5. Intention to be Legally bound PDF

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Theory on intention to be legally bound
Test of Earnestness...

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TEST OF EARNESTNESS

SUMMARY What is the "reasonable" intention of the parties. Is there intention to be bound? ◦ What intention was signaled? ‣ It is not about will, it is about signaled intention. ‣ Inward intentions are irrelevant ◦ what the reasonable party would understand as commitment --> there is commitment • Intention varies in different circumstances: ◦ In commercial agreements: the intention to be legally bound is usually assumed. ‣ It is for the other party to prove that this intention didn’t exist, which is very difficult. ‣ There is however the possibility for the parties to exclude this binding effect through a ‘subject clause’ (only written agreements are binding) or a ‘honour clause’ (only in English law, there are no enforceable rights whatsoever). • In gratuitous transactions the intention to be legally bound is not assumed. ◦ Since it is something that legislators do not expect (contract law does not recognise altruism) --> there are formalities ◦ In exceptional circumstances: these contracts are allowed to be revoked ◦ Examples: ‣ Prenups: the system in London allowed for an extremely loose interpretation of prenups" • Consensus ad idem: Parties need to agree on the same things ( a meeting of minds) • Binding: parties need to agree that their agreement is binding by law. ◦ Meaning each of them can go to court and enforce the agreement if necessary.

Intention to be legally bound ◦ PECL Art 2:101 (1): a contract is concluded "if the parties intend to be legally bound and reach sufficient agreement" ◦ Art 2:102 PECL: the intention of a party to be bound by a contract is to be determined from the party's statements or conduct s they were reasonably understood by the other party. ◦ English textbook "the Law of contract": requires an intention of creating legal relations ◦ Germany it is said that the promisor must have intended ‘that his conduct should have legal validity . . . and the promisee [must have] accepted it on this understanding’. • Objective, not subjective intention: ◦ not a question of his subjective intention, but rather of ‘whether the recipient in all the circumstances would conclude from the conduct of the other party in the light of good faith and normal practice that such an intention existed’. • Special cases: ◦ A service which falls within the promisor’s normal business activity will give rise to a contractual obligation, even if it is gratuitous or rendered ‘as a favour’, especially if the promisor should have realised how important it was to the promisee that the service be properly rendered.

Enforceability of promises •

Contracts are to be distinguished from agreements that are not binding, and from promises that are enforceable but unilateral (that is, acceptance requires performance to be enforceable). • To be enforceable a contractual agreement must be based on mutual intent - no mutuality, no contract ◦ Ex. Social pleasantries ‣ The judge and legislator interpret context according to the average consumer, individual --> reasonableness • Where there is no intention to be legally bound --> no contract ◦ "We'll have lunch next week!" ◦ "Sure thing!" • Where there is an intention to be legally bound --> contract ◦ You go inside a store, pick a product and buy it ◦ You are now the legal owner of the product but you are legally obliged to pay for it • Intention to create legal relations ◦ Seriousness: if it is not serious no legal intention can be understood ◦ Reasonableness: whether the average person would consider the exchange to be reasonable, no missmatch ◦ Proof of the existence of an agreement is usually needed. ‣ If there is no written proof, testimonies, reasonableness, context etc.

What is the intention of parties • Dissensus of intention and declaration exists. --> a contract is not concluded if there is no meeting of minds. ◦ Message sent to the wrong person ◦ Message understood differently ◦ Sent under the influence ◦ After consensus ad idem is present, parties might still discuss over the qualities or the value of the exchange --> making the contract void. Objective approach: look for the objective meaning of the words used rather than discover the 'real' intention. ◦ French law: any dissents is regarded as standing in the way of the valid formation of a contract ‣ If one party could reasonably believe the first party intended to say what it did, the latter is to compensate to the other party for the damages ob basis of tort. ‣ Puts more emphasis on the will of the parties ◦ German law: regards a 'mistake in declaration' as ground to void the contract on basis of 119|BGB. ‣ The person declaring must pay damages for the damage that the other party suffers as results of his relying on the validity of the declaration. ◦ Dutch law: prohibits a party from invoking the discrepancy between intention and declaration against someone who could reasonable rely on this party's declaration. ◦ English law: absence of a meeting of minds prevents the contract from coming into being. ‣ Defined objectively: reasonable reliance on a party's declaration will bring the contract about. ◦ French law: any dissents is regarded as standing in the way of the valid formation of a contract ‣ If one party could reasonably believe the first party intended to say what it did, the latter is to compensate to the other party for the damages ob basis of tort. ◦ German law: regards a 'mistake in declaration' as ground to void the contract on basis of 119|BGB. ‣ The person declaring must pay damages for the damage that the other party suffers as results of his relying on the validity of the declaration. • Factors when applying the objective approach: ◦ How easy it was for the addressee to investigate whether the declaration was really intended to mean what it says. ◦ Whether the transaction would be beneficial for one of the parties. ◦ What is customary in a certain branch or location. ◦ The meaning of the disputed term in everyday speech. ◦ The place of contracting. ◦ The expertise and experience of the parties. • Effect of the objective approach: party who justifiably relies on the contents of the other party's unintended declaration can claim that the contract has come into being. ◦ Only when it is impossible to find objective meaning, is there no agreement.

Test of earnestness in problematic cases • Commercial agreements: ◦ Parties to commercial contracts are assumed to have the intention of being legally bound. ‣ English law: it is a legal presumption that a commercial agreement is legally binding. • "If the parties have shown an intention to be contractually committed, albeit while deferring discussion of some aspect or aspects of the deal, then the court will recognise a contract unless what remains outstanding is not merely important but essential in the sense that without it the contract is to uncertain or incomplete to be enoforced." ◦ main exception: when parties explicitly say that they do not intend to be bound. ‣ It can be done by making negotiations 'subject to contract' ‣ Could agree to be bound only in 'honour' • Gratuitous and advantageous transactions ‣ ex. Promise to make a gift (donation) ◦ Intention to be legally bound is not assumed ‣ English law: there is no consideration, because it requires a quid pro quo (something for something) --> hence, unenforceable ‣ Civil law: can be enforceable even without notarial deed (the case of gratuitously giving someone a loan without interests) ◦ Whether they are enforceable depends on how likely it is that the court will find an intention to be legally bound on the part of the promisor. • Social agreements ◦ Promises in the social sphere, usually among friends or people who know each other well enough to enter into an agreement without realising the consequences. ◦ It is not assumed to be legally binding, unless clear and unequivocal evidence exists. ‣ "In their private lives, citizens should be protected from unnecessary interference by the courts" ◦ Cost-sharing agreements can be enforced ‣ Lottery example: • It would be reasonable for them to claim their part if they all contributed to the competition. • Domestic (or family) agreements ◦ Most legal systems assume that people in one household are not legally bound to their promises unless the contrary is proved. ‣ But socially and morally they are arguably more obliged towards each other than anyone else. ◦ Valid agreements: prenups ‣ Civil law courts across Europe have come to accept them as valid if they deal with the financial consequences of living together or of future divorce or separation. ‣ UK law: they are not enforceable for being against public policy

Consideration and Causa Consideration as requirement for validity(English Law) ◦ Each party to the agreement must give, do, or promise something in return. ‣ My payment is consideration for your delivery of (x) ‣ Your delivery of (x) is your consideration for me paying ◦ Consideration is the thing, service or promise that is given in return --> comes from the element of reciprocity ◦ Enforceability only applies if there is a quid pro quo ◦ (1) Consideration must be sufficient, but its adequacy is irrelevant to the law ‣ That a party pays too much or too little in return is not relevant as long as something is given in return for the promise. ◦ (2) Past consideration is not good consideration ‣ any act carried out before a promise is given is not given in exchange for the promise, and does not qualify as consideration. ◦ (3) An existing duty does not amount to valid consideration ‣ If a promisee is already under an obligation to perform (the promise), to perform this duty does not amount to valid consideration. ‣ Such obligation to perform might be a contractual or civil duty • if the promisee does something that he is already obliged to do he suffers no detriment, while the promisor only obtains what he was already entitled to and therefore obtains no benefit from the ‘extra’ promise. ◦ (4) There is no good consideration for the promise to accept part payment of debts as discharge of the entire debt ‣ Something extra needs to be added, such as: I could promise, for example, is to pay back the debt at an earlier date, providing you with a clear benefit and therefore with consideration for your promise. Circumventing consideration... ◦ (1) Agreement by deed • Parties can escape the consideration requirement by putting their agreement in a deed. • This makes it a formal contract • Requirements are laid down in section 1 of the Law of Property Act 1989 ◦ Must indicate it is a deed ◦ Be signed by the maker ◦ The signing must be attested by a witness (who also hs to sign as a witness) ◦ Where a seal used to go, it will contain the words "signed, sealed and delivered". ◦ (2) Promissory estoppel ‣ Your behaviour allows the counter party to rally on it ‣ There needs to be a pre-existing contractual relationship ‣ Promise must have acted in reliance of the promise ‣ No one is allowed to act in a manner contrary to ones own previous conduct, particularly not when another person has acted in reliance of this. ‣ Estoppel prevents a party from going back on what it said or did ‣ They are cases in which a promise was made which was intended to create legal relations and which, to the knowledge of the person making the promise, was going to be acted on by the person to whom it was made and which was in fact so acted on. • In such cases, the courts have said that the promise must be honoured. (...) ‣ Strict requirements must be met: • Pre-existing contractual relationship between the parties. • A clear promise must have been made, that the promisor will not enforce his legal rights against the promisee. • The promisee must have acted in reliance on this promise. • It must be inequitable for the promisor to go back on its promise. • Promissory estoppel is a shield but not a sword --> it can only prevent the enforcement of an existing right, it cannot create a new right.

Causa as requirement for validity (French based jurisdictions: Italy, Spain, Belgium, Romaniaa, Bulgaria) • Causa means quite different things in different contexts ◦ It means having a proper reason to be bound to a promise. ◦ Causa finale: the goal that praise pursue with the contract ◦ Subjective causa: the goal differs from one party to another (Motive of a party to bind itself) ◦ Objective cause: the goal pursued must be possible to realise. ◦ Objectives: ‣ Not allowing contracts which objective cannot be realised ‣ Preventing contracts against public policy or good morals from being valid. • Art. 1133 Code Civil 'a cause is unlawful when it is prohibited by law, when it is contrary to good morals or to public policy" ◦ Causa is no longer needed for this.... • Art. 1162 CC states that a contract cannot derogate from public policy ◦ Now a days it is not used • New principles: ◦ A clause is invalid either because it deprives a party's obligation essentielle of its practical effect (art. 1170 Code civil, as amended) ◦ Or because it creates ‘un déséquilibre significatif entre les droits et obligations des parties’ (art. 1171 Code civil, as amended)....