Contract Law

A COMPARATIVE INTRODUCTION

janM. Smits
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ __ __ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ __ _ _ __ __l?i~essorQjEuropea11 Private Laiv, Faculty o{Law, Maastricht University, T he Netl1erla11ds

Edward Elgar
Cheltenham, UK • Northampton, MA, USA
 1
lntroduction

; This chapter explains:

• The need for contract law in a well-functioning society;
• The types of contracts that are usually distinguished;
• The place of contract law in the system of prívate law as a whole;
• The ma in principies of contract law;
j
, • The historical developme nt of these principies since Roman times. ___j

A contract is usually associated with a piece of paper through which one buys
a house, takes up a job or ensures access to a mobile phone network, for
example. Although these transactions can in most cases indeed be qualified as
binding contracts, the law uses a broader definition. In any given jurisdiction,
contracts are defined as legally binding agreements, irrespective of whether
they are written down or not. This means that, in law, people conclude con-
tracts when they huy products in a supermarket, take óut insurance, down-
Ioad software, are treated by their doctor or go to the hairdresser. Contracts
can even come about in cases where no word is spóken at ali, as in case of
putting money into a machine to huy a cup of coffee and of computerised
-.i ·-
i '. derivatives trading. Each agreement that qualifies as legally binding - and
~-·· therefore as a contract - needs to meet certain requirements, that are dis-
cussed in Part 2 ofthis book. This chapter discusses the concept of a contract
in general and seeks to introduce the main principies of contract law.

· ~• "',,;
W hy contract law?
-~
~
~

The need for a well-functioning contract law follows from the type of society
.. that we live in. A market economy as is now prevalent in almost the entire
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\ ·u\:;·,t,·1:y
i:-.. ..:!. . ,:r1~t"'
world - with the possible exception of North Korea - is based on the
premise that people and companies shou1d make their own bargains on the
basis of a voluntary exchange of goods and services. It is not the govemment
·i.
':t that decides how many goods are produced or how much money a person is
1 i to pay for the product they desire. lnstead, witlün certain limits, it is left to
the n eeds of the people and therefore to the market's price mechanism to
4 · Contract law lntroduct,on · 5

i ❖tl5•
ensure that supply and demand correspond to each other. Such a market
economy - no matter if it comes in the version of continental Rhineland, the
Nordic social model, Anglo-American capitalism or China's socialism - CONTRACTSANDTHEECONOMY
cannot do without contracts. Contract law in turn ensures that these con-
tracts are binding, and can therefore·be enforced in the courts in case the lt is surely imaginable tiów an individual no such thing as an employment contract
other party <loes not perform. This turns contract law - the rules and princi- person could survive without making con- setting the working hours and pay. lnstead,
pies that govern transactions among parties - into the cement of modern tracts: he or she cpuld .live off charity or obligations followed from the status of
society: it enables market actors (individuals and companies, but also gov- obtain 'the necessities of life (such as food servant, who had to do virtually everything
ernment bodies, municipalities, NGOs, charities, etc.) to participate in eco- and hbusing) fr~m his ó(.her ownsesoúrces. the master asked: The master in turh. had
nomic and social life. A manufacturer would not be able to run its business if . lt is more difficult to coriceive Óf a society to ~upply f9od· and offec prÓtectiqn. This
customers could simply renege on their orders. I would not be able to lead a ¡~ which the neea' io-é6ntract with óther only changed with increasjng efivision of
normal life if my landlord were allowed to evict me from my apartment any :- p~ople-is•cQmp!_g~11Y ab~~~!-.)?.□.e. cou[d. labour and the ensuing cjevelgpment otJ["le
time she received a b etter offer from a potential tenant. Contract law thus
¡ Jhin\9f tbe typei,f éq_m~l}jgnify1ba!'.exi_st~d. econpmy, prompting the.ne'ªd lc;ir binding ·'. '
allows planning by individual members of society. Aristotle, in his Rhetorics
~ in ~r.e~!i!<?fic :.tiT~~ b~fo~jny_divi~on-~f . ·' ' contracts thÍtfr~~ P!~pie éould ma~e .w1th
f laboúr-ottµcrect shiall groúps:of iíomadic· • : eac;_[1.other: Ti]e German. author Hein Kótz
(I, 14, 22), already saw this: ' ... so that ifyou destroy the authority of con- .¿¡;._ -~ ~.# ~ . • • 1::-J"" • .....
t people_ ~ h9 J!J.ared w.hatlhi/fo_und-by ...•.PH,t.it lik~ thit '.Pé_o~I~ who:_spJ~ia]ise_, like
.,- - • , 9 ,,>., • .. • • • • " •

tracts, the mutual intercourse of men is destroyed'. This does not mean that· Hi_uñting, ·· ing_hag_fio. need _--·thefarmef iñ producilig fgód, 1he tr¡¡der in
J: .- - •, • .:.. :: • • .... - ' . .. .. -~· ~ ~ ,.; • - ~ ..
no alternative ways of organising society are available (see Box 1.1), but t-for contr r.ue that o n tributiilg gbods,:apd the· taiJor j11· rnakjng •
they are difficult to reconcile with today's views ofwhat a society must look f goóa .w_a hé r (e.g_, "V,/0 .thes, '~Í' th~tiaulie( the:nío~eylencjer, ~ ~ ..
Iike. t ior ~~oi s·; ,u_ ,. .!t .el\~ ange typi.· -,
~ .¿; .... :,-, - ,,.._--<. -:..~:<;... ~- ' -t;F':<'":'"
e ~o~s.frü§ ion
- · .... -s-
o/Qr~1r;
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'tiíi)é~cher,Jhf _;k;.
-· ..?.;.~ ..;.
¡.,• rilace on t.li · · ,,-,allow1.ng,the
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cyr, an. d -orhers who·prov1de.spec1ahst
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ice_~;a,11 ~~h,P~9P)fW,~ ~':;~ble t~~ ·•

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\~e1r proqucts or,s~¡y1ces for • -sa· ~ ~

t~
• - .,...: -~ .

¡: .9q90s ·cm.ey to·pcocure •

· need
;- ....
to·live on: .

-t he
t~whi~h cin
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irfiti¿
,,-';· ••
L~r:iQre¿!~- so,óe.ty, a . . .. .
f' in Európe u . HOO, -onfs.inhér- -. 1berali_s ~ ef.np .. .•
Lrted 5t~Ít~si s ª'.Y?:5~ª-'~ q_r33_1á_ndowoer·w~s ~'i!,< b~ a!lowed !<? shap~ qne's life c!S he wi~hect;
L-~e~isiv~ for-o_ñe's_[$.9~.tP~?~i?n; tne inJen-, ~- Freedom of :phti:a.c:t was seen ~ the n~ces-
t1on to .leave the gr.OJ.J.Jl.was ,rrelevant. 'An.d . s9ry tooJ to 01ake th1s la1ssez.fa1re poss1ble.
if ·o~~ wór~e·; raT á·r1c-;;-fi\pl~yee,-tlié~ew~s : . .. . : . .
·•• 'l.. ... -~-· • ~~ • .. ✓-!-,.,, •. :· .:. -:'
Contract law as part of private law
In the civil law tradition, to which most countries on the European continent
belong (see in more detail Box 2-1), contract law is seen as only one part of a
,: .··
more comprehensive 'system' of prívate law. Prívate law consists of the rules
and principies that deal with the relationships between prívate actors such as
individuals and companies. Next to contract law, also the fields of tort law
(sometimes referred to as the law of'delict' or law of'civil wrongs'), restitu-
tion, property law, trust law, inheritance law, family law and company law are
part of the overall system ofprívate law.

The law of contract, tort and restitution are often lumped together under
the heading of'law of obligations: This is because they can all give rise to so-
called 'obligations', a legal term indicating that a (usually) enforceable d uty
exists of one person vis-a-vis another person or severa! other persons. In a
b ilateral contract, such as sale, typically tv,o obligations come into b eing :
the obligation of the buyer to pay the price and the·obligation of the seller to
deliver the good. While in case ofa contract, this obligation arises voluntarily
because a party intends to b e legally bound, in case of a tort the obligation
is imposed upon a person independent of its intention, usually because the
law wants to attach consequences to wrongful behaviour causing damage
to the victim. Typical tort cases concern victims claiming damages for per-
sonal injury (as in case of assault, medica! negligence or liability for defective
products such as exploding iPhones) or for defamation ( think of publishing
false statements damaging someone's reputation). This distinction between
voluntary (self-imposed) and non-voluntary obligations is as old as the civil
law tradition itself: it was already set out as the summa divisio ( ultima te parti-
tion) in the Institutes, a textbook for iaw students written by the Ro man jurist
Gaius around the year 160.

This classification of different areas oflaw into one system of prívate law, as
well as of different types of obligations into one law of obligations, is typical
for the civil law tradition. German, French or Polish textbooks, fo r example,
only tend to deal with contract law as part ofbook series on the law of obliga:.
tions, if not on prívate law as a whole. This is different in the English common
8 · Contrae\ law
lntroduction · 9

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THE GARMENT INDUSTRY SUPPLY CHAJN:
A CASCADE OF CONTRACTS
The importance of contracts in the global
economy can be illustrated by reference to
the supply chain in the garment in9ustry, an.
industry worth 500 billion euro in 2014. The
typical supply chain consists of Europe-·gr_ • •
US-based clothing companies tbat place
orders with big manufactor~rs- iQ Así~.
which i_g turn subcontract:io smaller facto-
from the price; shipment delivered with
a delay of 30 days or more: 100 per cent
9eduction from the price'), on payment,
on termination of the contract, on own-
ership of de_sign rights and on use of
subcontractors.
'!." Shanghai Globa!tei¡ lnc. concludes sub-
contracts with severa! local co mpanie~ in
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THE CONTRACT ASJURJDICALACT.
The lavy is not only shaped by legislators
and courts. An equally important role is
played by legal academics who analyse and
systematise the products of the official law-
makers. In particular in the civil law tradition person acting. Art. 3)3 of the Dutch ~ivil
law professors have had a profound influ-
. enée on !he present system of prívate law.
, ,:he high tide of,this influeñc;e was in· nine-
. tegnth-century Germany when the so-called a declarat1on:
What Von Savigny sought to collect under
one umbrella term were acts that have
legal consequences because of the fact that
these consequences are intended by the
Code formulates it Íike this, 'A juridicál act
requires an intention.:to c(eate legal ref~-
t_ions, which intention becomes íñanifest in '
. .. - .• • ..--t.,-.
~ ~

Acontract is the most impar:

ries in their hóme country, which again may ~ Shangl]_ai (including China Jiajia Co.) for
outsource to homeworkeis~lt is ~o{dif- _ th.e. qeílvery of rriaterials, ·tor"cutting and
fiéult to imagine the high n"umo~r of~ idgly
diverse con,tra_cts reguired to· make .thjs - ,,- . •
sewing anff for packing and transport;
China Jiajia Co. .híres hO!f!eWorkers who
supply chain ~ork. In a_f1¡jica1·ix..a(Tlpl_e; we :, " ~re\ ,aid bytlie piece. .' ~ .v .
. fjnd fou!, c~ntracts ~t the :c~m~ of tht chai,{ ,_ .Next to this core supply ch¡,in, other con-
. ,.--- ..... ~ -,;- . ,,. i: ~- ,,... . . .. .. -·
~
Angelina buys a V-nE!c~·chlffoñ blouse at _tra95_$hat Prim_ark.will ha~e !º conch¿de,
her loial Primark shop (coris:Umer.~ le); "'! include those for design, cji~ rilJu.tiqn and
• Prim<1rk concludes_a tw0;;y~ar. ·~loth- ~ !!J~rketi[.lg of. the clgthfng, leásé of _offic:es,
ing ~ ánuf;cturing agre~ffi_e~r with . Diring ºÍ em_p!oy~es, insu'r<Jlic;e 9.f thé stock
. . manufacturer Shañghi i"GIÓbaltéx lnc, :~ 'againsflhe risk of fire, prinJin.!t of cata:
' (SG), 'requiring SG to m_anufaéture á Logue;/and "'(eb d~sígn. T~e reqiiler in t(!rn .
"-sét quantity of c!oth~s in acéo'rda_n¡ie
,·. withí lie quality.a:nd cjes1gn sfa_ndar<!s
wíll have to ~ea5e shop space a,~ em¡Jloy .
~aff; while tjié ma~nufacturer nas to p ur-
prescribed by Primar~-5fb};_c~ntfact typ_i;; G_hase pr l~ase mácbinery. Most of these :
'. Pa11~ectiS'ts. working <?n~tht basis of the tant exarnple 9f a juricjicaf act (~ometimes
'. tht n still applic-abl~ Roman law, developed
t sopli.isti~1ted_, aoctri~e.s tl}_a~.subsequentl~
found tñeir way info legal practice as they
also called a 'le9al tr!i°~sakion'), •bcit álso the
mákií).9 o.i a' wil! ('.¡e~am¿nr) an~ .t he deci-
sion to start.a solJl(;>any, fo quit Óne's job or
f ,i}~te· ta___k'en.oJer by le·gisi~to~ and COtJrts. · t9 legally rec'b:~ñi~ _t child_~nly·~~ve leg¡il __,.
[ This 1ñfl¡.ienée IÑ'.35 not.limited to Germany con?equences because these are· intended.
~ alQné, but can l¿e seen·throu·ghout the civil
-~The juridicalfáct has a promine·n_t place"-•>
f law worl_o (and sometimes·beyorÍd). .• in the Germañ-a?ld Óutéfi Civil Code/'- . •.
¡ <" Óne .óf these doctrines is tne·só-called ; -~ln·the Dukh Code"'a whole titlé~(Afu.-... •
l jurídicpl1ct (Re,:;htsgeschaft in G~rman, ·' 3:32- 59) 'is de~!~d to·tne ~echtsh;n71.~ling, :
t c1cte.jy_ñaigue in French, recl/tshandeling , ' deali/\9 ~ith questioñs of its forc:i)al:iÓR' r · .
¡ iñ 0utd\)_lts rñain intellectual father is
c1nd validi~·..:! '1(,Ge~ an_~od~J ~ac~49.é ·-./
:,f:ri~~}~_~rl vdi Savigny (·1~'79~ 1861),~a
ri r?
.!3erlin l_~ prqf~ or WQO W~ S ,becon:i.e
one o_f the mos,tf~mous juri~ts of his !i(Jle.
Redits9es~h{Jft~"-len JO (he yery fii:st,Bg'ok,
devoting al!Jlo~ 100 articles· to it.
~ ~ -~ 't, .: . ... , ..
. ~~

.,cally' erita°ils provisi6ns,qn!gu_ality'EQnfrbl • · parties ~re likely to have.concloded cred}t

_ ·(suc~ as ª duty to furn1?6 tg -l'rimar~-a ,· . a_greer11~_nts vyith banks !rangiñg'from the
sallJple.,of each produ~ \o l:íe am:i19ve·d__ ' éredi_t;93r~ that Angelina uses to buyl)er ·
¡. l?_e(ore pr9ducti9_r;i st9~ r ~m-,d~liv(ry f pO ~Jou~e.Jp an ei¡tended -loan fac:i~ity granted_
ments 'based on legal consistency are apt to mislead for the common Iaw is a
.days net fe rm'), on coniratt\fal remedies: 'to Prihíark by an iliternational cpnsortium of
pr¡ictical code adapted to <leal with the manifold diversities of human life,
('shipment delivered wtlh·a .•c[~~.Y of ,t ~Q ~ · ) an~s( !',11 ¡~ all, a _!rue casca~~ of soñ,traqs
· days or more: 20 p~·r_\ gñ~ de~uction ~ is _behind the simple purchase \:>Y Angelina. and as a great American judge has reminded us, "the life of the law has not
. ~ . been logic¡ it has been experience"' (Read v JLyons & Co ). ·

law; in which such scientific rationalisation has long b een absent. The first
comprehensive book on the English law of obligations was only published in
2010 and is seen as an outlier. What one <loes find, however, are separate
textbooks on contract law, the law of torts, propcrty law, etc. This different
mentality was well captured by the English judge Macmillan who in 1947
called upon his fellow-judges no t to rationalise the law of England: argu-