Formation of (International) Contracts Content Precontractual stage Gathering information First contacts Letter of Intent Comfort letter Liability for breaking up the negotiations Conclusion of a contract Offer Revocation of an offer Acceptance Acceptance and counteroffer Content Specific problems relating to general conditions Buyer's agreement to the seller's standard terms General conditions vs. verbal agreement Battle of forms Contract First contacts conclusion Performance Preconctractual stage Contractual stage Gathering information About the country Country risk reports About potential contractual partners First contacts Inquiries Sending catalogues advertisement Invitations to contract Invitations to submit tenders Letters of intent Comfort letters Nature of statements Not contractual statements Can have legal effect Contract Misrepresentation Misuse of confidential info Liability for breaking up the negotiations Non contractual liability Offer: CISG, Art. 14(1) A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. No intention to be bound Advertisement Newspapers, radio, TV WWW Sending catalogues Tenders? May be an offer where the invitee binds himself to accept the best tender Exceptions Carlill v. Carbolic Smoke Ball Co. 1893 EU Principles, Art. 2.201 (3) EU Principles, Art. 2.201 (3): A proposal to supply goods or services at stated prices made by a professional supplier in a public advertisement or a catalogue, or by a display of goods, is presumed to be an offer to sell or supply at that price until the stock of goods, or the supplier's capacity to supply the service, is exhausted. Liability for breaking up the negotiations The party has got a better offer from a third party, The party sees that it is impossible to reach an agreement The party sees, that the business proposals of the other party are not feasible, The party sees, that itself would not be able to perform under the terms of the future contract The party loses its confidence in the skills and abilities of the other party, … Freedom of contract Good faith (Reliance protection) Liability for breaking up the negotiations Transatlantic Recruitment Services v. Aruba 1993 … Legislation? Unidroit Principles Art. 2.15, “negotiating in bad faith” Slovenian Code of Obligations 2002, Art. 20 Project of the Dutch Civil Code, Art. 18.104.22.168 Unidroit P. Art. 2.15 (1) A party is free to negotiate and is not liable for failure to reach an agreement. (2) However, a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party. (3) It is bad faith, in particular, for a party to enter into or continue negotiations when intending not to reach an agreement with the other party Slovenian law – Art. 30 A party is at all times entitled to break-off the negotiations Is liable for damages: If negotiating without a serious intention to conclude a contract If abandoned this intention without a justified reason Dutch case law Baris Riezenkamp 1956 Supreme Court: “By starting negotiations, parties enter into a legal relationship where they have the duty to observe the requirements of good faith (redelijkheid en billijkheid).” Project of the Civil Code Dutch case law Plas v. Valburg 1982 3 stages 1. No liability 2. Liability for (additional) expenses 3. Expenses and compensation of lost profit: “where a party could justifiably expect that agreement would be reached” Which stage? Normal expenses (branch) Additional expenses Required by the other party Transatlantic Recruitment Services v. Aruba 1993 Decided by the Court of Justice of the Netherlands Antilles and Aruba No cassation by the Supreme Court (Hoge Raad) The legal rules were correctly applied The facts were misjudged Bad lawyer for the government English law British Steel Corp. v. Cleveland Bridge Co.) Letter of intent of CB to BSC Terms of the proposed contract Request to begin production immediately BSC manufactured and delivered No contract concluded Quantum meruit (unjust enrichment) Exclusion of liability “This letter is only a part of preliminary negotiations. We intend to be bound only upon the execution of a contract in writing.” Conditional statements Without prejudice Subject to contract Subject to satisfactory survey Unclear drafting “It is further mutually understood and agreed by and between the parties to this agreement that the validity of said proposed agreement is subject and conditioned upon the parties agreeing upon and reducing to writing all terms and conditions necessary and incidental to the validity of said proposed agreement.” “To be enforceable, an agreement between the parties must be written and signed by both parties.” “This letter of intent does not bind either of us and creates no rights or obligations.” Letter of intent Not a contractual statement Sender wants the recipient to rely on it, on order to make preparations Preparations are normally at party´s own expense Not if made in reliance upon a letter of intent Comfort letter Only moral, not legal obligations Parent Comfort letter Bank Subsidiary Loan Kleinworth Benson v. Malaysian Mining Co. 1989 Subsidiary borrows money, parent Co. gives “assurance”, not guarantee to the bank “It is our policy to ensure that the business of …… is at all times in a position to meet its liabilities to you under the above arrangement.” Subsidiary goes bancrupt 1st instance: liability Appeal: only moral obligation Commonwealth Bank of Australia v. TLI Management, 1990 : »We confirm that the company will complete takeover arrangements …« Takeover did not take place No legal obligation Denmark (Supreme Court) “In view of the fact, that the Bank has placed credit facilities at the disposal of the subsidiary, the undersigned parent company hereby declares, that … we shall if required transfer to the subsidiary sufficient liquid funds to make sure, that the subsidiary will at all times be able to fulfil it’s obligations towards the bank”. Clear and unconditional promise Conclusion of a contract Offer an d acceptance Agreement on essential points Conclusion by conduct (performance) Unidroit P. Art. 2.1: “A contract may be concluded either by the acceptance of an offer or by conduct of the parties that is sufficient to show agreement.” CISG, Art. 23 “A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention.” Offer Sufficiently definite Intention to be bound Who is who? Sale of goods the goods ordered which should be described without ambiguity; the purchase price and the terms of payment; and the terms of delivery, including instructions for packing and invoicing; transportation and insurance. EU P., Art. 2.1 (1)A proposal amounts to an offer if: a. it is intended to result in a contract if the other party accepts it, and b. it contains sufficiently definite terms to form a contract. (2)An offer may be made to one or more specific persons or to the public. Unidroit P., Art. 2.2 A proposal for concluding a contract constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. CISG, Art. 14 A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price. Revocability In principle irrevocable (firm) Revocable (consideration) In principle revocable Examples Slovenian CO Art. 25: An offer is binding, unless the offeror has indicated the opposite or if the opposite can be derived from the circumstances. A firm offer for the purchase or sale of goods given by a merchant in a signed writing is not revocable for lack of consideration. UCC, Art. 2-205: CISG, Art. 16 (1) until a contract is concluded an offer may be revoked if the revocation reaches the offeree before or at the same time as the offer. (2) However, an offer cannot be revoked: if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer. Acceptance Mirror image rule Offer and counteroffer Northland Airliners Ltd. v. Dennis Ferranti Meters Ltd. Seller: "Confirming sale to you GM aircraft … , Please remit £5,000." Buyer: "This is to confirm your cable and my purchase GM aircraft terms set out your cable … £5,000 sterling forwarded to your bank to be held in trust for your account pending delivery … Please confirm delivery to be made thirty days within this date." General conditions Most enterprises use them Mostly not agreed upon Mostly sufficient that the other party had a reasonable possibility to read them Possibly problematic general conditions Exoneration clauses Choice of forum clauses Choice of law clauses EC Regulation 44/2001, Art. 23 …such an agreement conferring jurisdiction shall be either: (a) in writing or evidenced in writing; or (b) in a form which accords with practices which the parties have established between themselves; or (c) in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned. General conditions vs. verbal agreement Specific agreement overrides general terms No problem, if written Verbal promise not to rely on a term in general conditions difficult to prove Battle of forms - example Buyer: Any controversy or claim arising out or relating to this contract or the breach thereof, shall be settled by the ICC arbitration held in Vienna, Austria, in accordance with the rules of the ICC. Seller: Any controversy or claim arising out or relating to this contract or the breach thereof, shall resolved solely by recourse to the courts and not by arbitration. Battle of forms Mirror image rule First shot or last shot Elimination of conflicting terms Battle of forms B.R.S. v Crutchley, 1967 Butler Machine Tools Co. Ltd. v. Ex-CellO Corp. 1979 “… on the terms and conditions stated therein” ORDER FORM: ……. …… ……. Signed: the buyers “we accept your order on the terms and conditions stated therein” Signed: The sellers Article 2-207(1) UCC A definite and seasonable expression of acceptance or a written confirmation …operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. Article 2-207(2) UCC 1. 2. 3. The additional terms are to be construed as proposals for addition to the contract. Between “merchants" such terms become part of the contract unless: the offer expressly limits acceptance to the terms of the offer; they materially alter it; or notification of objection to them has already been given or is given within a reasonable time after notice of them is received. Article 2-207(3) UCC Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract of sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. Dutch Civil Code Art. 6:225(3) Where offer and acceptance refer to different general conditions, the second reference is of no effect, unless it expressly rejects the general conditions in the first reference. CISG, Art. 19 (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 orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance. (3) Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party's liability to other or the settlement of disputes are considered to alter the terms of the offer materially. Battle of forms Buyer: Any controversy or claim arising out or relating to this contract or the breach thereof, shall be settled by the ICC arbitration held in Vienna, Austria, in accordance with the rules of the ICC. Seller: Any controversy or claim arising out or relating to this contract or the breach thereof, shall resolved solely by recourse to the courts and not by arbitration.