1. Legal Framework for Business Transactions
The Law and Development Institute
Diploma / Certificate in Law and Development Program
Lecture 2
Copyright Law and Development Institute

2. Copyright Law and Development Institute
I. Introduction
1. Legal framework for business transactions
- Legal framework relevant to business transactions: a wide range of private and public laws, including contract law, secured transactions, property rights, and government regulations
- Contract: legally binding business commitments – essential constituent element for business transactions, creating a “price” for not performing the promised transaction – also clarifies the terms of transaction
- Contract formed with or without formal documentary execution: day-to-day business transactions
- Relational contracts (social sanctions) / private contracts (civil sanctions) / public contracts (standardized terms and prices, regulatory sanctions)
- Implicit call for reciprocity in contracts
- Protection of rights and enforcement of obligations of the parties in business transactions essential for business transactions and economic growth
Copyright Law and Development Institute

3. Copyright Law and Development Institute
I. Introduction (cont.)
2. Contract law and secured transactions - Contract law: formation of contract, validity of contract, rights and obligations of the parties, and forms, defense - Private property rights prerequisite to valid contract transactions among private individuals - Contract cornerstone for the market economy: no market transactions without valid contracts - Contract law: primary function - recognize, protect, and enforce contractual rights - Enforcement related to the issues of institutional effectiveness and state capacity - Secured transactions: create a legal interest (security interest) in property to secure credit - Promoted as means to enhance business transactions in developing countries - Use of customary property rights in secured transactions
Copyright Law and Development Institute

4. II. Constituent Elements of Contract Law
1. Contract Validity
- Question of subject matter for contract: what can be contracted among private individuals? liberal or restrictive approach
- Related to private property rights: limit to private property ownership: e.g. strategic mineral resources:
- Grant contractual capacity by licensing (in the development context)
- Export and import licensing: relevant to economic development goals, potential revenue source for government
- Government authorization for land transactions
- Contract validity based on personal capacity: i.e. minority (in developing countries, liberal approach necessary to enable minorities to engage in necessary economic activities)
- Contract validity based on public policy: illegality of subject matter, prohibition against usury
- Can control the scope of business transactions among private parties by defining valid contacts: implications for economic development
Copyright Law and Development Institute

5. II. Constituent Elements of Contract Law (cont.)
2. Contract Formation
- Technical issues: offer and acceptance
- Issues: validity of an offer: terms must be clear and definite
- Acceptance should not vary the terms of the offer
- To facilitate economic development: liberal approach helpful in the assessment of offer and acceptance
- Terms inconsistent between offer and acceptance: contract formed? If so whose terms prevail?
- Battle of the forms: UCC approach – distinction between layman and merchant
- Flexible approach – what has been stated and has been accepted by conduct
- Consideration: requirement of common law contract. consideration absent in most civil law jurisdictions. Limited implications for commercial transactions
- United Nations Convention on Contracts for the International Sale of Goods (CISG, 1980) governs contract formation and rights and obligations of the parties for the sale of goods between parties in 83 signatory countries: can be excluded by the parties
1. Battle of the forms (UCC): 1) one party or both parties non merchants – contract formed on the terms of the original offer; 2) both party merchants – contract formed on the terms of acceptance unless the original offer expressly limits acceptance to the terms of the offer, the new or changed terms materially alter the contract, or the offeror objects to the new or changed terms within a reasonable period of time.
Copyright Law and Development Institute

6. II. Constituent Elements of Contract Law (cont.)
3. Form, defense, discharge
- Form: requirement of a signed writing: i) transfers in the interests in land, ii) contracts that cannot be performed within a year, iii) collateral promises iv) for the sales of goods over certain value - local practice important
- Defense: mistake, misrepresentation, duress, and undue influence
- Contract performance in compliance with the terms of the contract: “substantial performance” (meeting all the terms that are essential to achieve the objective of the contract) subject to damages.
- Legal standard for the assessment: reasonable compliance (local standard)
- Privity of contract: c.f. third party rights: intended beneficiary or incidental beneficiary
- Unequal bargaining power between the parties: economic efficiency v. social justice & equity
Copyright Law and Development Institute

7. II. Constituent Elements of Contract Law (cont.)
4. Remedy for breach
- Remedy for contract breach (non-compliance): money damages
- Measure of damages: “expectation damages”: compensate for lost bargain. example
- “Consequential damages”: damages for foreseeable consequential loss
- Liquidation damages
- Contract cancellation for a material breach: substantial performance standard: present & anticipatory
- Specific performance or injunction: problem of court supervision
- Rescission and restitution
- Reformation of contract
- Remedies effective in the context of economic development: low- cost enforcement: money damages, order of specific performance for projects essential for economic development
Copyright Law and Development Institute

8. III. Contract Enforcement
1. Formal v. informal enforcement
- Formal enforcement: enforcement by state following court proceedings
- Douglas North et al. development of enforcement mechanism of contract essential for economic development
- Requires institutional capacities and formal enforcement mechanism: implementation cost to the state
- May increase transaction costs: a risk of creating an excessively judicious culture with potential ramifications in the early stages of economic development
- Informal enforcement: enforcement based on business reputation, personal honor, business interest, and community pressure
- Early stages of economic development: lack of formal enforcement not barrier to economic development - Trebilcock
- Later stages of economic development: increased complexities in business transactions requiring formal enforcement mechanism
Copyright Law and Development Institute

9. Copyright Law and Development Institute

10. III. Contract Enforcement (cont.)
2. Strategy for developing countries
- Case for gradual adoption of formal enforcement: benefit/cost analysis
- Flexible approach to make use of conventional (informal) enforcement mechanism
- Use of state power to focus on recurring problems in business transactions suppressing economic growth
- Use of arbitrations tailored to transactions in question
- Linking criminal liability to contractual breach: e.g. fraud
- For foreign investments: helpful to create services by state to provide contract-related services on foreign investment
- Bilateral investment treaties (BITs) : setting certain contractual terms in favor of foreign investments such as most-favored nation requirement and national treatment requirement
Copyright Law and Development Institute

11. IV. Limitations on “Freedom of Contract”
1. Case for licensing /government authorization
- Strategic natural resources ; import and export transactions; land transactions
- Necessity for coordination with economic development policies, particularly in the early stages of economic development
2. Control based on public policy
- To correct unequal bargain powers between the parties: e.g. consumer finance, insurance contract
- In the early stages of economic development: lack of supply competition - need to address the unequal bargaining power by empowering state to intervene in the contract on behalf of weaker customers
- Contract rescinded for state action: e.g. expropriation
3. General restrictions on the freedom of contract?
- Unfeasible and unproductive in any stages of market-based economic development
- market proliferation in socialist North Korea: freedom of contract essential for economic development
Copyright Law and Development Institute

12. V. Secured Transactions
- Create a security interest (preferential right to possession or control of personal property) to enhance access to credit
- Advantage: a single property can be used to support a series of loans; debtor does not have to have title to the property; any property susceptible to monetary valuation, whether present or future, tangible or intangible, my create a security interest
- A security interest may be created by contract
- Public notice: by possession or control of collateral or by registration
- Registration: priority created by the time of filing
- Case for secured transactions: contribution to economic development by creating access to cheaper credit
- Effectiveness of notice and cost of setting up registration system
- Possibility of conflict between communal rights in a property and a security interested created through a formal mechanism
- Legal facilitation of secured transactions must be done in careful consideration of informal property rights and local loan practice
- Small-scaled consumer loan – vehicle for economic development? c.f. East Asian cases
Copyright Law and Development Institute

13. Copyright Law and Development Institute
V. Final Points
1. Legal framework for business transactions such as contract law: may contribute to economic development: reduces transaction costs by clarifying and protecting rights and obligations of parties to transactions
2. Contents of contract law: tend to have universal elements but should recognize prevalent local practice to increase applicability and effectiveness.
3. Promotion of formal contract enforcement: evidence does not necessarily support that it is essential for economic development, particularly in the early stages of economic development
4. Informal contract enforcement should be recognized and utilized in the early stages of economic development. Formal enforcement becoming more necessary in the later stages of economic development
Copyright Law and Development Institute