1. International Contracts Slide Set 2 General Doctrine of Contract Law Formation of Contracts Offer and Acceptance Model Non-conforming Reply to Offer Matti Rudanko

2. Functions of Contract Law 1 Defines if the parties have a binding contract and when the contract has been concluded Defines if the contract is valid –Invalidity grounds Related to the legal capacity and legal subjectivity of parties Related to misbehavior of the parties (Contracts Act) Related to underlying assumptions of the contract (error in motivation + error in expression; Contracts Act) Restricts the content of the contract (+ other contractual freedoms, slide 9) –Especially in consumer protection law, regulation related to employment contracts and competition law International Contracts 2 2

3. Functions of Contract Law 2 Defines the breaches of contract by a party and legal remedies of the counterparty for that Contractual regulation helps when these conditions are not met: Transactions are trouble-free, if all participants –are aware of their preferences and features of the products available –can freely decide about their commitments and terms of contract and –act according to the contract. International Contracts 2 3

4. What Is a Contract? Two expressions of will with the same content unite (legal view) -> agreement=contract –Bilateral legal act vs. unilateral legal act Pacta sunt servanda = agreements must be kept A means for risk management (business administrative view) –The collection of contracts is part of a company’s assets –Contract is an instrument to implement business decisions Net benefits gained from contractual arrangement is positive (Economic view) International Contracts 2 4

5. Contract Types Individual contract - standard contract Single contract – long-term contract Contracts between: –Entrepreneur – consumer (B2C) –Entrepreneur – Entrepreneur (B2B) –Consumer – Consumer (C2C) Different forms: Oral, Specified form (written, with witness, notary) International Contracts 2 5

6. Who is allowed to conclude contracts? Legal subjects: have rights and obligations/may gain rights and become obliged –Natural persons (from birth to death) –Legal persons (from establishment to dissolution) Legal capacity: a person can conclude legal acts with contractual validity (legal persons only by agents) –Natural persons: full legal capacity: at least 18 years old –Lack of legal capacity Court has limited one’s legal capacity Diminished responsibility (drunkness, illness) Legal incapacity = the court has declared one to be legally incompetent or one is under 18 years old International Contracts 2 6

7. Who Is Allowed to Conclude Contracts? Allowed legal acts of legally incompetent person –An incompetent person may enter into transactions which, in view of the circumstances, are usual and of little significance –An incompetent person has the right to decide on the proceeds of his/her own work earned during the Incompetency –Right to manage the assets that the guardian has given him –A 15-year-old person is allowed to enter into/terminate an employment contract International Contracts 2 7

8. About Contractual Legislation 1 Private Autononomy (freedom of contract) -> freedom to decide about: –Form and contents of contract –With whom one makes a contract –Rescission (cancellation / termination) of contract Central laws regulating contracts –Contracts Act 1929 (partly mandatory): How a contract is concluded, invalidity and adjustment of contracts, authority –Sale of Goods Act 1987: Duties and rights of seller and buyer (non-mandatory) –Consumer Protection Act 1978 (mandatory) –Special legislation related to some contracts: housing, employment contract, insurance contract International Contracts 2 8

9. About Contractual Legislation 2 Private autonomy + legislation -> Statute hierarchy: 1. Mandatory law (usually limits the freedom of contract) 2. Contract 3. Established practice between parties, commercial customs 4. Non-mandatory law Example: disagreement about delivery time: 1. Existence of mandatory law? No. 2. What says contract? Nothing If the parties haven’t agreed anything about delivery time, non- mandatory law defines the delivery time Example: Sale of real estate: Oral contract 1:existence of mandatory law? Yes. ->The contract is invalid. International Contracts 2 9

10. About Contractual Legislation 3 General principles of contract law, e.g. –Contracts are binding –Loyality (solidarity) towards the other party –Economic rationality Significance of general principles –Interpretation of law –When no law regulating the matter exists No fixed priority order Can be found from preworks, jurisdiction, precedents and statutes.. International Contracts 2 10

11. Limitations of Freedom of Contract Mandatory legislation to protect common good or the weaker party: Exception from Freedom to decide about form: –Form requirement (Sale of real estate) -> consequence: invalidity –All form requirements in Finnish law consist of demand for written contract + possibly public notary/witness Exception from Freedom to decide about content: –Contracts/terms considered to be against good manner –The position of third party, –Contracts’ inconformity with competition law –Adjustment of contracts. International Contracts 2 11

12. Limitations of Freedom of Contract 2 Obligation to contract (exception from freedom to choose contracting party) –Necessities or goods/services related to everyday life (Water, electricity, mail, bank account; usually obligation of state-owned companies) Controlling position in the market –Misuse of controlling position is prohibited -> compensation for damages if company refuses to make a contract Public procurement (states, municipalities buy services and goods from companies): –The most profitable one must be chosen Criminal Code, Non-discrimination act, Employment contracts act: Prohibition of discrimination International Contracts 2 12

13. On Permanence of Contracts Pacta sunt servanda = agreements must be kept, Possibilities to terminate the contract: –Cancellation of contract (grounds in contractual legislation): serious breach of contract –Notice (Long-term contracts) Freedom of notice main rule Regulation on procedures, grounds and periods of notice (rent, employment relationship) Parties can agree on procedures, grounds (e.g. changes in conditions) and periods of notice Contract is invalid (Contracts act Ch. 3:duress, inappropriate persuasion etc.) Adjustment of contract (e.g. changes in conditions) International Contracts 2 13

14. On Permanence of Contracts 2: Possibilities to Alter the Terms of the Contract: Main rule: Unilateral alteration not possible (exception: special agreement on right of alteration ) Parties may agree about altering terms Renegotiation- and hardship –terms entitle to multi- or unilateral alteration Parties agree that only a third can alter terms Implied altering (consent by silence or contributing behavior) Court can alter an unreasonable term (adjustment) International Contracts 2 14

15. Conclusion of Contract Conclusion types according to Contracts Act (1929) –Offer- Acceptance (and auction) Other types –In Finnish law a contract is established if a consensus is reached about engaging into a contract and contents of the contract –Contract negotiations: consensus reached step by step, not at once (cf. offer – acceptance –model) –Contracts based on circumstances: parking, public transport… –Implied contract: cooperation between parties which indicates that contractual relationship exists but difficult to trace when or how the contract is concluded. International Contracts 2 15

16. Offer-Acceptance -Model 1 GENERAL –According to the offer-acceptance- model, a contract is concluded by an offer and acceptance given to offer (both required) –Parties: Offeror (gives an offer) and offeree (gives a reply/ acceptance) OFFER: –Must be formulated in a way that the offeree is able to answer “yes” or “no” to the offer –Binding nature of an offer => the offeree has the option of concluding the contract by answering “yes” –The binding force s of the offer starts when the offer has come to the offeree’s attention. International Contracts 2 16

17. Offer-Acceptance -Model 2 Validity time of the offer: –The acceptance must reach the offeror during validity time, limited by the offer The Contracts Act: the acceptance shall reach the offeror within a reasonable time –An offer made orally without granting a fixed time for acceptance shall be accepted immediately; unless an immediate acceptance is given, the offer is considered rejected International Contracts 2 17

18. Offer-Acceptance-Model 3 ACCEPTANCE –Acceptance (“Yes”) that reaches the offeror on time (agreed / reasonable time / oral->immediately) concludes a contract OTHER ANSWERS: –A. ”No” -> Binding nature of offer lapses -> No contract –B. No answer during the validity time of the offer -> Binding nature of the offer lapses -> No contract –C. ”Yes” + expression of will differs from the offer = new offer Binding nature of the original offer lapses. By accepting the new offer the original offeror concludes the contract International Contracts 2 18

19. Offer-Acceptance-Model 4 Contracts Act: “A reply that purports to be an acceptance but which, due to an addition, restriction or condition, does not correspond to the offer, shall be deemed a rejection constituting a new offer. ” D. ”Yes” but acceptance arrives late = new offer –By accepting the new offer the original offeror concludes the contract –Contracts Act: ”An acceptance that reaches the offeror too late shall be deemed to constitute a new offer made by the original acceptor.” International Contracts 2 19

20. Offer-Acceptance-Model: Exceptions to C and D C: shall not apply if the offeree has considered the reply to correspond to the offer and the offeror must have understood the same. –If the offeror in that case does not wish to accept the reply, he/she shall, without undue delay, notify the offeree thereof; –otherwise a contract shall be deemed concluded on the terms contained in the reply –Difference between C and error in expression (Contracts 1): relationship between will and expression of will International Contracts 2 20

21. Offer-Acceptance-Model: Exceptions to C and D D: shall not apply if the acceptor has assumed that the acceptance has reached the offeror within due time and the offeror must have understood the same. –If the offeror in that case does not wish to accept the acceptance, he/she shall, without undue delay, notify the acceptor thereof; –otherwise a contract shall be deemed concluded by way of the acceptance International Contracts 2 21

22. Cf. The International Regulation Unidroit Principles article 2.1.11 (and CISG art. 19) (Modified acceptance) (1) A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer. (2) However, a reply to an offer which purports to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, –unless the offeror, without undue delay, objects to the discrepancy. If the offeror does not object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. International Contracts 2 22

23. The International Regulation, Cont. Unidroit Principles article 2.1.9 (and CISG art. 21) (Late acceptance. Delay in transmission) (1) A late acceptance is nevertheless effective as an acceptance if without undue delay the offeror so informs the offeree or gives notice to that effect. (2) If a communication containing a late acceptance shows that it has been sent in such circumstances that if its transmission had been normal it would have reached the offeror in due time, the late acceptance is effective as an acceptance –unless, without undue delay, the offeror informs the offeree that it considers the offer as having lapsed. International Contracts 2 23

24. Offer-Acceptance -Model 5 REVOCATION OF AN OFFER OR ACCEPTANCE An offer or an acceptance that is revoked shall not be binding, if the revocation reaches the person to whom it is addressed before, or at the same time as, the offer or acceptance comes to his/her attention Revocation possible also later if agreement about it. International Contracts 2 24

25. Offer-Acceptance-Model 6 OTHER ISSUES: Distinguishing binding offer and mere preparation of contract: –Offeror’s desire to bind himself, –Expressions must be clear and detailed enough so that the offeree can decide about her commitment, –Expressions have to be directed to limited group of people. Marketing advertisements: –Not considered as binding offers but rather invitations to make offers. International Contracts 2 25

26. Standard Terms 1 Standard terms: –Term collection, drawn up beforehand –Intention to use the collection in multiple contract relations –Function: to minimize transaction costs, uniform contractual practices Different kinds of standard terms: –Standard terms drafted unilaterally –Standard terms drafted bilaterally (agreed documents) –Standard terms drafted by company/entrepreneur and confirmed by public officer (in Finland the Consumer Ombudsman) The need to protect the counterparty varies in these situations. International Contracts 2 26

27. Standard Terms 2 Protection - what for? –Enhancing the level of awareness about the content and consequences of standard terms, especially in case of unilaterally drafted terms The adverse party is protected in two respects -> compensating the imbalance between parties: –Criteria 1: How the standard terms are attached to the contract –Criteria 2: Demand to highlight strict and surprising terms International Contracts 2 27

28. Standard Terms 3 Attaching the standard terms to the contract – valid alternatives: –1. Standard terms are included in the same contract paper that is used. –Web-based trade: buyer must read and approve standard terms before ordering. –2. Contract paper refers to the terms and states them to be applied Prerequisite: Adverse party must have had an opportunity to explore the content of the standard terms = Adverse party must be aware of where he/she can explore the terms or the terms have been presented to him/her beforehand International Contracts 2 28

29. Standard Terms 4 Attaching the standard terms to the contract (cont.) –3. Standard terms become part of contract due to commercial or contractual practice, especially when 1) standard terms are formed together by both parties (“agreed documents”) and when 2) same standard terms have been used before by parties. Strict and surprising terms –Demand to highlight -> How? –What is a non-strict term: Comparison with non-mandatory law and general principles in contract law If non-strict term didn’t appear among terms, the balance of obligations wouldn’t change International Contracts 2 29