on the power of representation or agency and claim a contract with the principal: see for example Article 3.61(2) of the Dutch CC (called agency by estoppel, or apparent or ostensible agency or authority in common law). The third party has no investigation duty in this respect beyond the obvious. The agent who clearly exceeds his authority is naturally liable to the principal but it has no further effect on the innocent third party dealing with the principal through the latter’s agent. It is often less clear whether the principal may similarly invoke the third party’s reliance to invoke a binding contract himself in those circumstances. This notion of reliance of this nature is closely connected with (a) the principle of publicity, which underlies the normal form of agency under which the principal is disclosed by the agent in the transactions he concludes on the former’s behalf, cf also Article 3.66 of the Dutch CC;

403 D.45.1.38.17 and D.45.1.26.2. 404 De Iure Belli ac Pacis, Lib II, Cap XI, s 18. Grotius de-personalised the contractual bond except where clearly highly personal. 405 See D.41.1.13 pr. 406 Commentarii in Primam Digesti Novi Partem ad D.39.5.13. The Dutch Supreme Court in a decision of 1624 went further and accepted that the principal acquired the property (possession and ownership) directly on the basis of his agreement with the agent whether or not the agency was disclosed: see J Coren, In Supremo Senatu Hollandiae, XXV (Amsterdam, 1661).

Volume 3: Contractual Agency 271 and (b) the normative theory of contract on the other; see for this latter point also section 8 of the Comment, Restatement (Second) of Agency in the US and what was said about the normative approach to contract in section 1.1.7 above. It is important to appreciate that the normative interpretation approach in contract acts here in the first instance in the relationship between the principal and agent (the internal relationship) upon which the third party subsequently relies in terms of the agent’s authority. In the normative approach, reliance on the declarations and conduct of the principal is reduced to what is normal for the third party to assume and to expect under the circumstances, for example in respect of employees of a corporation, in which connection the conduct and declarations of the agent himself rather than those of the principal may even become controlling.407 It thus depends on the setting and circumstances. There is here a strong analogy with the vicarious liability of the employer. Use of a company’s signals, such as titles, letterheads, visiting cards and premises, even lack of proper supervision and an unclear organisational structure may all lead to a situation in which a third party may assume the agency and need not make further inquiries, although this may still remain exceptional.408 Where modern agencies continue to operate in commerce, they are normally de-personalised by large commercial entities which make agency their professional business, such as shipping agents and investment banks as securities brokers and investment managers. It tends further to support the notion of independence: the third party relies on the agent and need not fear the effects of any principal disowning the agent. Commercial practice also requires it. It is possible that the seniority and standing of the agent in relation to the principal also play a role. As a consequence, the professional agent is likely to have apparent authority vis-à-vis third parties in some matters more than in others. It is difficult to generalise and the facts will be decisive.

3.1.3. The Notion of Independence, Apparent Authority and Agencies of Necessity Whatever the (contractual or other) source of the authority to bind the principal and third party may be, it has already been noted that this authority is subsequently likely to acquire an existence of its own and is in any event exercised according to its own rules not necessarily derived from the internal relationship between principal and agent, be it a contract or the appearance thereof or a unilateral act such as the granting of a power of attorney, but rather from general legal principles. It has already been mentioned that creating power or authority in this sense is therefore often seen as a separate unilateral act of the principal addressed to a third party, even though this party is not necessarily identified by the principal but might be chosen by the agent. It should be considered that, as far as the agent is concerned, his power is likely still to be bilateral in respect of the principal but to entail special duties, which may not be derived from the underlying agency agreement either but rather from the agency concept itself. Any underlying agency agreement or the appearance thereof or a truly unilateral power of attorney (which gives a right but cannot impose a duty to act as agent until accepted and cannot therefore limit the attorney’s own freedom to compete) is in this view only a way to bring the power of the agent into being, which itself, at least in respect of the third party, results independently under the operation of the law. It is an approach borne out by the new Dutch Civil Code, Article 3.61. It also supports the notion, in so far as the third party is concerned, that apparent 407 See in the Netherlands HR, 27 November 1992 [1993] NJ 287. 408 See also the English case of First Energy UK Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194.

272 Volume 3: Contractual Agency authority is always the key (although the independence is its base, even if it relates primarily to the principal and the appearance of authority to the third party) while the agreement between principal and agent is not fully dispositive for the third party. Again, legally relevant is only what the principal (or sometimes even the agent) either directly or indirectly (unilaterally) intimates (by conduct) to the third party, not what the internal arrangements between principal and agent are. This principle of apparent authority combined with the principle of abstraction or independence leads to the distinction between the internal and external aspect of the authority or power, a distinction first formulated in this connection in Germany by P Laband.409 In common law, a similar approach was taken by Corbin.410 There is therefore congruity between common and civil law in this most important aspect and there is clearly a common core in common and civil law inspired by similar practical needs even if the law of agency remains better developed in common law especially as far as the fiduciary duties are concerned, while there also remain important differences in the undisclosed or indirect agency concept, especially in liability of the agent and the proprietary effects, as we have already seen.411 That there is such a common core is in itself not surprising, as it is often said that the notion of agency came into English law through continental commercial practices even if the English became in general particularly comfortable with agents of all sorts (and their cost) in commerce and finance. The differences in fiduciary duties and in the consequences of undisclosed agency are connected with subsequent developments in common law in which agency became closely related to the trust, while in equity agency and trustee duties became comparable, although they are by no means the same, as we shall also see. To repeat, the principles of abstraction or independence and of reliance on apparent authority allow for a more extensive role of the agent when the need arises, therefore regardless of any contractual stipulations about authority between principal and agent, if at all explicit and however confining. There may also be an agency of necessity in common law terms or a negotiorum gestio in civil law terms supplementing the consensual agency and taking over. One could even consider the principle of independence implicit or supplemental to all agency relationships, in this connection sometimes also referred to as inherent authority, provided, of course, that the agent acts reasonably. In fact, one purpose of delegated authority may be to avoid constant recourse by third parties to the principal.412 It follows that once a principal gets an agency going, he must realise and accept that it may create its own momentum and he cannot hide behind the internal relationship and the limitations he may have set therein on the agent’s activity. Again, the operations of the agent are for the principal’s risk, whatever comes of it, assuming that the third-party acts reasonably in his reliance, while the agent, at least in common law, must comply with his fiduciary duties vis-à-vis the principal and support the latter as best he can, postponing his own interests, even though not doing so does not affect the third party. 409 P Laband, ‘Die Stellvertreter bei dem Abschlu ss von Rechtsgeschäften nach dem allgemeinen Handelsgesetzbuch’ (1866) 10 Zeitschrift für das gesammte Handelsrecht 183ff. 410 A Corbin, ‘Comment’ (1925) 34 Yale Law Journal 788, 794. 411 See for comparative analyses especially the works of W Müller-Freienfels in Germany, Stellvertretungsregelungen in Einheit und Vielfalt, Rechtsvergleichende Studien zur Stellvertretung (Frankfurt, 1982) and also K Zweigert and H Kötz, 2 Einführung in die Rechtsvergleichung, 3rd edn (Tübingen, 1996), translated into English by T Weir, Introduction to Comparative Law, 3rd edn (Oxford, 1998) 431. See for English law, the treatise of FMB Reynolds, Bowstead on Agency, 16th edn (London, 1995) and for US law, Restatement (Second) of Agency and DA DeMott, Fiduciary Obligation, Agency and Partnership: Duties in Ongoing Business Relationships (St Paul, MN, 1991). See further Fridman’s Law of Agency, 7th edn (Toronto, 1996). 412 See Learned Hand J in the US case of Kidd v Thomas A Edison 239 F 405 (1917).

Volume 3: Contractual Agency 273 Not all legal systems go equally far in the aspect of independence. Particularly the idea of Laband that the third party may depend on the authority, even ignoring the restrictions agreed between the principal and agent or the defects in their contractual relationship of which he knew, is often not accepted in modern legal systems such as those of the Netherlands and Germany. It follows that, where the agent holds himself out in that capacity but acts without proper authority while no apparent authority can be deduced from the circumstances and an agency of necessity does not exist either, there is no agency and the so-called agent is personally and exclusively liable to the third party, certainly if the principal disowns the arrangements the agent made, even if there was no negligence on the latter’s part; cf also Article 3.70 of the Dutch CC. The modern idea is that, besides the power bestowed by the principal as signalled to the third party and whatever necessity will subsequently require, the agent independently warrants his own authority, a concept in common law long known in the context of undisclosed agency. This may mean that if the principal cannot perform that part of the transaction that went beyond the authority given in the internal relationship, the misguided agent might still be liable to the third party for the excess. Of course, even if there was no apparent authority or agency of necessity, the principal may always ratify the acts of the unauthorised agent and thus potentially discharge him. This ratification is commonly considered retroactive, see Article 3.69 of the Dutch CC.

3.1.4. The Consequences of Agency: Conflicts of Interests, Rights and Duties of the Agent To repeat, the notion of independence suggests that lack of consent in and defences derived from the internal relationship between the principal and the agent normally have no consequence in the external relationship between the principal and the third party, at least if the latter did not know of them at the time he contracted. The notion of independence is also likely to lead to special rules in the area of set-off, excluding the direct or disclosed agent (and his own rights and obligations vis-à-vis the third party) from the process. Equally in matters of retention rights of the third party/seller vis-à-vis the principal/buyer, the relationship with the disclosed principal/buyer, and not with the agent, is likely to determine their extent. In the aspect of good faith when acquiring personal property from an unauthorised third party, even the good faith of the disclosed agent may be imputed to the principal. The normal consequence of the agency is that the direct or disclosed principal is directly bound vis-à-vis the third party (and vice versa) under any contract that the agent concludes. The principal thus acquires or surrenders directly any proprietary right that may accrue or be divested through his agent, while the agent himself does not normally acquire any rights or incur any duties in this respect. The agent is entitled to a fee from the principal for his services and must perform his duties as well as he can. In common law these are of a contractual but additionally also of a fiduciary nature. Especially in investment brokerage, they may be reinforced by statutory law. The fiduciary duties in common law are equitable and require the agent to protect the principal’s interest, avoid any conflicts with his own by postponing these, and observe the necessary discretion, often summarised as the duties of care, loyalty and confidentiality. They are of particular interest when the agent acts as a broker for several principals, and more so if the agent also deals for his own account at the same time. They are all the more important in undisclosed or indirect agencies where the agent is given some discretion as is usually the case when making investments in securities. Civil law is notably less well developed in this area of potential conflicts and often continues to allow the agent, when the latter acts in his own name while the agency

274 Volume 3: Contractual Agency remains undisclosed, to possibly benefit from the transaction under circumstances which remain generally undefined, a situation which must be considered unsatisfactory and will be further discussed in the next section. The common law fiduciary duties are particularly important in trusts,413 therefore in the relationship between the trustees and the beneficiaries who largely depend on their trustees and are vulnerable to abuse. They are not contractual in nature but may supplement certain types of contracts where there is a dependency relationship.414 The common law technique of literal interpretation of contracts and its reluctance to imply terms or accept good faith notions presented problems. Thus, early on fiduciary duties were introduced into the relationship between principals and agents, but also between solicitors and clients, companies and directors, probably employers and employees.415 They could also be added in the relationship between guardians and wards, executors and legatees, and each partner in its relationship to a partnership as a whole. The key is that these fiduciary duties may impose duties of care which are higher than normal and may require the fiduciary (here the agent) to act with greater care than the agent would use in his own dealings.416 These fiduciary duties are gradually being introduced also in civil law, at least in investment securities brokerage, first through Article 11 of the EU Investment Services Directive effective in all EU countries as of the end of 1993, now superseded by the Markets in Financial Instruments Directive (MiFID), which is more demanding (see Volume 6, sections 3.5.5ff.). They may not be captured entirely by the good faith notion, although the elaboration of the information and performance duties in contract may be developed in the same direction and may be used as the context in which the fiduciary duties will be received into civil law. Using good faith notions would limit them to application in contractual situations only, might not cover the concept of independence, and might not so readily highlight the extra effort that is required, and they may be hindered by the fact that they could then be given relevance in all contractual situations and as such be diluted, unless the typical nature of the relationship between contractual parties is better understood. This type of relationship thinking is implicit in common law. But even in common law, some fiduciary relationships are more intense than others. The facts are important.417 Fiduciary duties co-exist with contractual duties but seem to be always overriding. Compared to the American notion of good faith in sales contracts under the UCC or in the Restatement (Second) of Contracts (see section 1.3.7 above), the fiduciary duties are objective requirements, while the fiduciary can never act in his own interest (without full disclosure assuming even then that there is a ready alternative for the principal) which contract parties naturally may do. Good faith in this sense usually requires parties to take into account only each other’s justified interests and it seeks a balance after the contract has been concluded. Under fiduciary duties, on the other hand, the interest of the beneficiary always prevails over that of the fiduciary.418 Under them, even pre-contractual disclosure duties (for example, of conflicting

413 See for the beginning of this development Keech v Sandford (1726) 25 ER 223. 414 Not any situation of dependency or confidence gives rise to fiduciary duties, however, and the key is that the fiduciary undertakes to act in the interest of another person who is entitled to expect that the beneficiary will only act in his interest. Acting merely for the account of someone else is notably not sufficient. 415 See the Australian case of Hospital Products Ltd v US Surgical Corpn (1984) 156 CLR 41, 96–97. 416 See Cardozo J in the US case of Meinhard v Salmon 249 NY 458 (1928); see also Restatement (Second) of Agency, s 387 and Comment. 417 See Frankfurter J in the US Supreme Court case of SEC v Cheney Corp 318 US 80, 85 (1942). 418 See also the Canadian Supreme Court case of Cansons Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129, 154.

Volume 3: Contractual Agency 275 interests) may arise in the formation of the internal relationship, which under concepts of good faith might still be less pronounced even where the good faith notion is accepted in the performance of the contract, as it now is under Article 2 UCC in the US. Another point is that, because of the overriding nature of fiduciary duties, they are not easily excluded, diminished or varied by contractual stipulation, although parties in the internal relation may define some standards. The liability they give rise to may as such be more comparable to the one in tort.

3.1.5. Undisclosed and Indirect Agencies. Trusts as Alternative in Common Law It has already been mentioned that there may be some form of agency even if it is not disclosed at all, while no indication is given or conduct established by the principal either, leading to reliance by the third party on apparent authority of an agent. In fact, these forms are very common. Certain agents, such as brokers or commission agents (‘commissionaires’ in civil law) who buy or sell goods for a principal may thus act in their own name upon the undisclosed instructions of a principal who gives them possession of his goods or access to his accounts. Particularly in civil law, this often gives rise to difficult questions about the relationship (if any) between the third party and the principal, but also about the rights the principal has in the assets so acquired. The question then arises whether there was any agency at all. In common law, on the other hand, some form of privity is still assumed between the undisclosed principal and the third party, thus establishing a type of agency, which gives the agent rights in the assets at the same time. The justification for agency in these cases is that consideration moved from the principal and not from the agent, who is therefore not a proper party to the agreement. One sees here a particular example of common law laying stress on the ‘exchange and bargain principle’ rather than on the parties’ intent or ‘will’ (see section 1.2.4 above).419 However, even in common law, it is considered an exception to the traditionally strict rule of privity (see section 1.5.3 above) and the relationship between the undisclosed principal and the third party is therefore sometimes viewed as arising only through the operation of the law, and is not then a contractual construction. A condition may be that the third party does not have any reasonable interest in the identity or nature of his counterparty, just like the debtor in the case of assignments. The third party normally will have such an interest, however, if the undisclosed agent has performance duties towards him. In common law, the undisclosed agent must have had the intention to act for the principal in each instance and the contract between principal and agent should not have excluded that possibility.420 The main difference from the normal (disclosed) agency is then that, at least until disclosure, the agent will be liable together with the principal towards the third party as a natural protection for the latter (even though the agent did not provide any consideration) and may not even automatically drop out after disclosure if the third party has a continuing interest in the agent being so bound.421 It is a matter of credit risk. Through mere disclosure of the agency, the principal becomes directly entitled to the benefits of and assets acquired by the agency and also becomes directly liable to the third party, but such

419 See also W Müller-Freienfels, ‘The Undisclosed Principal’ (1953) 16 MLR 299. 420 See also Reynolds (n 411) 414ff. 421 See for a leading case (Privy Council) in this area, Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 WLR 370.

276 Volume 3: Contractual Agency a disclosure does not automatically put the principal fully in the shoes of the agent. At least as far as the liabilities of the agent towards him are concerned, the third party may be able to object to any transfer, not only because he may not want to release the agent as he does not trust the credit of the principal but also when it is inconvenient for him to deal directly with certain types of principals such as private clients in investment securities transactions, for example, because they are not connected to settlement systems necessary to make and complete share transfers in a safe and efficient manner. In the meantime, it remains somewhat unclear, even in common law jurisdictions (because it never distinguishes sharply between contractual and proprietary aspects), whether title to any goods obtained under the undisclosed agency automatically passes through to the principal; it would seem logical, certainly upon disclosure of the agency (as a way to directly claim the benefit). There will in any event be a recovery possibility for the principal against the undisclosed agent in the internal relationship. It will also cover moneys received by the undisclosed agent from the third party, at least if sufficiently set aside. Claims of the agent on the third party (eg for the delivery of shares or sales proceeds) will also belong to the principal who may pursue them in his own name upon disclosure unless again the third party has an interest in the agent exclusively pursuing them. In common law jurisdictions (depending on the perceived intention of the parties), the construction of a trust may alternatively allow the benefits to accrue to the principal as beneficiary. The principal in that case does not become the counterparty, however, nor does the principal incur liability directly (he has no action against the third party, and the third party has none against him). The exceptions to the nemo dat rule are also different when the agent acts as (constructive) trustee in this manner, in which capacity the agent may legally transfer title in the assets to a bona fide purchaser for adequate consideration, thus defeating the principal’s interest: see for these exceptions also Volume 4, section 1.4.4 below. In fact, in common law it is entirely possible to appoint a trustee instead of an undisclosed agent to handle, sell or buy some goods, and it may indeed not always be clear whether an intermediary is appointed an agent or a trustee. In the securities brokerage industry, the trust characterisation is uncommon and not easily presumed to have been created, even in discretionary portfolios, although there may still be a constructive trust for tracing purposes. The differences are material in the sense just mentioned. But even if there is a mere agency, the connection with the trust remains close, as particularly expressed in the fiduciary duties, which also affect the undisclosed agent, and in the direct interests of the undisclosed principal, even if stronger in the agency than in the trust construction, where he has only the rights of a beneficiary. This is all much less clear in civil law where reference is often made to indirect agency or indirect representation in this connection rather than to undisclosed agency, at least when an agent acts in his own name. There is an important difference. Indeed, the indirect agency of civil law lays particular stress on the agent having acted in his own name rather than on the lack of disclosure. This type of agency may therefore also exist if the third party knows that there must be a principal or if the principal is even known to him. On the other hand, in civil law, the agency idea remains more embryonic in these circumstances. The problem is that the concept of the will or intent of the parties, developed in the nineteenth century, did not easily allow for the formation of a contract between two parties unaware of each other. Common law, as we have seen, puts the emphasis here rather on the concept of the ‘exchange and bargain’ (and the movement of consideration). As a consequence, the agent acting in his own name is as such in civil law considered primarily responsible for the deal, and the principal may not be given a direct interest, the corollary being that the principal has no direct liability to the third party either. In fact, the trust construction in common law

Volume 3: Contractual Agency 277 comes closer to this civil law notion of indirect agency than the undisclosed agency, with the important difference, however, that the common law undisclosed principal still has in such cases the rights and protections of a trust beneficiary and the advantage of the benefits being separated from the person of the trustee. In civil law the principal has (in principle) only a personal claim on his agent for the benefits which are not then considered separated. This seriously exposes the principal in a bankruptcy of the agent.

3.1.6. The Civil Law Indirect Agency. The Relationship between Principal and Third Party. Customers’ Assets Although acting in one’s own name, even as undisclosed agent, does not in civil law on the face of it create a direct relationship between the principal and the third party, this has never been satisfactory. Under practical pressures, some direct tie between the principal and the third party is often assumed, especially in Germany and Switzerland, at least if the third party has no special interest in the identity and nature of the principal, when, unlike in common law, the agent may even be considered discharged. This is the case for cash purchases of little value. But also where a person acts as an agent without disclosing the particular principal (open agency in Germany), a direct relationship between the principal and the third party may still be established if the identity of the former does not matter to the latter. This is very much the normal situation in investment securities brokerage, when the third party knows from experience that there is an agency and therefore a principal, even if undisclosed. Again there is the analogy with the debtor under an assignment and with the depersonalisation of contracts generally, which has been at the heart of the notion of agency ever since Grotius insisted on it.422 Another reason for this approach may be the realisation that the indirect agent acts only upon the initiative and is always subject to the control of the principal, even if the third party may not know this but could suspect it. The consequence is that the principal may usually claim the title to goods obtained for him by the agent assuming they have passed from the third party and are sufficiently identified, but this may still depend on specific statutory authorisation. Short of such an authorisation, in Germany the situation is again more complicated, at least in the proprietary aspects of agency, as under German law the acquisition of title depends not only on a contract and delivery (of legal possession), but also on the agreement to deliver (Einigung) (see Volume 4, section 1.5.6), the agent playing a role under all three. As delivery of physical possession is considered a factual matter in Germany, there is another problem here in cases where it is required, as agency under German law is limited to legal acts (Rechtsgeschäfte). Also the Einigung suggests a transfer to the undisclosed agent personally (section 164 BGB). In Germany, it is possible and common, however, to include in the contract between principal and agent, therefore in the internal relationship, a clause under which the agent commits to acquire legal title and to accompany this with an anticipated intent to transfer the asset to the principal, even though neither is declared at the moment of the actual acquisition of property by the agent to the third party. Here we see indeed some emphasis on the internal relationship itself and the question of control. If the transfer remains defective from the principal’s point

422 See further for Germany, KH Schramm, Münchener Kommentar zum Bürgerlichen Gesetzbuch 1 Allgemeiner Teil, 3rd edn (Munich, 1993) Fünfter Titel, s 164, nos 42ff, and s 392(2) of the German Commercial Code. It does not extend to the obligatory rights: see s 392(1) HGB. See for Switzerland, Art 401 of the Code of Obligations.

278 Volume 3: Contractual Agency of view, it may still be perfected later to what the agency contract originally required (see section 181 BGB).423 Another aspect may be that the third party must have some awareness of the agency, even though he does not need to know the principal. In security brokerage this requirement will normally be in place as end-investors using brokers are aware of the fact they usually do not operate for their own account (although in modern securities dealings large brokers often deal from own inventory or book-entry entitlements at best market prices, when in truth they have stopped being agents and the issue of title passing through them to the principal no longer arises). In France, the situation is also not fully clear but in the case of use of commission agents the third party upon disclosure may be able to hold both principal and agent liable while at least any property rights accrue directly to the principal.424 In the Netherlands, on the other hand, there is still no direct tie admitted between principal and third party in indirect agencies. Under Article 3.110 CC, property rights accrue to the principal if passed to the agent, but merely on the basis of the internal relationship. Provided the agent holds the assets in question for the principal, the internal relationship is specific on this point, and the acquisition is the direct result thereof. Because of the apparent lack of an external relationship proper, it remains less clear in this connection whether the third party may equally receive title directly from the undisclosed principal assuming the property has passed to the agent. There are also still problems with moneys held for clients in the agent’s own name. However that may be, the principal appears at least protected in its proprietary rights against its agent if the latter has executed the transaction with the third party but not yet with the principal, at least as far as any tangible assets the agent has so acquired are concerned. This is particularly relevant in the agent’s bankruptcy. As just mentioned, it may not, however, apply to money the agent received (for which Dutch case law may give some protection if sufficiently separated out in a client account, although there are still serious doubts in this area too, as we shall see). Importantly, it does not extend to contractual rights which the agent still has against the third party, particularly for delivery or payment in a transaction which is not yet in the stage of performance. In Germany, creditors of the undisclosed agent still have full recourse to all assets acquired by the undisclosed agent. If the undisclosed agent acted as Kommissionar, any contractual obligation of the third party against the agent will not be available for attachment by the agent’s creditors (section 392(2) HGB) but some protection of the principal may be achieved by the concept of an anticipated transfer from the agent to himself, as noted. Title may as a rule not shoot through, however, but will remain with the agent for as short a period as possible. It must be remembered that this only applies to truly undisclosed agency and not to open or direct agency when a direct link between principal and third party is established. Similarly, in the case of default or bankruptcy of the undisclosed agent, under new Dutch law, the principal may appropriate these contractual rights (if not highly personal), including the

423 See also German Supreme Court, 11 June 1920, 99 RGZ, 208 (1920). 424 See in this vein Jurisclasseur Commercial Facs 7A (No 76), 360 (No 120) and 365 (No 20). See in France for an early plea for a direct link upon disclosure between principal and third party (in both the proprietary and obligatory aspects) B Starck, ‘Les rapports du commettant et du commissionairs avec les tiers’ in J Hamel (ed), Le contrat de commission (Paris, 1949) 163, but this approach was not followed, see Ripert and Roblot (n 360) 682. In Belgium there was support from W van Gerven, Algemeen Deel (Antwerp, 1969) 494–97 and L Simont, ‘Le Problème de representation dans le contrat de commission sur marchandises’ (1956) Jurisprudence commerciale de Bruxelles 129. Belgian case law accepts the proprietary link but not the obligatory link: see Cour de Cass Belge, 9 December 1999, Pas I, 1669 (1999): see for a criticism, E Dirix, Liber Amicorum Jacques Herbots (Antwerp, 2002) 97.

Volume 3: Contractual Agency 279 right to any damages or repairs: see Articles 7.420 and 7.421 CC (in the context of the contract of mandate but also applicable outside it, see Article 7.424 CC). The principal may do so by the mere declaration of his interest to both the agent and the third party. The third party left in limbo by the agent but discovering the agency has similar rights against the principal in the case of a default or bankruptcy of the agent. This facility is often interpreted as a statutory assignment. However, it leaves important questions of set-off, retention rights and bona fides protections unresolved. The consequence seems to be that the principal’s rights may still be curtailed by counterclaims the third party may have had against the bankrupt agent. Equally, it could be asked whether any other defences (or retention rights) the third party had against the agent continue against the principal. Another point is whether any good faith status of the indirect agent may also accrue to the principal in these circumstances. The complication of the transaction still being in a clearing process in which outsiders cannot normally intervene is also not considered. Another problem may be presented here if securities are held for clients with a custodian in a custody account in the broker’s name, or through a book-entry system to the extent it is characterised as creating only contractual rights against a custodian (even though that is now increasingly uncommon—see Volume 4, Part III below). Does the principal enter into these rights directly upon a bankruptcy of the broker as well? It would have been more logical to extend the principle of Article 3.110 of the Dutch CC (that title to physical assets already received by the agent always shoots through to the principal) also to any contractual claims the agent has received for the principal against a third party, and vice versa. It is a typical civil law problem not to characterise claims as assets but it would have substantially approximated the common and civil law notions of undisclosed and indirect agency and would have been better than the statutory assignment construction and yields a more modern result. This being said, common law too is not without sensitivity either as to the defences of the third party in an undisclosed agency425 that becomes disclosed after the agent has acted. As we have seen, in general, the possibility of the agent dropping out of the transaction is restricted when the third party relied on him personally or on the defences such as set-off, assuming they were contemplated and discounted in the deal he struck with the undisclosed agent, but not those arising fortuitously or from later transactions. This is especially relevant in investment brokerage transactions, when the third party knows that normally there is an agency and a principal involved and does therefore not have these defences.426 Yet, as in disclosed agencies, there is an exception when there is a regular current account relationship between agent and third party or when the agent deals for several clients (principals) and possibly also for himself at the same time short of immediate allocation (pooling).

425 In a disclosed agency, there is no set-off unless the principal agrees, or when there is a regular relationship between agent and third party and a current account relationship between them, all the more so where individual principals are not disclosed, as is common in investment securities brokerage: see also P Wood, English and International Set-off (London, 1989) 996. 426 Especially in the US the cases are unanimous in holding that there can be no set-off where the third party should know or suspect that there is a principal: Branham v Fullmer 181 NW 2d 36 (1970). The third party is also not discharged from payment if he pays the agent in such circumstances unless in good faith: see Fradey v Hyland 37 Fed 49 (1888), although the Restatement (Second) of Agency (s 208) follows the English rule, which does not even accept good faith payments, criticised by Reynolds (n 411) 439 and not in accordance with business practice in investment securities brokerage. Upon disclosure, payment to the agent is the risk of the principal who could, however, instruct the third party not to pay to the agent, although in the security brokerage business the loss of the option may be deemed implied, at least in retail business.

280 Volume 3: Contractual Agency The text of Articles 7.420 and 7.421 of the Dutch CC was largely derived from the UNIDROIT Agency Convention of 1983 (not yet in force because the necessary 10 ratifications are still missing, the Netherlands being one of the ratifying powers so far), itself the product of Dutch input at the time. In its Article 13(2) it proposes this system427 as a compromise between common and civil law. It gives the Dutch implementation some wider importance. This approach has also appeared in Articles 3.301ff of the PECL but was not retained in the DCFR—see the few references to indirect agency in Articles II-6:106 and IVD-1:102(e). Because it leaves major issues unresolved, this approach seems unsuitable, particularly for the commodity and investment securities brokerage business when, while dealing with brokers, the existence of an agency must in any event be assumed. In the meantime, the notion of segregation of clients’ accounts and customers’ moneys (or other pooled client assets), although still in the name of the indirect agent, is a broader civil law problem, increasingly respected, but also by no means completely. This is particularly important as regards any moneys a bankrupt agent acting in his own name has received for his client(s). Dutch case law appeared at first favourably disposed but now less so, short of statutory backing. The situation under Belgian and French law as to segregated (pooled) assets including money still in the name of the agent appears not much clearer.428 The particular problems arising in connection with indirect agency in the investment services industry are discussed more fully in Volume 6, section 1.3.10. Another problem that arises in particular in this industry derives from the fact that undisclosed agencies are unlikely ever to create a direct relationship between a principal and a third party. But also open agency may be problematic if the principal is not even known to the agent or is as yet non-existent. Thus, where

427 See [1983] Uniform Law Review 164ff and for a defence of the compromise (and its implicit disadvantages), AS Hartkamp, ‘Indirect Representation According to the Principles of European Contract Law, the Unidroit Agency Convention and the Dutch Civil Code’ in J Basedow et al (eds), Festschrift für Ulrich Drobnig zum siebzigsten Geburtstag (Tübingen, 1998) 45. This approach was fundamentally challenged by LD van Setten, De Commissionair in Effecten [The Investment Securities Broker], (Dissertation, Utrecht, 1998), in favour of a pure agency construction seen here as the underlying idea of Arts 7.420 and 7.421 of the Dutch CC. Indeed, the better view is that this limited Dutch statutory system through which the principal may receive direct rights against the third party in an indirect agency is in truth based on and derived from the agency notion itself and the assignment characterisation and its limitations are then illogical. Indirect agency should therefore be interpreted as a form of agency as the undisclosed agency is in common law. Especially the set-off complication would then be reduced to more normal proportions. In Dutch legal scholarship from before the introduction of the new Civil Code, a far-reaching automatic recognition of the undisclosed principal’s position had already been suggested by P van Schilfgaarde, Toerekening van Rechtshandelingen [Attribution of Legal Acts] (Dissertation, Groningen, 1969), as long as the agent meant to operate for the principal and the third party had no particular interest in the agent as his counterparty, while the principal was sufficiently solvent. In this view, the agent upon disclosure became a mere guarantor of contractual obligations which it entered into, much along common law lines, while the property acquired by the agency was always directly obtained by the principal. Van Setten follows this reasoning but takes a more radical position, which would unite common and civil law concepts also in this area of agency. 428 See HR 3 Feb 1984 [1984] NJ 752 but new Dutch case law is more restrictive and limits segregation to situations of statutory separation, HR June 13 2003 RvdW nr 108, 2 July 2003 and 6541 WPNR (2003). There remained, in any event important problems also in this area: see E Dirix and RD Vriesendorp (eds), Inzake Kwaliteit [The Client Account] (Deventer, 1998). In continental legal writing, the difference between agency and trust is little understood and so far as client money and assets are concerned, the preference seems to be for trust structures, even though they have hardly any basis in civil law. In the meantime, the (indirect) agency concept, which is much better known and much more suitable to be further developed in the sense of pure agency (see previous note), remains in this sense neglected and underdeveloped. It would give the principal a legal position vis-à-vis the third party, however, which he does not have in a trust construction where he is a mere beneficiary subject to the rules in this connection.

Volume 3: Contractual Agency 281 brokers act upon instructions of investor advisors who do not disclose their own principals to the agent, no direct relationship between them and the third party may come into existence, in fact not under common law either. When intermediaries act for principals in a pooled manner, leaving allocations of sales and purchases to them until later, it does not seem that an agency can operate either, at least not before the allocation, and the agency is then dependent on the agent’s expressed intention about who will get what.

3.1.7. The Economic Importance of Modern Agency The major differences between the common law of agency and the civil law of representation are thus likely to be in the areas of the undisclosed agent and conflict of interests. The undisclosed agent, like any other acting in his own name, has greater independence in civil law vis-à-vis his principal, and is traditionally more likely to be allowed to compete with him, although in modern securities and investor protection laws, duties and restraints similar to those long known in the common law of agency are gradually being introduced following the EU Investment Services Directive now succeeded by the Market in Financial Instruments Directive (MiFID) (see Volume 6, section 3.5.5ff). Civil law countries have, however, had considerable difficulty in faithfully adopting the Directive in this regard. It would in truth have required a rewriting of the law of agency for investment transactions. In common law, these fiduciary duties tend to be reinforced in the investment area under modern statutes such as the UK Financial Services Act 1986, replaced by the Financial Services and Markets Act 2000, and in the US much earlier under the Securities Exchange Act 1934 and its many amendments in the US. Agents of these various kinds are frequent in commercial business because of the distances or different specialities involved. Modern communications have often made it possible to dispense, however, with their services, thereby reducing cost, also in international sales, all depending on the sophistication and staff of the principal. As a consequence, by far the most important manifestation of agency is now in the area of investment services or commodity dealings through brokers, therefore in the area of undisclosed and direct or open agencies where there are at the same time the greatest differences between common and civil law. But the implied or embedded agencies in transportation and payment arrangements remain important also. Another area where agency remains common is in the factoring of receivables for collection purposes. New Dutch law makes clear that the creditor may give the collector exclusive rights in this respect, which does not, however, prevent debtors unaware of this exclusivity from paying the original creditor and receiving a discharge, cf Article 7.423 CC. The true factor collects, however, in his own name and for its own account and is not an agent: see more particularly Volume 6, sections 2.3.1ff.

3.2. International Aspects of Agency 3.2.1. Private International Law Aspects of Agency Finally, it may be of interest to mention briefly the private international law issues in agency. Early on, there had been an English rule making the disclosed agent in England liable for the obligations of a foreign principal, who in turn could not himself be sued or sue in England. This defeated much of the purpose of a disclosed agency and made it unattractive in international

282 Volume 3: Contractual Agency dealings. Being foreign is now only one factor in determining whether the parties had meant the principal to be directly and exclusively liable by contract between them.429 In the US there had always been an unwillingness to recognise foreign general powers to the discharge of local agents.430 Beyond these simple and incidental rules, there has never been much consensus about the treatment of agency internationally. As was pointed out above, in agency there are in essence three relationships which require attention: (a) the one between principal and agent, which is at the origin of the ensuing transaction or other legal act (such as delivery) with the third party (or the internal relationship); (b) the relationship between the agent and the third party which achieves the transaction or other legal act (which relationship is likely to have no independent meaning in disclosed agencies); and (c) the relationship between the principal and the third party which results from the transaction or other legal act (the external relationship). In the traditional conflict of laws approach, all three may conceivably be covered by different domestic laws. This of course complicates matters considerably even if there were a consensus on the conflict rules in each instance. Another aspect to consider is whether the granting of the authority itself as a legal act separate from, although initiated by, contract between agent and principal but based on the latter’s declarations or conduct, is not itself also subject to a distinct set of legal rules. That appears to be the better view and is a natural consequence of the notion of independence. This then raises the further question of what domestic law covers this aspect. If one sees the declarations or conduct of the principal as the main factor in the creation of the agency to the extent disclosed, then his law would, from a private international law point of view, be of primary importance, at least in the creation of the authority. It is also possible, however, to refer in this respect to the law of the third party who relies on these declarations or this conduct, although it may leave the principal at the mercy of (the law of) any third party the agent may choose (if given that discretion). It has already been said that this is then generally considered his risk. Whatever law may thus apply to the creation of the agency, the agency is then likely to depend for its effect on the law of the country where it is invoked. Indeed, what we are concerned with here is primarily the recognition of the authority conferred and the binding force of the obligations between principal and third party (and the elimination of the agent as a party), including any proprietary effect that may result. The law of the place where the effect is invoked will normally be the law of the country of either principal or third party, at least as to them being bound under the relationship created by the agent (if the principal makes the allegation it is therefore normally the law of the third party and vice versa), including possibly their conflicts laws, but in the traditional conflict of laws approach, it is likely to be the law of the situs of the assets if it concerns the proprietary effects of the agency. The question of the discharge of the agent and the implementation of his (fiduciary) duties would more properly be a question of the law of the country of the agent. This is a particular manifestation of the lex loci actus, which is normally associated with the place where the agent acts, intended to act or has his business. Set-offs and retention rights or other defences would not apply to the agent if he properly drops out of the arrangement under the agent’s own law as is likely in a disclosed agency. If the agent does not, his law may have to be considered in these areas also. Bona fide acquisition of chattels by the agent for the principal, likely to be possible in civil law countries, may as to the determination of the bona fides also be a matter of the law of the place of the agent or

429 Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 545. 430 See Von Wedel v McGrath 180 F 2d 716 (1950).

Volume 3: Contractual Agency 283 otherwise of the location or situs of the relevant chattels. These seem the most common-sensical and expedient solutions if one still adheres to the private international law approach searching for the application of some national law in these matters. It would remove this aspect of (undisclosed or indirect) agency from the contractual choice of law by the principal and agent, logical if the authority and its operation are seen as a question of the objective law as it affects third parties. It would also concern the nature of the fiduciary duties and the liability or discharge of the agent vis-à-vis both the principal and particularly the third party. Another approach altogether would be to consider the agency transnationalised when principal and third party are in different countries and to view the legal nature of the agency and its independence, at least in international commerce and finance between professionals, as transnationalised concepts in that case under the notion of the lex mercatoria, subject principally to its own principles and logic, see further section 3.2.3 below. According to the pre-eminent author in this field, Ernst Rabel,431 virtually every type of conflict solution had even then (by 1929) been proposed, including applicability of: (a) the law of the underlying agency contract or internal relationship, particularly in legal systems not accepting the notion of independence; (b) the law of the place of the agent, easy to verify and particularly relevant if agents act as general representatives or as establishments of the principal in other countries and are subject to local customs, but it presents problems where both parties use agents from different countries; and (c) the law of the main contract or relationship created between principal and third party itself. It achieves unity in the applicable legal regime, including the duties of disclosure in the pre-contractual phase, but is also problematic as the main contract is established only after the agency is already in being and the law applicable to it may itself remain uncertain. This latter point is also an argument against applying the law of the internal relationship, which, if ascertainable, may moreover be entirely extraneous to the third party. The great diversity of approaches continues to this day.432 In fact, tripartite arrangements are particularly difficult structures in private international law and can very seldom be covered by reference to one domestic law. The multitude of domestic laws that may become applicable to the various aspects of such arrangements often present a picture of considerable complication and arbitrariness.

3.2.2. Treaty Law Concerning the Law Applicable to Agency It should be noted in this connection that Article 1(2)(g) of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I) excludes from its scope the question whether an agent is able to bind a principal. Technically, this does not mean that the purely internal relationship between principal and agent and the contract between principal and third party are also excluded. The Hague Convention on the Law Applicable to Agency of 14 March 1978, on the other hand, more particularly concerns itself with the role of the agent vis-à-vis the third party and his authority to bind the principal (and the third party to each other). It entered into force in 1992 between France, Argentina and Portugal, joined later in the same year by the Netherlands. It is valid for a period of five years and is automatically renewed for states that have not denounced it (Article 26).

431 E Rabel, ‘Vertretungsmacht für obligatorische Rechtsgeschäfte’ (1929) 3 RabelsZeitung 807. 432 See for the various alternatives and their supporters, HLE Verhagen, Agency in International Law (The Hague, 1995) 66ff.

284 Volume 3: Contractual Agency It refers to international agencies, which term itself remains undefined (Article 1). One must assume that the Convention is to be applied by any forum in a Contracting State confronted with a serious conflict of laws problem in this area. Agency itself is not properly defined either and problems of characterisation are likely to arise, especially in the area of undisclosed or indirect agencies and alternative trusts: Article 1 considers anyone an agent who has the authority to act, acts or purports to act on behalf of a third person (the principal) in dealing with a third party. The fact that formally the agent acts in his own name is not apparently in itself material for the (dis)application of the Convention. Indirect agency in a civil law sense may thus be covered, although it is a very different thing, at least in civil law. The characterisation may itself well be based on transnational or internationally common notions of agency. However this may be, it leaves considerable uncertainty as to what types of agencies are covered. The serious lack of clarity of the Convention on its own scope suggests that the concept of agency and the issues arising in an international context were insufficiently mapped out and studied for a comprehensive consensus on the applicable domestic law to arise, even if one accepts that Conventions of this type are unavoidably based on compromise between domestic concepts and insights as long as transnational law notions have not superseded the conflict of laws approach in this area. Particularly agencies operating in the family, corporate, and perhaps also banking and securities (the securities broker or ‘commissionaire’) areas do not seem to fit. Proprietary aspects such as the direct acquisition of tangible assets by the third party if the agent, even if undisclosed or indirect, acquires them, the good faith acquisition of movables by an agent, the consequences of set-off, and retention rights are not considered. According to the Official Report, the exclusion of proprietary matters is self-evident, but it is somewhat surprising that the Convention itself does not make that plain as it is a most important issue. One must thus assume that the Convention concentrates on the contractual aspects of the more current forms of consensual agency only. This being the case, it would have been normal to include a measure of flexibility in the applicable law if the formulae of the Convention proved inadequate in the great variety of factual situations, types of agency, and agency issues that may present themselves from time to time along the lines of Article 4(3) of the EU Regulation, an idea expressly rejected, however, by the Hague Conference at the time in the interest of quickly and easily ascertaining the applicable law. Yet this cannot be the only objective of treaty law of this kind; it also needs to make some sense. As a consequence of this approach, Article 11 introduces the principle of the lex locus actus as a hard and fast conflicts rule making the law of the state of the business establishment of the agent (at the time of acting) applicable to his role, except that the law of the state in which the agent acted (if a country other than his own) applies if the principal or third party has his business establishment there or if the agent has acted at an exchange or auction or has no business establishment at all (which suggests that he is not a professional). There is no distinction made here between creation and effect, cf also Article 6 for the internal effects (although the existence and effect of the authority referred to in Article 8 hardly seem an internal matter). The system of the Convention is unitary in principle and the agency is thus supposed always to operate under the law of the (professional) agent. This is therefore the law of the one party (the agent), who legally is meant to drop out of the transaction altogether, while the acts of the principal and of the third party relying on the agency are at least as important as the acts of the agent himself. Unavoidably, the agent will often act either at the place of business of the principal or third party, when under the Convention exceptionally their law applies (except when it is through telephone, fax or mail, see Article 13). The Convention further accepts a contractual choice of law by agent and principal to be binding, certainly less appropriate in the proprietary, set-off and retention aspects which, as just

Volume 3: Contractual Agency 285 mentioned, are, however, not believed covered by the Convention. In any event, this choice is effective on the third party only with his consent (Article 14). Whatever the merits of this overall approach may be, the applicability of the law of the agent would normally appear appropriate as to his direct liability towards the third party under the agency (if any), because this is likely to be the law of the most characteristic obligation. It may also be appropriate as to his liability towards the principal under his (fiduciary) duties in the exercise of his functions, cf also Article 8(c). A more difficult problem is presented in this respect by the undisclosed agency, especially in the securities area, when the principal as a private investor may need protection against the agent under his own mandatory law. Upon the analogy of Article 6 of the EU Regulation, these protections might then prevail, or otherwise perhaps the most favourable rule for a consumer investor. Article 16 leaves greater discretion relying on a significant connection. The public policy bar may further be used to curb the undesirable effects of the choice of law rules (Article 17). A good argument can be made that undisclosed agencies are not covered by the Hague Agency Convention at all if under the law of their creation they only have an internal relationship, which could still include, however, automatic in rem transfers to the principal of any tangible assets the agent acquires for him, if acceptable to the lex situs, and any reimbursements of his costs by the principal. Naturally the internal relationship should then be covered by its own law, rather than by the rules of the Convention, which for the internal effect of true agencies (where a direct relationship between the principal and the third party is created) in Articles 5 and 6 refers to the law chosen by the principal and his agent and otherwise imposes the law of the agent. The Hague Agency Convention should then apply only where the undisclosed agency has some automatic external effect, as under common law or in countries like Germany and Switzerland when the third party has no reasonable adverse interest. Proprietary aspects would in any event not be covered.433 It would probably have been better if undisclosed or indirect agencies, especially those in the securities area, had been expressly excluded from the scope of the Hague Agency Convention, which does not seem to concern itself greatly with fiduciary duties (only in Article 8(c)), investor protection and proprietary aspects either, all issues of particular importance in this area. The Convention allows Contracting States not to apply the Convention to banking transactions (Article 18), but this appears not to cover the securities business, except, according to the Official Report, underwriting activities in the (primary) international markets. The banking exemption appears to exclude, however, agencies in connection with documentary letters of credit and bank guarantees. An exemption may also be made for insurance and the exercise of public functions, but no other (Article 18). Portugal has invoked all exemptions, the Netherlands only the insurance exemption, France and Argentina none at all. The Convention itself excludes the shipmaster’s agency (Article 2(f)), which is often thought to be covered by the law of the flag.

3.2.3. The Lex Mercatoria and Agency Instead of attempting to develop internationally acceptable private international law principles pointing to the application of a domestic law of agency whenever an agency operates across

433 See, however, also R Verhagen, ibid, 152, 161, insisting on the general inclusion of the undisclosed agency in the scope of the Convention, but presumably not for the proprietary aspects.

286 Volume 3: Contractual Agency borders, it may be more useful and efficient to look at agency in an international and professional context as a distinct structure dominated by its own intrinsic purpose and logic and further study custom and market practice and develop common principles which may be found in this connection in domestic laws in order to interpret and supplement the agency structure always subject to fundamental legal notions, which in the case of agency may have a particular meaning where a principal creates the appearance of authority in others and in respect of fiduciary duties of the agent (see also Volume 1, section 3.1.1). In this approach a domestic law selected on the basis of the prevailing conflict of laws rules would only be applicable as a last resort. In the area of agency, the principles so developed would largely build on the common law notion of agency, which is further advanced in the development of fiduciary duties, the notion of tracing also in undisclosed agencies, and in the limitation of defences of the third party if the agency is not disclosed but if this party must realise that there normally is one, as in securities brokerage. The proposals contained in the PECL and DCFR do not appear adequate or sufficiently mindful of the practical requirements either, at least when intermediaries are used in the securities and commodity trades: see more particularly section 3.1.6 above also for the UNIDROIT Agency Convention of 1983, so far not sufficiently ratified. The civil law concept of indirect representation when an agent operates in his own name, albeit for the risk and account of someone else, is an unsuitable concept and has shown to leave far too much power to the intermediary, not properly balanced by fiduciary duties and tracing powers for the principal, even if modern civil law tries to improve the situation and find some compromise with the common law (undisclosed) agency notions but the result is rather more confusion.

3.2.4. The EU Commercial Agents Directive On 18 December 1986 the EU issued a Council Directive on the co-ordination of the laws of the Member States relating to self-employed commercial agents,434 now incorporated in the law of all Member States. It applies only to intermediaries in the purchase and sale of tangible movable assets and contains a set of harmonised, largely mandatory rules covering in those situations the relationship between principal and agent only. The essence is the latter’s protection against the former. The Directive is, strictly speaking, not concerned with the legal consequences of agency at all and particularly not its third-party aspect or even with the fiduciary duties of the agent towards his principal. As such, it does not truly have a place in the present discussion but may still play a role in international sales in terms of the contractual relationship between commercial agents and the entity appointing them. It concerns here in essence the service aspect of agency. Under Articles 3(1) and 4(1), parties must act here in good faith, which is then an EU concept; see also section 1.3.9 above. The Directive is limited to those acting in the name and for the account of others in disclosed agencies. It aims at the protection of the agent against the principal and covers basically the duties of the principal towards the agent, the agent’s rewards, the extent of the agent’s own liability under the transaction, the termination of the agency agreement, the compensation regime and limits on a non-competition provision after termination. The harmonisation effort in the EU largely eliminates conflict of laws for agencies operating in the EU in the areas covered by the Directive, except where protection is given under national laws 434 [1986] OJ L382/17.

Volume 3: Contractual Agency 287 in excess of those of the Directive. If there are non-EU elements in the agency, the law applicable to the agent’s protection will still have to be established in accordance with the normal conflict of laws rules of the forum (including those of the Hague Agency Convention in France, Portugal and the Netherlands, if the case is brought in those countries, which normally refers to the applicability of the law of the agent). The mandatory nature of the minimum rules of the Directive means that these rules cannot easily be set aside by the law thus considered applicable to the agency if not respecting these rules, even if the agency contract is concluded between a non-EU based principal and agent, as long as the agent is operating or the agency has an effect in the EU. Particularly a choice of law by the principal and agent to opt out of these protections by selecting a law which does not incorporate them might not be effective under the circumstances. This is the likely result under Article 16 of the Hague Agency Convention in those EU Member States having ratified it. For those EU Members who did not ratify this Convention, in a more general fashion the same result would appear to follow under Article 9 of the 2008 EU Regulation (Rome I). The key is therefore the contact between the agency and an EU country and the competence of courts in the EU. The analogy with employment contracts presents itself, commonly disallowing a contractual choice of law; cf for cases brought within the EU also Article 7 of the EU Regulation. In this connection an argument can be made, however, that the EU mandatory rules do not apply if a professional agent expressly agreed to another, for him less favourable, regime while it is to be noted that most agents in the international sphere must be considered professionals. Where the agency operates outside the EU, the situation may be less clear, even if both principal and agent are based in the EU. The courts, certainly if outside the EU, are then likely to exercise their own discretion depending on the extent of the remaining contacts with the EU or the protection under their own lex fori if the agency operates in their jurisdiction. Finally, the distinction between an agent and sole distributor who operates in his own name and for his own account is often blurred. Sometimes the seller sets the price and takes back any unsold goods so that the risk for the sole distributor is much reduced. In other cases of agency, the (del credere) agent may take at least the credit risk of the third party so that he has a substantial exposure under the agency and does not drop out completely even if the agency is disclosed. Regardless of the distribution of risks and the name in which the agent formally acts (either in the negotiation or conclusion of deals—the EU Directive rightly does not make a distinction between these two activities), for proper agency, the key is always whether direct ties are created between principal and third parties or not, which may also be the result of mere negotiation as pre-contractual activity, and not whether the agent has fully dropped out. If there is no privity created, there is no agency proper. It does not mean that the protection of the agent as envisaged by the Directive cannot be extended to sole distributors and similar operators. Often that will be fair as they tend to fulfil a similar role in the promotion of the seller’s business and implementation legislation in the various EU countries might take that into account. This goes well beyond the scope of the EU Directive and its limited notion of agency as a service. Finally, it may be noted that the DCFR has a special chapter on commercial agency, franchise and distributorship as one of the contract types it defines: see Book IV, Part E. It substantially follows the EU Directive.

288

INDEX Introductory Note References such as ‘178–79’ indicate (not necessarily continuous) discussion of a topic across a range of pages. Wherever possible in the case of topics with many references, these have either been divided into sub-topics or only the most significant discussions of the topic are listed. Because the entire work is about ‘transnational law’ and ‘commercial law’, the use of these terms (and certain others which occur constantly throughout the book) as entry points has been minimised. Information will be found under the corresponding detailed topics. abandonment 21, 86 absolute impossibility 124–25 abstract system 114, 153, 215 abstraction 17–18, 25, 28, 123, 198, 266, 269, 272 and independence 21, 27 abuse of rights 2, 81–82, 106, 228, 231 acceptance 23–26, 45–48, 55–56, 69–72, 143–44, 172–75, 225–26, 228–32 language 22, 34, 46, 51, 55–56, 169, 181 acquirers 214 Acquis Group 152 acquisition 277–78 bona fide 282 actio quanti minoris 210–12, 237 actio redhibitoria 210–11 Action Plan EU Financial Services 152 actiones redhibitoria 210–12 adaptation 125, 127, 129, 131–32, 134, 175, 177, 238 adhesion contracts 24, 42 adimpleti contractus 135, 217, 237 adjudicatory jurisdiction 195 agency 8, 15–16, 90, 94, 145, 221–22, 265, 265–87 agreements 266, 270, 286 Commercial Agents Directive 286–87 consensual 272, 284 consequences 273–75 contracts 8, 278, 287 contractual 7–8, 15, 169, 265–87 direct 269–70, 278 disclosed 266–67, 273, 279, 281–82, 286 economic importance 281 general notion 265–81 indirect 15, 145, 266–69, 272–73, 275–80, 283–86 international aspects 281–87 of necessity 272–73 open 277, 280–81 and private international law 281–83

and treaty law 283–85 undisclosed 15, 68, 149, 266–70, 272–73, 275–81, 285–86 agents 94, 145–46, 148–49, 219, 221–23, 225, 255–57, 265–87 bankrupt 279–80 commercial 61, 94, 286 commission 275, 278 indirect 268, 279–80 position 221, 265, 268 role 268–71 shipping 222, 268, 271 agreements agency 266, 270, 286 collateral 149–50 distribution 24, 169 rental 3–4, 44, 124, 134, 139, 142–43, 169 sales, see sales, agreements transfer 150 transportation 221, 265, 270 aircraft 227–28 amendments 61, 66, 76–77, 151, 182, 185, 215, 217 American realism 35 anthropomorphic approach 5–10, 16, 20–22, 56–58, 72, 77, 135–37, 188–89 anthropomorphic notions 21–22, 56–57, 77, 135–36, 163, 166, 169, 229–30 anti-competitive behaviour 74, 76, 112, 161 anticipatory breach 227, 237–38 appeal, limitations of 19 appearance of authority 64–65, 101, 266, 268–69, 271–73, 275, 286 applicability 122–23, 232–33, 241–42, 249–50, 252, 283, 285, 287 applicable domestic law 196, 203, 213, 239, 242, 284 applicable law 159–60, 164–65, 191–93, 195–97, 199, 213, 251–53, 284

290 Index applicable private international law rules 190, 213, 240 appropriation 109–10, 204, 217–18 arbitration 12, 79, 85, 192, 195, 201, 250, 253 clauses 12, 32, 151, 197 international 7, 12, 192, 195–97, 245, 250, 253, 255 arbitrators 32, 69, 73, 101, 129, 255, 259, 261–62 commercial 259 international 32, 85, 197, 249–50, 255, 259 asset-backed funding 203 assets 9–10, 65–67, 199–201, 203–7, 210–12, 214–19, 221–23, 275–80 classes 5, 67, 187–88 client 280 commoditised 9, 229 future 67 immovable 4 liquidity 139, 141 movable 187, 200, 217, 227, 232, 286 physical 229, 279 underlying 41, 43, 66, 142–43, 147, 223–24, 268 assignees 139, 141, 146 assignment restrictions 139, 142 assignments 66–67, 140–41, 148–50, 199–200, 225, 250, 275, 277 bulk 199 equitable 66 statutory 279 asymmetric information 128 attachments 253, 278 auctions 227–28, 284 Australia 93 Austria 33, 76 authorisation 277 statutory 8, 277 authority 64–65, 160, 162–63, 165, 171, 266–67, 269–73, 282–84 apparent 64–65, 101, 266, 268–69, 271–73, 275, 286 independent 32, 85 automatic return 114, 191, 214, 217–18 automaticity 216 autonomous legal sources, see autonomous sources of law autonomous sources of law 8, 12, 25, 29, 59, 86–87, 159–61, 167–68 custom and practices 160 fundamental principle 87 party autonomy 160 transnational 161 autonomy 17–18, 30, 95, 97–98, 159–60, 189, 231–32, 242–44 party, see party autonomy avoidance 113, 115–16, 118–20, 122, 176–77, 213, 227–28, 238 bad faith 68, 70, 75, 78, 83, 161, 163, 168 bailees 146 bailment 146

bailors 146 balance 19, 52, 59, 63, 76, 125–27, 130–33, 197–98 contractual 125–27, 132–33, 163, 198 bank guarantees 144, 198, 219, 285 banking 119, 225, 284–85 system 225 bankrupt agents 279–80 bankruptcy 43, 101, 108, 130–31, 133, 204, 214–19, 277–79 France 204, 214–17 Germany 204, 215, 217 law 90, 150, 214–18, 253, 278 trustees 150, 218 banks 39, 41, 198–99, 202, 219–21, 223–25, 265, 270–71 intermediary 220, 223 paying 198, 224–25, 265 bargain 5, 20, 22, 47–52, 54–55, 57, 62, 275–76 bargaining power 82, 198 bearer bills/drafts 224, 256 Belgium 8, 156, 199, 280 beneficiaries 136, 138, 140–48, 150–51, 225, 251, 274, 276 donee 143, 150–51 third-party 138–40, 143–45, 148–50, 178, 224 best and reasonable endeavour clauses 66, 105 bilateral contracts 110, 120, 238 bills of exchange 18, 146, 148–49, 199, 224–25 bills of lading 18, 146, 148–49, 198–99, 218, 220–25, 256–59, 265 on-board 257 binding force 17, 19–20, 22–23, 50–51, 53–54, 60, 104, 228 blame 20, 42, 47–48, 115–16, 118, 122–23, 178–79, 207–8 blockchain 41–43 bona fide acquisition 282 bona fide creditors 214 bona fide holders 224 bona fide purchasers 17, 139, 141, 146, 189, 205, 254, 276 protection 189, 214, 254 bona fide third parties 113–14, 218, 225 bonds 200 book-entry entitlements 278 book-entry systems 279 borrowers 42, 144 prospective 119 boundary drawing 146 Brazil 8, 155 breach 20, 23–24, 28, 51–52, 117–22, 176–77, 212, 236–38 anticipatory 227, 237–38 of contract 113–14, 136–37, 141 of fiduciary duty 90, 137 fundamental 122, 125, 176–80, 182, 188, 191, 193, 236–38 of pre-contractual duties 24, 82

Index 291 brokerage 267, 273–74, 276–80, 286 brokers 8, 72, 76, 267–69, 271, 273, 275, 278–81 bulk assignments 66, 199 bulk transfers 188 business dealings 15, 17, 80, 133, 135, 163, 166, 169 international 86, 88, 243 buyers 121–22, 198–99, 203–13, 215–25, 235–37, 239, 255–57, 265–68 defaulting 214 in possession 205, 216–17, 239 Canada 90 Canon law 44–45, 63 capacity 17, 19–20, 64–65, 141–42, 161–62, 194–95, 197, 228 capital goods 204, 209 capital markets 43 care, duties of 24, 33, 48–49, 60, 71, 174–75, 201, 273–74 carriage 146, 207, 222, 252, 256, 258, 260, 267 carriers 146, 148–49, 220–23, 239, 257, 259–60, 265, 267 case law 61, 79–80, 94, 110, 131–34, 150–51, 242, 259; see also Table of Cases France 12, 46, 148 good faith 31, 71, 79–80, 83, 86, 94, 103 modern 33, 61, 211 Netherlands 278, 280 United Kingdom 150 cash sales 175, 218 causa 44, 56, 62–64, 82, 112, 174, 235 caveat emptor 115, 118, 208, 212 certainty 71, 95, 195, 220, 251 CESL (Common European Sales Law) 7, 12–13, 15–17, 167–68, 170–72, 174–78, 183–86, 188–90 change of circumstances 81–82, 100–1, 105–6, 120, 122, 125–35, 168–70, 238 clauses 52, 134, 194 modern legislative approaches 131–33 characterisation issues 284 characteristic obligations 40, 233, 251, 285 charges 138, 195, 208, 210, 223, 225, 256 chattels 53, 108, 110, 114, 141, 187, 189, 282–83 law of 53, 108, 189, 232, 282 transfers of 141, 189 choice of law 138, 197, 199, 233, 249, 251–55, 283–85, 287 clauses 194, 199, 254 church law, see Canon law CIF (cost insurance freight) 198, 201, 223, 236, 239, 255–60 contracts 258 circumstances exceptional 36, 98, 129 personal 43, 120, 123, 125–26 unforeseen 124–32, 191

CISG (Convention on the International Sale of Goods), see Vienna Convention civil codes, see codification; Table of Legislation and Related Documents civil law 31–35, 44–49, 55–65, 70–80, 82–87, 108–20, 133–37, 272–77 approach 49, 51, 57, 59, 78–79, 126, 146–47, 257 codification 16, 32, 68, 79, 85–87, 154–56, 164, 166 countries 33–34, 61–62, 64, 67–68, 76–80, 82–85, 146, 281–82 judges 84–85, 90 law formation 64, 85–86 lawyers 93, 96 modern 21, 44, 116, 120, 141, 147, 286 thinking 2, 17, 56, 102, 116, 119, 156, 160 claims 108, 110–11, 120–23, 137–38, 141, 148–50, 239, 276–77 damage 110, 133 for damages 101–2, 109–10, 115–17, 119–20, 122, 125, 133, 237–38 monetary 107, 110, 139 personal 277 proprietary 108, 214 restitution 65, 145 transfers of 250 underlying 203, 225 clausula rebus sic stantibus 128, 134 clearing 202, 279 client accounts 278, 280 client assets 280 co-operation 25–28, 33, 36, 69, 71–72, 127, 129, 145–46 duties 18, 101, 104, 121, 145, 173, 175, 181 contractual 60, 69, 74, 76, 101 co-ordination 40, 286 codification 16, 76, 78–79, 84–88, 95–96, 152–53, 179–80, 187–89 approach 84, 86, 95, 166, 234 civil law 16, 68, 79, 85–87, 154–56, 164, 166, 241 and common law 179 countries 8, 68, 79, 85 ethos 81, 87, 165, 167 France 84 partial 151, 183, 187–88, 193, 228, 230, 234, 260 private 81, 85–86, 152, 167, 179, 229 private law 16, 81, 86, 182, 228 thinking 74, 78–79, 81, 86, 95, 98, 153–54, 159 unitary 156 collateral 41 agreements 149–50 contracts 102, 149 collection arrangements 223, 225 collections 108 commercial agents 61, 94, 286 commercial and financial legal order 7–8, 10, 18–19, 153, 159, 243–44, 246, 262 commercial arbitration, see arbitration

292 Index commercial contracts 15–16, 33, 37, 41, 48, 64–65, 159, 163 international 16, 56, 68, 96, 152, 157, 159 commercial courts 7, 19 commercial dealings 6, 23, 48, 57, 101, 120, 152, 166 commercial flows 88 commercial practice 12, 63, 99, 151, 168, 179, 188, 271–72 international 5, 163, 205, 230 commercial transactions 4, 39 commerciality 159, 201, 247 commission agents 275, 278 commitments 28, 47, 51, 54, 60, 127 commodities 109, 128, 134, 184, 188, 205, 210–11, 267 commoditised assets 9, 229 commoditised products 114, 187, 197 commodity goods 111, 206, 209 common creditors 204, 214 Common European Sales Law, see CESL common intention 100 common law 4–5, 44–64, 88–94, 108–18, 120–26, 134–41, 266–70, 272–77 approach 1, 6, 68, 70, 93, 119, 208, 237 contracts 2, 6, 135–36 countries/jurisdictions 64–65, 67–68, 84–85, 90–91, 144–46, 189, 201, 203 courts 84–85, 91, 109–10, 112, 120, 130, 201, 203 and equity 176 and interpretation 49, 57–58 judges 84–85, 90 law formation 85–86 old 35, 49, 59, 91, 112, 141, 208, 212 terminology 234 traditional 34, 86, 111, 114, 124, 139, 179, 189 common principles 261, 286 communications 38–39, 151 company law 64, 253 comparative law 21 compensation 109, 121 competition 88, 246 law 25, 27, 33, 123, 140, 196 completeness 86, 241 conditional owners 214 conditional ownership, rights 108 conditional title 217 conditionality 116, 118, 198, 215, 217 conditions market 134, 198, 227 precedent 117, 119 and warranties 116, 212 conduct 18–19, 22–23, 46–47, 55–56, 95–96, 246–47, 270–72, 282 and effect 12, 19, 160, 196–97, 231, 246, 251 and reliance 5, 18, 26, 34, 38–39, 47, 55, 173–74 confidentiality 273 conflict of laws 40, 160, 170, 185, 192, 282, 284, 286–87

conflict rules 192, 196, 227, 233–35, 250–51, 255, 259, 261–62 conflicts of interest 266, 268–69, 273 conform delivery 118, 198, 205–6, 209, 211–12, 220, 227, 236–37 confusion 15, 33–34, 68, 164, 172, 180–81, 240, 242 consensual agency 272, 284 consensus 25–27, 44–57, 60, 72, 99–100, 111–16, 172–73, 175–76 and intent 5, 21, 26, 48, 56, 123, 136, 173 notions 25, 30, 35, 44–46, 48, 51, 60, 63 consent 44, 111–12, 119, 135–36, 140, 142–43, 146, 228 consequential damages 24, 121, 206, 237, 239 consideration 48–51, 54–57, 59–63, 138–39, 143–44, 149–51, 234–35, 275–76 common law 23, 52, 62 notion/doctrine 47–48, 52, 54–56, 60–61, 63, 143, 149, 176 objective 49, 64, 234 requirement 23, 60–62, 64, 99, 102, 116, 144, 234 constant transformation 9, 180, 203 constituto possessorio 190, 218 construction 1, 49, 51, 57–59, 74, 162, 276 contracts 54, 67, 134, 275 constructive delivery 218, 236 constructive possession 236 constructive trustees 268 constructive trusts 276 consumer contracts 4, 37, 49, 56, 164–65, 252 consumer dealings 4–5, 16–18, 30–31, 72–73, 152–55, 157, 164, 169 consumer goods 15, 212, 226 consumer law 14, 16, 18, 90, 155, 162, 188–89, 229–30 consumer mentality 163, 188 consumer protection 13, 15, 72, 76, 98, 156–57, 169, 184–85 consumer sales 7, 181, 184–85, 200–1, 206, 209, 228, 232 consumer transactions 94, 164, 233 consumers 4–8, 15–16, 24–28, 92–94, 164–67, 169–70, 180–81, 183–85 continuation 107, 134, 153 contract 1–7, 15–37, 44–72, 74–83, 86–95, 97–151, 173–78, 187–263 contract formation 5, 16, 18, 20–25, 40–42, 114, 172, 172–75 in civil and common law 44–67 contract interpretation 25–27, 30–32, 49, 57–60, 67–76, 93–95, 122–24, 246–47 contract law 15–18, 31–32, 35–38, 53, 77–80, 82–84, 151–53, 185–86 development 44–48 modern 1, 17, 25, 27, 35, 52, 179, 181 new model 26 unification 151 contract performance, see performance 20, 37, 75, 135, 137, 239

Index 293 contract principles 94, 96, 158, 163, 168, 170, 172, 175 contract terms 20, 23, 90–91, 113, 116–17, 238, 247–48, 260–61 implied 95, 160, 166–67 standard 36, 38, 40, 42, 48, 67, 81, 97 unfair 4, 166, 185 contract theory, modern 30–35, 39, 47, 77, 82, 193, 202, 208 contracting parties 33, 60, 67, 116, 149, 200, 227 contracts agency 8, 278, 287 bilateral 110, 120, 238 of carriage 146, 222, 267 CIF 258 collateral 102, 149 construction 54, 67, 134, 275 and remedies in civil and common law 57–59 consumer 4, 37, 49, 56, 164–65, 252 duration 25–26, 30, 55, 58, 60, 70, 132, 134 electronic 39–40 employment 143, 252, 287 executory 45, 50, 54, 63 international sales 191–92, 198, 200, 202, 219, 246, 262 interpretation 124, 128, 145, 232, 246, 262 oral 114, 229 original 84, 139, 144–45, 147, 266 pre-existing 142, 146 privity of contract, see privity professional 1–2, 6, 8, 18–20, 23, 25–26, 176, 179 sales 175, 189–92, 204, 213–15, 217–18, 235, 246–47, 256 service 3, 184, 270 smart 16, 35–36, 40–43, 48, 77 standard 30, 43, 77 types 2, 4, 7, 15–17, 72, 76, 137, 270 underlying 250, 270–71 valid 115 contractual agency 7–8, 15, 169, 265–87 contractual arrangements 142, 206, 221, 265 contractual assignment prohibitions 141 contractual balance 125–27, 132–33, 163, 198 contractual choice of law 134, 137, 233, 251–55, 283–84, 287 clauses 251–53 contractual claims 139, 279 contractual co-operation duties 60, 69, 74, 76, 101 contractual content 5, 47, 98, 161–62, 181 contractual duties 2, 6, 19, 37–38, 112, 137, 141, 145 contractual intent 57, 62, 246 contractual interpretation, see contracts, interpretation contractual liability 24, 36, 53, 60, 90, 100, 103 contractual obligations 40–41, 108, 112, 233, 237, 249, 251, 254 contractual purposes 28, 227 demonstrable 25

contractual relationships 23, 39, 134, 146, 149–50, 267, 273, 286 contractual remedies 220 contractual rights 17–18, 45–48, 54, 70, 101–2, 134, 145–46, 278–79 contractual terms, see contract terms contractual validity 57, 81, 101, 138, 188, 201, 254 capacity and authority 64–65 definiteness 66–67 formalities 65–66 control 124, 127–28, 138, 142, 206–9, 238, 242, 277 Convention on the International Sale of Goods, see Vienna Convention convergence 86 conversion 110, 203 convertibility, free 202 corrections 1, 63, 69, 81, 90, 171, 231 cost/benefit analysis 25, 75, 80 cost insurance freight, see CIF costs 102, 109–10, 130, 133–34, 192, 198, 255–56, 258–59 extra 121, 140, 199 information 38, 147, 230 counterclaims 279 counterparties 64, 100–1, 116, 118, 149–50, 222, 266–70, 275–76 country of destination 190, 203–4 country of origin 40, 190, 203–4 courts, see case law; commercial courts; common law, courts; ecclesiastical courts covenants 116, 119, 141–43, 146 restrictive 141–42 creation of proprietary rights 189 credibility 17–18, 75–76, 85, 134, 163–64, 169, 178–79, 232 credit 138, 197–99, 202, 218–25, 257, 265, 267–68, 270 credit risk 146, 183, 192, 198–99, 275, 287 creditors 43, 143–44, 177, 214, 216–17, 224, 278, 281 bona fide 214 common 204, 214 new 144 original 281 creditworthiness 119, 134, 214, 216–17, 224–25, 237 cross-border dealings 8, 153, 155, 157, 161, 165–68, 170–71, 186 cross-border sales 7–8, 168, 183, 185, 227, 262–63 crowd funding 43 currencies 131, 190, 193, 202–3, 255 currency risk 131, 193, 202 custodians 212, 218, 279 custody 192, 199, 219 custom 74–75, 95, 98–99, 159–60, 164–68, 171–73, 241–50, 258–62 industry 25, 164, 200, 258 customary law 59–60, 78, 85–86, 188, 195, 240, 244, 261

294 Index damages 37–38, 101–3, 108–11, 119–23, 137–38, 190–91, 206–7, 236–39 claims for 101–2, 109–10, 115–17, 119–20, 122, 125, 133, 237–38 consequential 24, 121, 206, 237, 239 direct 19, 28, 54 expectation 19–20, 23–24, 37, 51, 54, 82–83, 102–3, 121 monetary 109–10 punitive 140 reliance 121 DAOs (decentralised autonomous organisations) 43 DCFR, see Draft Common Frame of Reference dealings commercial 23, 48, 57, 120, 152, 166 consumer 4–5, 16–18, 30–31, 72–73, 152–55, 157, 164, 169 cross-border 8, 153, 155, 157, 161, 165–68, 170–71, 186 financial 7–8, 32, 157 international 13, 29, 85, 157, 161, 164, 169, 192 professional, see professional dealings debt 52, 67, 119, 146 debtors 124–27, 144, 146–49, 151, 203, 224–25, 275, 277 in possession 214 professional 71, 100, 106, 126 decentralised autonomous organisations 43 declarations 47, 49–50, 54–55, 112, 114, 270–71, 279, 282 default 107–10, 118–20, 122–23, 125–28, 187–88, 207–14, 216–19, 235–38 rules 2, 37–38, 128, 138, 187–88, 194–95, 242, 261 defaulting buyers 214 defaulting parties 70, 118, 123, 125, 236–37 defects 16, 66, 100, 114, 121, 210–11, 228, 235 hidden 206–7, 209–13, 239 defences 4, 57–58, 111–13, 136–37, 140–41, 148, 176, 279 and continued validity of contract 175–77 equitable 136, 235 proprietary 53, 140 definiteness 66–67, 173, 175 delays 37, 109–11, 192–93, 203, 215, 258 delivery 187–93, 198–201, 204–12, 215–18, 220–24, 227–29, 234–37, 265–67 act of 222, 267 conform 118, 198, 205–6, 209, 211–12, 220, 227, 236–37 constructive 218, 236 duty 206, 221, 265 late 117–18 physical 189, 198, 207, 209, 211–12, 228, 236, 239 place and time of 66–67, 122, 175, 187, 229, 235 of possession 189 requirement 200, 234 for title transfer 208, 236, 257

democratic legitimacy, see legitimacy demonstrable contractual purpose 19, 25 Denning, Lord 59, 149 dependency 24, 27, 59–60, 86, 88, 90–91, 99, 102 deposits 104 derivatives 41, 65 description 191 destination 190, 203–4, 219, 222, 255, 258 place of 222 deterioration 118, 198, 205–7, 239 detrimental reliance 22–23, 47–48, 50–52, 54–57, 60–61, 102, 104–5, 234–35 Digests 44 digital content 184 diplomatic conferences 226 direct actions 140, 149–50, 178 direct agencies 269–70, 278 direct damages 19, 28, 54, 118 direct liability 276, 285 direct relationships 277, 280–81, 285 direct rights 144 Directives 14, 39–40, 90, 93–94, 155, 185, 281, 286–87 directory law/rules 79, 84, 172, 188, 191, 253, 255, 261–62 discharge 112, 115–18, 127, 207, 212–13, 221–22, 265–67, 281–83 disclosed agencies 266–67, 273, 279, 281–82, 286 disclosure 25–26, 28, 55, 98–99, 173–75, 209–11, 267, 274–76 duties 4, 27–28, 33, 99, 209, 283 pre-contractual 74, 76, 98–99, 101, 103, 163, 166, 168 discounting 225 discretion 81, 83–85, 109, 111, 128, 261–62, 269–70, 273 judicial 78–79, 81, 83, 113, 128, 132 discretionary accounts 268–69 disparity, gross 99, 177 disposition 116 free 6, 19–20, 188, 194–95, 197, 200, 251, 253–54 rights 43, 65–66, 139 dispute resolution 40, 69, 73, 85, 192 distribution 32, 104 agreements 24, 169 chains 5, 9, 180, 187, 192 risk 19, 23, 27, 36, 71, 105, 130–31, 188 distributors 13, 267, 287 diversity 17, 182, 230, 233, 262, 283 dividends 41, 214 division of risks 33, 60, 104 documentary letters of credit 220, 224, 270, 285 documents of title 146, 200, 222–24 negotiable 222, 256 Domat, J 45 domestic laws 93–96, 160, 195–97, 243–44, 255, 261–62, 282–83, 285–86 applicable 196, 203, 213, 239, 242, 284 domestic public policy 138, 160, 164–65, 242

Index 295 domestic regulation 262 domestic sales 7, 168, 185, 192, 195, 200, 202, 263 donee beneficiaries 143, 150–51 Draft Common Frame of Reference (DCFR) 16–17, 94–95, 97–100, 106, 151–59, 165–81, 186, 188–89; see also Table of Legislation drafters 6, 41, 88, 160–61, 163, 167–68, 172, 181 drawees 146, 148–49, 225 drawers 224–25 duration contracts 25–26, 30, 55, 58, 60, 70, 132, 134 duress 111, 115–16, 177, 228 economic 115, 127, 131 duties 98–99, 101–4, 106, 137–42, 144, 146–47, 239–40, 266–69 of care 24, 48–49, 71, 174–75, 201, 229, 234, 273–74 closely connected 139–40 co-operation, see co-operation, duties contractual 38, 141, 145, 222, 274 extra-consensual 17–18, 20 extra-contractual 6, 37, 59, 90, 137 extra-intentional 24, 27 fiduciary, see fiduciary duties implied 104 information 4, 82, 93, 102 inspection 206, 209 investigation 175, 206, 211, 239, 270 non-consensual 17, 20, 78, 194, 234 non-intentional 25–26, 48, 55 performance 116, 188, 210, 218, 274–75 pre-contractual 24, 37, 81–83, 91–92, 99, 102, 121, 166 renegotiation, see renegotiation, duties of respect 140 search 9 special 77, 88, 201, 266, 271 third-party 146–47 dynamic contract law 24, 67 dynamism 81, 179 e-commerce 38–40, 43, 159, 186 e-mail 39 early payment 199, 221, 257 easements 141 ECJ (European Court of Justice) 13, 88, 94, 179, 250, 254–55 economic considerations 78, 83 economic duress 115, 127, 131 economic hardship 126–27, 129 economic impossibility 125, 129, 190, 207 economic value 84 effect and conduct 12, 19, 138, 160, 196–97, 231, 246, 251 effectiveness 16, 138, 197, 219 efficiency 9–10, 16–17, 19–20, 25–28, 32, 35–36, 69–71, 74–75 eighteenth century 45, 52–53, 256 Einigung 277

electronic contracts 39–40 electronic signatures 39 empirical research 37, 74, 155, 167, 183 employees 13, 101, 148, 252, 271, 274 employment contracts 143, 252, 287 end-investors 278 endorsement 224, 257 endorsers 225 enforceability 41, 60 enforcement 40–43, 92, 94, 107–8, 203, 228, 231, 252–53 of contracts 78, 111 international 40, 203, 231, 241 mechanics 111 UCC 91–92 England, see United Kingdom enrichment indirect 145 unjust 16, 57, 112, 176 entitlements 204 environment 6–7, 30, 35, 77, 128, 193–94, 241, 246 equilibrium 19, 106, 163, 166 equitable assignments 66 equitable defences 136, 235 equitable interests 143 equitable remedies 6, 111, 113 equity 49–51, 57, 59, 67, 81–82, 88, 90, 109–16 and common law 179 judges 90, 136 equivalence 52, 61 error 100–1, 114–15, 176 estates 110, 204 in land 142 estoppel 54, 81, 270 promissory 54 Ethereum 41, 43 EU law Commercial Agents Directive 286–87 Regulation on the Law Applicable to Contractual Obligations 251 and sale of goods 262 and Vienna Convention 249 Eurobonds 13, 190, 203, 254 market 200 European Continent 11, 15, 35, 44, 174, 224, 268 European Court of Justice, see ECJ ex works 192–93, 201, 227, 235–36, 255, 258 exceptio non adimpleti contractus 135, 217, 237 excess 34, 49, 65, 90–91, 175, 217, 235, 247 excessive burden 106, 125, 132–33 exchange 18, 44–45, 47–54, 60–62, 116, 148–49, 224–25, 275–76 of promises 44, 47–50, 52, 55, 63 exclusivity 86, 281 excuses 4–7, 20–21, 36–37, 47–49, 116–20, 122–27, 135–38, 176–78 of performance 28, 57, 105, 116–19, 123, 129

296 Index execution sales 107, 147, 217, 219, 227 executors 274 executory contracts 45, 50, 54, 63 exemption clauses 97, 144, 163 exoneration clauses 148, 150 expectation damages 19–20, 23–24, 37, 51, 54, 82–83, 102–3, 121 expectations, justified 26, 28, 71 Expert Group on European Contract Law 16, 22, 34, 46, 171–72, 174–78, 180–82, 189 external relationships 222, 267, 273, 278, 282 extra-consensual duties 17–18, 20 extra-contractual duties 6, 37, 59, 90, 137 extra-contractual rights 17–18, 20 extra-intentional duties 24, 27 extrapolation of past experiences 167 fact situations 22, 31, 48, 57, 78–79, 84–85, 132, 137 factoring 199, 246 of receivables 281 failed sales agreements 114, 218 fair dealing 57, 83, 92, 95–98, 161, 165–66, 168, 177 fairness 34, 58–59, 64, 80, 90–91, 130–32, 162 Fallgruppen 81 FAS (free alongside ship) 258 fault 6, 20–21, 47–48, 114–16, 118, 134–35, 178, 238–39 fees 102, 119, 198, 225, 263, 268, 273 fiduciary duties 34–35, 49, 90, 94, 102, 266–69, 272–76, 285–86 fiduciary relationships 274 finality 114, 172, 188–90, 194–95, 197, 205, 230, 241 issues 203, 229, 263 payment 170, 172, 181, 183, 189, 197, 202, 228 transactional 188, 205 finance 7–9, 11–12, 34, 36, 48–49, 55–57, 131, 153–55 companies 149 international 203 leasing 190 modern 144 sales 200 statements 204 financial dealings 7–8, 32, 157 financial instruments 254 financial law 156–57, 170, 244 financial legal order, see commercial and financial legal order financial practice 179–80 financial products 155 financial regulation 39, 196, 262 financial services 8, 15, 39, 281 financial stability 18, 246 financial transactions 10, 155, 165, 190, 199 financiers 77, 144 financing, asset-backed, see asset-backed funding fines 25–26, 30, 109–10 finished products 128 fintech 43

fitness for purpose 205–6, 212 flexibility 59, 72, 81, 83, 86–87, 90, 123, 220–21 floating charges 10, 181, 190 flows, international 248 FOB (free on board) 198, 201, 223, 236, 239, 255–60 force majeure 115–20, 122–27, 129, 131–35, 176–80, 205–9, 211–12, 237–39 foreign interests 204 foreign law 86 foreseeable risk 20, 101, 134 formal requirements 66 formalism 30, 53, 62, 86–87 formalities 39, 63, 65–66, 172–73, 190, 192, 194, 204 formation of law, see law formation forum 178, 195–96, 214, 233, 250, 252–53, 284, 287 state 253 fourteenth century 45, 63 France 12, 62, 64–66, 82–84, 189–90, 204, 208–11, 213–18 bankruptcy 204, 214–17 case law 12, 46, 148 codification 84 law 57, 62–66, 75–77, 82–85, 120, 189–90, 204, 214 franchisees 13, 251 franchises 24, 251, 287 fraud 99–102, 111–15, 162–63, 166, 168, 176–77, 210–11, 213–14 free alongside ship (FAS) 258 free convertibility 202 free disposition 251, 253–54 free movement of goods 93, 156 free on board, see FOB freedom 11, 69, 81, 83, 163, 171, 269, 271 contractual 254–55 frustration 122, 124–26, 129–30, 134–35, 138, 162, 190 functions 43, 47, 75, 78, 80–81, 265, 267, 285 safe harbour 219–22 fundamental breach 122, 125, 176–80, 182, 188, 191, 193, 236–38 fundamental principles 74–75, 87–88, 159–61, 163–65, 167–68, 172, 230–32, 241–46 funding 10, 54, 144, 193, 197 asset-backed 203 purposes 200 future assets 67 GATT 193 gazumping 66 general good faith duty 99 general law 2, 6, 29, 44, 135, 188 general principles 8–9, 74–75, 94–95, 152–54, 159–60, 164–65, 240–45, 259–62 Gergen, Mark 146 German doctrine 32, 80

Index 297 Germany 66, 109–10, 114–16, 147–48, 203–4, 208–11, 233, 277–78 Civil Code 62, 115–16, 132, 147, 209, 217 law 46, 77, 110, 120, 129, 148, 233–34, 277 gifts 39, 60–61, 138, 143, 147–48, 150, 187 globalisation 7–10, 31, 131, 196–97 gold clauses 12, 201 good faith 21–25, 31–36, 73–107, 128–32, 161–63, 168–70, 242–47, 273–75 approaches 99, 107, 137 case law 31, 71, 79–80, 83, 86, 94 civil law 2–3, 34–35, 59–60, 62, 67–68, 75–86, 88–91, 274 and codification 86 common law 47–48, 59–60, 66–67, 74, 88, 88–94, 123–24, 274 EU notion 93–94 and fair dealing 83, 92, 95, 97–98, 161, 165–66, 177 general duty 99 interpretation 2, 23, 53 as mandatory concept 96–99 observance of 231, 240, 244 practical effects 99–107 and sources of contract law in the CISG, UNIDROIT and European Contract Principles 94–96 standards 4, 169, 232 goods 121–22, 187–201, 203–15, 217–30, 232–36, 238–40, 255–58, 260–63 commodity 111, 206, 209 consumer 15, 212, 226 replacement 125, 204 specialty 140, 205, 210–11 in transit 126, 193, 205, 239 underlying 220, 256–58 governmental action 123, 194, 199, 202 governmental interests 165, 197, 248, 253 governmental intervention, see intervention grantors 143 gross disparity 99, 177 Grotius, H 44–45, 63, 72, 147–48, 270, 277 guarantees 65–66, 117, 120, 123–24, 197–98, 205–7, 209, 212–13 bank 144, 198, 219, 285 implied 118, 120, 124, 205–6, 209, 239 of quality 118, 184 guarantors 142, 146, 225 habitual residence 227, 233, 251–52 Hague Conference 284 hardship 26, 29, 106–7, 122, 125–30, 132–35, 162–63, 238 clauses 107, 116, 120, 130, 133, 135, 159, 169 economic 126–27, 129 harmed parties 33, 101, 113 harmonisation 13, 15, 64, 157, 219, 286 private law 156 health, public 6, 246

health and safety 193 hidden defects 206–7, 209–13, 239 hierarchy 96, 98, 170–72, 195, 197, 242–44, 260, 262 of norms 13, 191, 197, 230, 243–45, 250, 255, 261 hire-purchase 149 holders 221, 224–25, 239 bona fide 224 interest, see interest holders physical 209, 218 subsequent 148 holdership 218 honesty 53, 83, 92, 96 horizontal effect 11 human relationships 80 human rights 11, 74, 87, 95, 159, 167, 203 ICC, see International Chamber of Commerce identification 146, 191, 207, 210 and specificity 66–67 identity 275, 277 illegality 62, 64, 111–12, 116, 120, 140, 207, 216 illness 120, 125 immanent law 9, 13, 169 immediate repossession 108 immovable assets/property 4 impediments 16, 106, 112, 124–25, 127, 135, 183, 238 implementation 26–27, 39, 41–42, 229, 231, 261–62, 280, 282 legislation 287 implied conditions/terms 58–60, 91, 95, 116–17, 128–31, 137–38, 159–60, 165–68 implied duties 104 implied guarantees 120, 124, 205–6, 209, 239 impossibility 115, 120, 123–26, 129, 147, 190, 206–7 absolute 124–25 economic 125, 129, 190, 207 impracticability 122, 126, 129, 135, 207 in rem, rights 139, 141, 147, 214, 217, 219, 285 incapacity 125 incentives 37 incorporation 5, 161 Incoterms 258–62 indemnities 135 independence 21, 25, 27–28, 70, 266, 269, 271–74, 281–83 notion/principle 18, 221, 271–73, 282–83 independent sources 59–60, 64, 70, 74–76, 78, 82, 95, 159 indirect agency 145, 267, 269, 272–73, 275–81, 284–85 indirect agents 268, 279–80 indirect enrichment 145 individualisation 153, 188, 210 industry custom 25, 164, 200, 258 industry practices 74–75, 164, 167, 171, 200 influence, undue 51, 57, 111, 115–16, 177, 228 informality, procedural 19

298 Index information 5, 9, 38, 128, 209, 211, 228, 230 asymmetric 128 costs 38, 147, 230 duties 4, 82, 93, 102 incorrect 166, 177 infrastructure 188, 228 initiative 18, 21, 25, 27, 29, 55, 60, 224 innocent misrepresentation 111, 113–14, 207, 212 innovation 16, 158 inspection 206, 211–12, 227 duties 206, 209 instructions 39–41, 121, 224, 281 clear 106, 192 payment 39, 41, 205, 224 insurance 7–8, 185, 192, 197–98, 200–1, 250–51, 255–56, 258–59 companies 144, 150, 197 policies 251, 257, 259 intangible assets 66, 141, 200 assignment 66 intangibles, see intangible assets intent 4–6, 17–25, 27–30, 34–37, 41–42, 44–60, 178–82, 246–48 common 47, 176 and consensus 5, 21, 26, 56, 123 contractual 57, 62, 246 letters of 24, 104 original 25, 27–28, 69, 82, 132, 257 presumed 72, 91 psychological 20, 70, 77, 80, 163 subjective 172, 263 intention 20, 25, 37, 63, 69, 72, 191, 227 common 100 interests foreign 204 governmental 165, 197, 248, 253 justified 274 proprietary, see proprietary interests security 67, 190, 204, 217–19, 254 special 80, 134, 253, 277 intermediaries 40, 42–43, 219, 221–23, 265–68, 270, 276, 286 intermediary banks 220, 223 internal market 14–15, 40, 93, 154–55, 157, 165, 168–69, 171 internal relationships 266–67, 269–73, 275–78, 282–83, 285 international arbitrations 7, 12, 192, 195–97, 245, 250, 253, 255 international arbitrators 32, 85, 197, 249–50, 255, 259 international cases 64, 86, 162, 190, 201, 250–51, 255 International Chamber of Commerce (ICC) 219, 258, 260 international commerce 7, 12, 131, 179, 187, 195, 221, 225 international commercial and financial legal order 243, 246, 262

international commercial contracts 16, 56, 68, 96, 152, 157, 159 international commercial practice 5, 163, 205, 230 international contracts 12, 254 international convergence, see convergence international dealings 13, 29, 85, 138, 157, 161, 164, 169 professional 10, 153, 155, 165, 167–68, 171, 198, 262 international finance 139, 190, 203 international flows 9, 168, 183, 195, 248 international harmonisation, see harmonisation international law merchant 244, 261 international markets 85, 179–80, 232, 256, 285 international minimum standards 9, 32, 138, 194, 246, 262 international practice(s) 8, 157, 179, 260 international professional dealings 10, 165, 168, 198, 262 international sale of goods 7, 10, 12, 157, 159, 170, 187–263, 265 ancillary arrangements 219–25 contracts 192, 198, 200, 202, 219, 246, 262 contracts between professionals 199–202 currency and payments 202–3 legal risk 194–97 main aspects 187–219 special arranements to cover risks 197–99 special features and risks 191–94 transfer of title 203–5 international sales 7, 187–97, 199–203, 219, 221–24, 226–27, 229–31, 248–49 law 185, 213, 233–34, 242, 260 international trade 160–61, 163, 165, 224, 226–27, 229, 231–32, 248 international transactions 9–10, 30, 32, 138, 193–97, 231, 244–46, 248 internationalism 241, 243 internationality 159, 193, 200–1, 244, 247 interpretation 30–34, 47–51, 57–59, 67–76, 93–95, 98–102, 230–32, 240–47 and common law 48, 179 contracts 30–32, 49, 57–60, 67–76, 93–95, 122–24, 228, 246–47 good faith 2, 23, 28, 53 and good faith notion in civil law 75–78 liberal, see liberal interpretation literal 18, 20, 23, 25, 30–33, 47–49, 71–72, 74 logical 47 normative 31, 31–35, 58–59, 67–68, 99, 101–2, 145–46, 245 purposive 32, 70 restrictive 71, 76 strict 36, 57 subjective 21, 47 techniques 21, 26, 68, 81, 84, 168, 232, 242–43 teleological 25–26, 32, 70–71, 245 uniform 95, 241

Index 299 interpretational freedom 69 intervention 25, 123, 157, 164, 194, 223, 252 judicial 79, 90, 128, 237 invalidity 64, 111–12, 120, 176 inventory 267, 278 investigation duties 175, 206, 211, 239, 270 investment securities 227, 267–69, 274, 276–77, 280 investments 19, 23, 27–28, 36, 54–56, 61, 273 investors 8, 13, 25, 27, 39, 42–44, 72, 76–77 private 99, 285 issuers 254 Italy 75, 83, 137, 189 iura in re aliena 141 ius cogens 10, 161, 262 ius commune 44, 63, 71, 129, 147 Japan 155 Jhering, R von 99 judicial discretion 78–79, 81, 83, 113, 128, 132 judicial intervention 79, 90, 128, 237 judiciary 65, 73–74, 84–85, 98 juridical acts 21 juries 53 jurisdiction 93–94, 153–55, 168, 182–83, 185, 192, 195–96, 252–53 adjudicatory 195 justice 6–7, 9–10, 25, 27–28, 32, 34–36, 69–70, 165 natural 34, 59, 137 ultimate 17 justifiable reliance 54–55, 65 justified expectations 26, 28, 71 justified interests 274 justified reliance 33, 106 Justinian 44, 147 knowledge 119, 128, 148, 166, 195, 200, 210, 239 prior 141 land 53, 66, 108, 141–43, 146 estates in 142 law 108 registers 141 language, offer and acceptance 22, 34, 46, 51, 55–56, 169, 181 law and economics analysis 35–38 law formation 17, 85–86, 88, 157, 167, 169, 182, 184 law merchant 8, 10, 154–55, 157, 159, 194, 243–45, 261–62 international 244, 261 leasing 145, 246 finance 190 ledger 41–43 legal acts 21, 63, 205, 222, 265–67, 277, 282 legal capacity, see capacity legal dynamism, see dynamism legal formalism, see formalism

legal orders 9–10, 74, 197, 202, 243–44, 246, 248, 261–62 domestic 74, 197, 246 independent 74 international commercial and financial legal 246 legal owners 268 legal partitioning 146 legal positivism, see positivism legal possession 258, 277 legal pragmatism, see pragmatism legal principles 79, 83, 129, 191, 231, 261–62, 271 common 261 general, see general principles legal rights 102 legal risk 192, 194–95, 197–98 legal scholarship 63, 80–81 legal sources, see sources of law legal systems 126, 128–29, 135, 137, 250, 252–53, 255, 273 legal transnationalisation, see transnationalisation legal universalism, see universalism legitimacy 14, 19, 84–85, 155, 160, 165, 246, 253 lenders 119 lessees 142, 144, 148–49 lessors 142, 144, 148–50 letters of credit 197–99, 202, 219–21, 223, 225, 257, 265, 267 documentary 220, 224, 270, 285 letters of intent 24, 104 lex commissoria 216–17 lex fori 111, 122, 178, 233–34, 236, 250, 255, 287 lex mercatoria 152–57, 159–61, 164–65, 170–72, 193–97, 230–31, 242–46, 259–62 and agency 285–86 approach 88, 160–61, 243–44, 262, 283 operation 10, 153, 243, 248 transnational 8–9, 161, 165, 193–94, 197, 213, 230, 243 lex rei sitae, see lex situs lex situs 190, 203–4, 214, 254, 285 liability 14–15, 90–91, 103, 140, 163, 266–72, 275–76, 285–86 contractual 24, 36, 53, 60, 90, 100, 103 direct 276, 285 product 6, 15, 209 tort 90–91, 144 vicarious 270–71 liberal interpretation 67, 76, 96, 98, 230, 232, 241, 243 technique 26, 76–78, 87, 89, 96, 161, 241, 245 liberalisation 202 licensed concepts 11, 69, 136 liens 218 statutory 217 limitation, statutes of 210 limitations of appeal 19 liquidity 139, 141–43, 147, 221–22, 224 risk 193, 198–99, 221

300 Index literal interpretation 18, 20, 23, 25, 30–33, 47–49, 71–72, 74 litigation 65, 69, 71, 73, 101, 233, 237, 245 loading 199, 220, 223, 239, 252, 255–56, 258–60 port of 258 loans 42, 119, 144–45, 169 local laws 9, 14, 19, 42, 45, 181, 185, 193 location 190, 227, 234, 283 loyalty 28, 71, 83, 269, 273 mandatory custom 172, 231, 262 mandatory rules 159–61, 163, 165, 202, 231, 251–53, 255, 286–87 manifest unreasonableness 22, 25, 36, 137, 162 manipulation 220 Mansfield, Lord 53, 55 market conditions 134, 198, 227 market forces 182 market practices 3, 6, 179, 181, 254, 286 market prices 121–22, 133–34, 220, 278 markets 18, 25, 41, 43, 107, 197, 281, 285 capital 43 Eurobonds 200 international 85, 179–80, 232, 256, 285 maturity 41–42 merchantability 205, 209, 212 methodology 15–16, 86, 179–80, 183, 242 minimum standards international 9, 32, 138, 194, 246, 262 transnationalised 155, 196 minors 64 misbehaviour 101, 112 misrepresentation 57, 99–100, 111–14, 116, 206–9, 212, 214, 239 innocent 111, 113–14, 207, 212 negligent 100, 113, 136 mistake 99–101, 111, 114–16, 166, 169, 177, 206–13, 239 mutual 115, 136 models 31, 79 modern contract law 1–8, 17–23, 25, 27, 35, 52, 179, 181 modern contract theory 16–17, 30–32, 35, 77–78, 169, 172, 174, 176 modern lex mercatoria, see new lex mercatoria monetary claims 107, 110, 139 money judgments 107–9 money laundering 27, 36, 76, 196 morality 44 mortgages 108 movable property/assets 15, 17–18, 147, 187, 200, 217, 232, 286 mutual mistake 115, 136 national laws 192, 195–96, 199, 201, 203, 259–60, 283, 286 natural justice 34, 59, 137

natural law 11, 44–45, 72, 147, 270 concept 176, 270 school 44–45, 72, 147, 270 secular 44 natural persons 6, 13, 47, 64, 184 necessity, agency of 272–73 negligence 51, 83, 102–3, 122, 137, 166, 206, 238 negligent misrepresentation 100, 113, 136 negotiable documents 198 of title 222–24, 256 negotiable instruments 92, 190, 200, 203, 224, 227, 250, 259 negotiation 4, 26–28, 38–39, 98–99, 101–4, 134, 163, 173–74 in bad faith 163 duties 4, 6–7, 74, 76, 98–99, 101–4, 163, 168 post-contractual 98, 169 pre-contractual 56, 99, 101, 103, 168 nemo dat 276 Netherlands 63–66, 75–76, 83, 109, 148, 155–56, 208–9, 217–18 case law 278, 280 law 46, 87, 103, 208, 216, 268, 278, 281 netting 70 new law merchant, see new lex mercatoria new lex mercatoria 197 nineteenth century 13, 20, 44–45, 71–72, 75, 80, 270, 276 early 45 late 270 non-conformity 121, 206, 208, 239 non-consensual duties 17, 20, 78, 194, 234 non-defaulting parties 211, 213, 237 non-intentional duties 25–26, 48, 55 non-owners 65 non-performance 6, 48, 72, 116–18, 120, 135, 176, 178 non-professional parties 8, 104 normative approach 32, 34, 58–59, 67, 69–70, 74, 78, 271 normative interpretation 31, 33–35, 122, 126, 230, 235, 243, 245 in practice 67–107 normativity 32, 76–77, 88 norms 73, 77–79, 96, 98, 197, 243–45, 255, 260–62 notification 141 novation 61 nullity 207, 228 objectivation 19, 25, 28, 237 objective approach 22, 70, 73, 76, 124, 176, 182, 247 objective law 132, 135, 178, 188–89, 198, 212, 221, 229 objective purpose 27, 70 objective standards 25, 30, 62, 96, 165 objectivity 18, 30, 47, 83

Index 301 obligations 45–47, 90–93, 123–24, 139–40, 142, 146–47, 237–38, 281–83; see also duties characteristic 40, 233, 251, 285 contractual 40–41, 108, 112, 233, 237, 249, 251, 254 of good faith 91–92 law of 17, 27, 40, 91, 147, 228, 233, 282 payment 117, 123, 125, 220–21, 223, 257, 265 obligatory rights 139 offer 45–48, 50, 52, 54–56, 114–15, 173–75, 228–29, 234–35 offer and acceptance language 22, 34, 46, 51, 55–56, 169, 181 offerees 40, 46, 52, 56, 61, 97, 174–75 offerors 40, 46, 175 omission 207, 243 on-board bills of lading 257 open agency 277, 280–81 openness 70, 96 oral contracts 114, 229 ordering, private 145–46 original intent 25, 27–28, 69, 82, 132, 257 outsiders 21, 36, 90, 139–40, 144, 147, 165, 279 overvalue 204, 218 owners 4, 65, 141–43, 150, 207–8, 222, 258–59, 268 conditional 214 legal 268 new 141–42, 189, 208 succeeding 141–42 ownership 108, 139, 141, 187, 189–91, 202–3, 209, 216 protection 189, 216, 254 reputed 214, 216 rights 108 conditional 108 temporary 10 transfers of 141, 187, 189, 203, 209, 254, 265 pacta sunt servanda 45, 161 parol evidence rule 18, 49, 57, 59, 74, 175, 247, 254 partial codification 151, 183, 187–88, 193, 228, 230, 234, 260 parties contracting 33, 60, 67, 116, 149, 200, 227 defaulting 70, 118, 123, 125, 236–37 harmed 33, 101, 113 non-defaulting 211, 213, 237 non-performing 52, 118 non-professional 8, 104 original 138, 142, 144, 257 third 65, 110, 138–50, 189, 218–19, 222–25, 265–73, 275–87 types of 1–2, 4, 28, 59, 80, 99, 153, 156 partitioning, legal 146 partnership 30, 134, 274 party autonomy 8–12, 17–20, 27–30, 69–70, 78, 84–85, 189–91, 242–44 degree of 9–10, 17, 190 true 171, 189

passing of risk 126, 198, 205–13, 228–29, 238–39, 255, 258, 260 of title 189, 209, 236, 239, 278 past experiences, extrapolation 167 payees 205, 224–25 third-party 225 paying banks 198, 224–25, 265 payment finality 170, 172, 181, 183, 188–89, 197, 228, 230 payment instructions 39, 205, 224 payment obligations 117, 123, 125, 220–21, 223, 257, 265 payment risk 198, 222, 263, 268 payments 10, 41–42, 172, 181–82, 184, 201–2, 239, 265 immediate 198 payors 117 PECL (Principles of European Contract Law) 94–98, 152, 157, 159, 164–66, 168–72, 174–77, 188; see also Table of Legislation peer groups 6–7, 21, 28–29, 51, 58 penalties 109–11, 120, 129, 178 perceptions 21, 31–32, 58, 85–86, 100, 125, 127, 130 performance 24–26, 46–52, 90–93, 104–40, 144–48, 150–51, 176–78, 235–39 defective 120 duties 116, 188, 210, 218, 274–75 excuses of 28, 57, 105, 116–19, 123, 129 in kind 107–11, 120, 137–38 remedies 111, 114 securing 137 specific 48–49, 90, 107–12, 114, 120–22, 178, 236, 238 substitute 150–51 personal actions 176 personal circumstances 43, 120, 123, 125–26 personal claims 277 personal property 16, 21, 273 in personam rights 122, 139, 147, 229, 238, 241 philosophy 128 physical assets 229, 279 physical delivery 189, 198, 207, 209, 211–12, 228, 236, 239 physical holders 209, 218 physical movable assets 187 physical possession 114, 146, 205–9, 220, 222, 277 physicality 153 place and time of delivery 66–67, 122, 175, 187, 229, 235 place of destination 222 place of payment 67, 203, 235 pledges 221 policies, insurance 251, 257, 259 political risk 125, 193–94, 197, 199, 220 pools 42 port of loading 258 Portugal 83, 151, 181, 194, 229, 283, 285, 287 positive law 12

302 Index positivism 86 possession 189–90, 205–9, 214, 216–18, 220–23, 236, 258–59, 277 buyers in 205, 216–17, 239 constructive 236 debtors in 214 delivery of 189 physical 114, 146, 205–9, 218, 220, 222, 258, 277 sellers in 207, 221 transfers of 190 possessory rights 146 post-contractual duties 84, 98, 169, 194, 228 post-contractual renegotiation duties 4, 6, 18, 60, 69, 74, 76, 121 post-contractual rights 81 Pothier, R-J 45, 148 powers 11, 52–53, 64–65, 73–74, 84–85, 217–18, 268–73, 286 of attorney 267, 271 tracing 268, 286 practicability 124, 129 practitioners 180, 188, 194, 230 praetor 44 pre-contractual disclosure 74, 76, 98–99, 101, 103, 163, 166, 168 duties 98, 101, 103, 166, 168, 274 pre-contractual duties 24, 37, 81–83, 91–92, 99, 102, 121, 166 pre-contractual negotiation duties 56, 99, 101, 103, 168 precedence 144, 172, 253 precedent 53, 85, 116–17, 119, 259 predictability 31, 36, 87, 170, 172 prescription 228, 253 presumed intent 72, 91 presumptions, rebuttable 251 prices 66–67, 109–11, 129–30, 175, 190–91, 210–11, 227, 235–37 agreed 115, 121, 187 concessions 136, 138 market 121–22, 133–34, 220, 278 purchase 143, 199 reduction 56, 113, 178, 180, 211, 239 sales, see sales, prices principals 148, 273–74, 276, 279, 281 principles common 261, 286 fundamental 74–75, 87–88, 159–61, 163–65, 167–68, 172, 230–32, 241–46 general 8–9, 74–75, 94–95, 152–54, 159–60, 164–65, 240–45, 259–62 Principles of European Contract Law, see PECL prior knowledge 141 priority 80, 218 private international law modern 244–45 rules 40, 159–61, 165, 190, 213, 230, 239–40, 255

private investors 99, 285 private law 11, 25, 84–86, 88, 152–58, 167–68, 182–83, 240–41 codification 16, 81, 86, 182, 228 and common law 179 domestic 74, 95 formation 17, 85–86, 153–54, 157, 182, 184 intervention 194 nature 17, 67, 74, 86, 179 sources of 67, 74, 81, 86, 88, 94, 167, 172 transnationalisation of 74, 88 unification 155–56, 226 uniform 13, 95, 226 private ordering 145–46 private parties 11, 30, 172 privity 1, 138–51, 178, 275, 287 procedural informality 19 product liability 6, 15, 209 products 5, 10, 43, 160, 185, 188, 252, 256 commoditised 114, 187, 197 modern financial 155 professional activities 13 professional contracts 6, 8, 18–20, 23–26, 32, 176, 179, 185 professional dealings 2–9, 18–26, 28–33, 47–50, 69–78, 153–57, 161–63, 176–81 international 10, 153, 155, 165, 167–68, 171, 198, 262 professional debtors 26, 71, 100, 106, 126 professional law 8, 156, 186 professional parties 4, 7–8, 20–31, 74, 96–105, 127–30, 162–64, 178–80 professional sales 7, 15, 180, 189, 210 professional sphere 16–18, 27–28, 55–56, 76, 91, 103–4, 106–7, 200–2 professionalism 100, 102 professionality 134, 201, 247 professionals, see professional parties promisees 50, 120, 149–51, 178 promises 12, 44–45, 47, 49–55, 60–63, 66, 69, 116–17 exchange of 44, 47–50, 52, 55, 63 mutual 50, 61 promisors 50, 117–18, 120, 128, 150, 237 promissory estoppel 54 promissory notes 139, 224 property, see also Introductory Note law 5, 9–10, 17–18, 30–31, 66–67, 70, 139, 189–90; see also Introductory Note modern 67 personal 16, 21, 273 proportionality 182, 195, 253 proprietary actions 140–41 proprietary claims 108, 214 proprietary defences 53, 140 proprietary effect 67, 141–42, 146–47, 216, 272, 282 proprietary interests 199, 204, 223 proprietary matters/issues 176, 181, 189–91, 213, 217, 246, 250, 255

Index 303 proprietary protection 217 proprietary remedies 101, 121, 238 proprietary rights 6, 92, 139–41, 189, 219, 228, 267–69, 278 creation 189 transfer 141 psychological intent 20, 70, 77, 80, 163 public health 6, 246 public interest 33, 69, 77, 88 public international law 8, 10, 240 public order 62, 64, 74, 76, 86–87, 96, 160–64, 245 concepts 62, 96, 165, 231, 252 considerations 19–20, 27–28, 64, 160, 162, 196–97, 244, 248 requirements 17, 64, 160–61, 164, 167–68, 231–32, 244–45, 262 public policy 17, 19–20, 27–30, 32–33, 69–71, 75–76, 164, 179–80 bar 285 domestic 138, 160, 164–65, 194, 242, 248 publicity 189, 270 punitive damages 140 purchase prices 143, 199 purchasers 109, 114, 260 bona fide, see bona fide purchasers quality 186–87, 190–92, 198–99, 208–9, 211–12, 220, 223–25, 239 certificates 199, 220 required 107, 134, 205 risk 192, 198 Rabel, E 132, 226, 283 rationality 10, 30, 44, 193 real estate 16, 65–66, 108, 142, 154, 200, 251 realism 179 American 35 reasonable commercial standards 92 reasonable person 18, 29, 34, 58, 89, 118, 136, 237 reasonable reliance 56, 174–75, 266 reasonableness 58–59, 89, 91–93, 95–98, 130–31, 161, 165–66, 248 test 166, 248 rebalancing 101, 130, 195 rebuttable presumptions 251 receipt 46, 173, 218, 222, 234, 239, 256 receivables 141, 149, 199–200, 246, 281 financing 142, 225, 254 trade 141–42 transfers of 149, 200 reclaiming 102, 214, 218 rights 112, 219 recognition 12, 65–66, 88, 196, 201, 203, 227, 231 recourse 41, 43, 83, 137, 140, 170, 210, 278 recovery 51, 111, 144, 220, 235 redistribution 7, 20, 22, 26, 33, 98, 118, 135–36 of risk 7, 22, 91, 117, 135, 206

registration 13, 141, 204 regulation 40, 94, 123–24, 233–34, 249–54, 262, 283–85, 287 financial 39, 196, 262 reimbursement 102, 198, 224, 257, 285 relationship thinking 1–4, 16–19, 25–28, 31–37, 55–59, 68–72, 75–76, 81–83 relationships direct 277, 280–81, 285 external 222, 267, 273, 278, 282 fiduciary 274 underlying 149, 269 relevant facts 79 reliance 22–24, 34, 46–49, 54–56, 58–61, 100–2, 172–75, 269–72 and conduct 5–6, 18, 34, 38–39, 41, 47, 169, 173–74 damages 121 detrimental 22–23, 47–48, 50–52, 54–57, 60–61, 102, 104–5, 136 justifiable 54–55, 65 justified 33, 106 notions 22–23, 36, 46, 49, 54, 56, 60, 80 reasonable 56, 174–75, 266 religion 44 remedies 1–2, 4, 57, 111–12, 121–22, 176–78, 235–36, 238–39 contractual 220 equitable 6, 111, 113 proprietary 101, 121, 238 rescission, see rescission renegotiation 1, 4, 26–28, 33, 106–7, 127–28, 130, 132–35 duties 74, 76, 121–22, 126, 128, 132–33, 135, 166 post-contractual 4, 6, 18, 60, 69, 74, 76, 121 rights 128 rental agreements 3–4, 44, 124, 134, 139, 142–43, 169 repayment 42 replacement goods 125, 204 replevin 101, 176 repos 145 repossession 101, 108 representations 69, 85, 112–14, 116, 119, 181, 270, 281 repudiation 117, 120 reputed ownership 214, 216 resale 140, 218, 222, 260 rescission 57, 111–14, 116, 208, 210–14, 216–19, 236, 238 clauses 191, 199 possibility of 113–14, 116, 212 reservation of title 191, 199, 204, 213–17, 219 residence 227, 233, 251–52 habitual 227, 233, 251–52 residual rules 95, 196–97, 243–44 respect, duty of 140 restitution 57, 102, 112, 116, 146, 176–77, 209, 238 claims 65 restitutionary damages, see direct damages

304 Index restraint of trade 36, 109, 140 restrictive covenants 141–42 restrictive interpretation 71, 76 retention 217–20, 224, 284 rights 217–19, 238, 273, 279, 282, 284 retentors 217 retransfer 214–15 retrieval 219 retroactivity 195, 213–14 return 10, 13, 191, 198, 210–11, 217–19, 222, 238–39 automatic 114, 191, 214, 217–18 of title 57, 191, 214–19 revindication 215–18 rights 219 reward 61, 110, 144 rights 9 conditional ownership 108 contractual 17–18, 45–48, 54, 70, 101–2, 134, 145–46, 278–79 direct 144 disposition 43, 65–66, 139 extra-contractual 17–18, 20 human 11, 74, 87, 95, 159, 167, 203 of immediate repossession 108 legal 102 obligatory 139 ownership, see ownership, rights in personam 122, 139, 147, 229, 238, 241 possessory 146 proprietary, see proprietary rights reclaiming 112, 219 recovery 70 in rem 139, 141, 147, 214, 217, 219, 285 renegotiation 128 retention 217–19, 238, 273, 279, 282, 284 revindication 219 third-party 138, 143, 146–47, 151 user 4 voting 214 risk 100–1, 125–35, 190–94, 196–202, 205–12, 236–39, 258–60, 266–69 acceptance 18, 20, 70–71, 99–100, 103–6, 131–33, 173–74, 177 allocation 20, 29, 93, 123, 125, 146, 208, 233 credit 146, 183, 192, 198–99, 275, 287 distribution 19, 23, 27, 36, 71, 105, 130–31, 188 foreseeable 20, 101, 134 legal 192, 194–95, 197–98 liquidity 193, 198–99, 221 management 1–2, 20, 22, 28, 54–55, 57, 134, 136 choices 20, 22–24, 91 tools 5–7, 18, 20, 31–32, 36, 130, 134–37, 178 passing of 126, 205–9, 211–12, 228–29, 238–39, 255, 258, 260 payment 198, 222, 263, 268 political 125, 193–94, 197, 199, 220 quality 192, 198

redistribution of 7, 22, 91, 117, 135, 206 transfer of 207, 210–11, 229, 236, 258 unforeseeable 101 unforeseen 23, 29, 134–35 roadmaps 5–7, 18, 20, 28–29, 31–32, 74, 130, 134–37 Roman law 4, 44–45, 71, 109, 147–48, 189, 210, 270 influence 4, 44 ius commune 44, 71, 147 revival 71 safe arrival 198–99, 220, 223–24 safe harbour function 219–22 safety 193–94, 224, 254 sale of goods 3–4, 15–17, 111, 121, 180–81, 187, 208–10, 212 EU efforts 262 international, see international sale of goods sales agreements 124–26, 187, 189, 209–13, 216–19, 221–22, 241–42, 256–57 failed 114, 218 minimum requirements 191–94 cash 175, 218 consumer 7, 181, 184–85, 200–1, 206, 209, 228, 232 contracts 175, 189–92, 204, 213–15, 217–18, 235, 246–47, 256 cross-border 7–8, 168, 183, 185, 227, 262–63 domestic 7, 168, 185, 192, 195, 200, 202, 263 execution 107, 147, 217, 219, 227 finance 200 prices 111, 191, 198, 220, 239, 257 protection 191, 213–17 professional 7, 15, 180, 189, 210 temporary 200 Savigny, FC von 45 scale 265 scholarship, see legal scholarship Scotland 15, 90, 201 secular natural law 44 secured transactions 16, 66, 92 securities 10, 217–19, 223–24, 228, 273, 279, 284, 286 securitisations 42, 144 security entitlements 92 security interests 67, 190, 204, 217–19, 254 segregation 280 sellers 111, 198–99, 201–13, 215–25, 235–37, 239, 255–58, 265–68 original 220 in possession 207, 221 unpaid 204, 217–18 separation 84, 240 service contracts 3, 184, 270 service providers 40, 251, 265 services 9, 108, 110, 113–14, 184, 227–28, 256, 269–70 servitudes 141

Index 305 set-off 70, 145, 202, 273, 279, 282, 284 settlement 107, 175, 235 systems 276 settlors 143 seventeenth century 44–45 severability 12 shareholders 4 shares 135, 200, 214, 276 shippers 252 shipping agents 222, 268, 271 shipping documents 185, 207, 220, 256, 270 ships 115, 220, 227–28, 256, 258–59 ship’s rail 222, 236, 257–59 signatures 39, 175 electronic 39 simultaneity 221–22 situs 282–83 smart contracts 16, 35–36, 40–43, 48, 77 SMEs 7, 183–86, 189, 232 social peace 6, 9, 17, 19–20, 27–28, 32–33, 35–36, 69–70 social values 30, 33, 84–85, 162 society 11, 25, 30–31, 33, 39, 77, 85–86, 229 modern 17, 30, 85, 107, 230 software 5, 9–10, 187, 229 sophistry 7, 42, 84, 185 sources of law 74–81, 85–88, 94–95, 153–57, 159–61, 167–68, 179–82, 243–45 autonomous 59, 86–87, 160–61, 168 custom and practices 160 fundamental principle 87 party autonomy 75, 160 dynamic 60, 78 hierarchy 13, 160, 171, 243, 262 independent 64, 74, 95 private law 67, 74, 81, 86, 167, 179, 240–41, 243 public international law 10 traditional 31–32, 70, 73, 78, 85, 88, 96, 99 transnational 64, 74, 78, 161 sovereigns 12, 75, 197 Spain 83 special duties 77, 88, 201, 266, 271 special interests 80, 134, 253, 277 specialty goods/assets 140, 205, 210–11 specific performance 48–49, 90, 107–12, 114, 120–22, 178, 236, 238 specificity 66–67, 172 and identification 66–67 requirements 67 spot sales 174 stability, financial 18, 246 standard contracts 30, 43, 77 standard terms 36, 38, 40, 42, 48, 67, 81, 97 standardisation 16, 35–36, 41–42, 195 standards 19, 23, 26, 76, 92, 96, 98, 191–92 objective 25, 30, 62, 96, 165 reasonable commercial 92 transnational minimum 30, 153, 196–97, 244, 248

state intervention, see intervention status quo 121, 142, 144 statutes of limitation 210 statutory assignments 279 statutory authorisation 8, 277 statutory interpretation, see interpretation statutory law 14, 61, 98, 111, 129, 134, 143, 273 statutory liens 217 strict interpretation 36, 57 subcontractors 110, 134, 144–45, 148–50, 175, 234 subjective approach 83, 92, 126, 174, 176, 181–82, 247–48, 261 subjective intent 172, 263 subjective interpretation 21, 47 subjectivity 21, 119, 123, 166, 176, 178, 180, 188 subsequent holders 148 substantive law 260 substitute performance 150–51 substitution 110, 151 succeeding owners 141–42 successors 44, 143, 146, 150, 226 supplementation 19, 94–95, 159, 170, 230–31, 240–47, 249, 260–62 suppliers 38, 107, 131, 140, 144, 149–50, 184 supply chains 5, 140, 145, 229 suspension 135, 226–27 swaps 13, 65, 145 Switzerland 33, 76, 277, 285 system building 79, 81, 84 system thinking 31, 74, 77, 79, 81, 84, 86, 153–55 tangible movable assets 187, 200, 217, 232, 286 tariffs 193–94 taxes 183 technology 5, 9–10, 180, 187, 228–29 teleological interpretation 25–26, 32, 70–71 temporary ownership 10 temporary sales 200 temporary transfers 4 termination 107–8, 120, 127, 129, 131–34, 142–43, 176–77, 286 clauses 128, 195 terminology 32, 35, 119, 122, 129, 131, 234, 243 common law 135, 234 terms contractual, see contract terms standard 36, 38, 40, 42, 48, 67, 81, 97 trade 198, 201, 236, 255–61 theft 125, 207 thieves 65 third parties 65, 110, 138–50, 189, 218–19, 222–25, 265–73, 275–87 bona fide 113, 218, 225 third-party beneficiaries 138–40, 143–45, 148–50, 178, 224 third-party benefits 138–39, 143–44, 147–48, 150–51 third-party creditors 70

306 Index third-party effect 139, 141, 143, 147, 266 third-party payees 225 third-party rights 138, 143, 146–47, 151 title 187–89, 191–92, 203–6, 213–15, 217–19, 222–24, 256–59, 276–79 conditional 217 documents of 146, 200, 222–24 passing of 189, 209, 236, 239, 278 reservation of 191, 199, 204, 213–17, 219 return of 57, 191, 214–19 transfer of, see title transfer voidable 113 title transfer 187–92, 203–5, 208, 215–18, 221–23, 228–30, 236, 256–58 chattels 141 delivery for 208, 236, 257 tort 23–24, 52–54, 57, 99, 102–4, 109, 140–41, 145–46 actions 103, 140, 143, 145 liability 90–91, 144 tracing 268, 276, 286 powers 268, 286 trade receivables 141–42 trade terms 198, 201, 236, 255–61 traders 97, 184–86 traditional sources of law 31–32, 70, 73, 78, 85, 88, 96, 99 transaction costs 36, 38, 147, 153–54, 182–83, 230 transactional finality 188, 205 transactions 65–66, 91–92, 159–62, 192–96, 202, 266–70, 278–79, 281–82 commercial 4, 39 consumer 94, 164, 233 financial 10, 155, 165, 190, 199 international 9–10, 30, 32, 138, 193–97, 231, 244–46, 248 secured 16, 66, 92 transferability 142, 202 transferees 141, 216 transfers of assets 41, 66, 139–40 bulk 188 of chattels 141, 189 of claims 250 of ownership 141, 187, 189, 203, 209, 254, 265 of possession 190 of proprietary rights 141 of receivables 149, 200 of risk 207, 210–11, 229, 236, 258 temporary 4 of title, see title transfer transformation 5, 9–10, 13, 32, 145, 187–88, 229 constant 9, 180, 203 transit 126, 193, 198–99, 205, 207, 218, 220, 239 goods in 126, 193, 205, 239 transnational commercial and financial legal order, see international commercial and financial legal order

transnational minimum standards 30, 153, 196–97, 244, 248 transnationalisation 8–9, 13, 15, 74–75, 88, 153, 155, 190 of contract law 8, 23, 31, 56 formal efforts 17 of private law 8, 74, 86, 88, 95 process 86, 95 transportation 7–8, 10, 187–88, 192, 197–98, 219–21, 255–56, 258–59 agreements 221, 265, 270 treaty law 8–13, 15, 151, 194, 197, 240, 262, 283–84 and agency 283–85 uniform 13, 15, 226, 230, 250 tripartite arrangements 143–44, 283 trust construction 276 trust structures 10 trustees 65, 143, 150, 274, 276–77 bankruptcy 150, 218 constructive 268 trusts 2, 16, 65, 143, 150, 272, 274–76, 284 constructive 276 ultimate justice 17 UNCITRAL (United Nations Commission on International Trade Law) 15, 39, 201, 226, 228–29, 242, 246 underlying assets 41, 43, 66, 142–43, 147, 223–24, 268 underlying claims 203, 225 underlying goods 220, 256–58 underlying relationships 149, 269 undisclosed agency 15, 68, 149, 266–70, 272–73, 275–81, 285–86 undue influence 51, 57, 111, 115–16, 177, 228 unfair contract terms 4, 90, 166, 185 unforeseeable risks 101 unforeseen circumstances 124–32, 191 unforeseen risks 23, 29, 134–35 UNIDROIT 15–17, 94–96, 159–60, 163–66, 174–75, 177–78, 246, 248–49 Principles 16–17, 94–96, 119, 159–66, 171, 174–78, 235–36, 248–49; see also Table of Legislation unification of contract law 151 of private law 155–56, 226 uniform international sales laws 12, 226–63 uniform law 94, 154, 183, 196, 226–27, 241, 243, 250 uniform treaty law 13, 15, 226, 230, 250 mandatory 231 unitary approach 4, 6, 152–54, 157, 164, 167, 169, 181–82 unitary codification 156 unitary system 2, 156

Index 307 United Kingdom 54–55, 58–59, 61–63, 65–66, 89–91, 111–13, 122–24, 149–50 case law 150 law 89–91, 103, 111, 115, 119, 137–38, 208, 254 United States 54–56, 89–93, 121–24, 149–51, 204, 217–18, 229–35, 258–60 unity 88, 154, 201, 283 universal natural law, see natural law unjust enrichment 16, 57, 112, 176 unpaid sellers 204, 217–18 in possession 217–18 unreasonableness 131 manifest 22, 25, 36, 137, 162 unwilling defendants 109 updating 32, 35 USA, see United States usage 59, 97–98, 166, 171, 242, 248, 259, 262 user rights 4 utility 11

Vienna Convention 94–95, 118–22, 124–27, 159–60, 170–72, 174–78, 187–96, 226–63; see also Table of Legislation applicability 232–34 coverage 228–30 and EU law 249 meaning of conduct and custom 246–48 origin and scope 226–27 sales law 234–39 supplementation and interpretation 240 system 231–32 and trade terms in international sales 255–58 voidability 111, 114–15, 176, 207 voidable title 113 voidness 57, 65, 111, 115–16, 177, 207, 211 Volksgeist 167 von Jhering, R, see Jhering, R von von Savigny, FC, see Savigny, FC von 45 voting rights 214

valid contracts 115 validity 44, 46–47, 49–50, 57–59, 64–67, 175–76, 194–95, 241–42 contractual, see contractual validity value(s) 30, 37, 39, 61, 65, 75–76, 78–79, 84–85 social 30, 33, 84–85, 162 vicarious liability 270–71

warehouse receipts 220–22, 265 warehouses/warehousing 197, 221–22, 235, 265 warranties 67, 116–17, 119, 122, 190, 212, 235, 237 and conditions 116, 212 weaker parties 26–27, 43, 49, 59, 72, 76, 82, 90–91 protection 72

308