German Doctrine of “Culpa in Contrahendo”
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The wrong committed in the process of developing contract
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Idea that there is a duty of negotiating with good faith – being mindful of the other party’s interests, not just at the contract’s conclusion, but during negotiation
German Civil Code (2002)
Section 311
Obligations created by legal transaction and obligations similar to legal transactions
(1) In order to create an obligation by legal transaction and to alter the contents of an obligation, a contract between the parties is necessary, unless otherwise provided by statute.
(2) An obligation with duties under section 241 (2) also comes into existence
by the commencement of contract negotiations
the initiation of a contract where one party, with regard to a potential contractual
relationship, gives the other party the possibility of affecting his rights, legal
interests and other interests, or entrusts these to him or
similar business contacts,
[…]
Section 241
Duties arising from an obligation
(1) By virtue of an obligation an obligee is entitled to claim performance from the obligor. The performance may also consist in forbearance.
(2) An obligation may also, depending on its contents, oblige each party to take account of the rights, legal interests and other interests of the other party.
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CCQ 1425-1432, 1379, 1434-1436, 1377, 1384
Fact Pattern from Class
CML – Royal Bank of Canada v. Kiska |
Jurisdiction
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Canada
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Facts
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John’s brother signed a Bank agreement just after turning 18, guaranteeing John’s hairstyling business. John had already given security to the Bank. The brother gained nothing personally, the Bank guarantee containing no promise to the brother. However, the Bank guarantee did say [SEAL] next to his name and after the brother left, the Bank applied a wafer to the paper. The Bank is suing to enforce this guarantee.
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Issues
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Is Kiska liable for the guarantee of the debt?
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Holding
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Yes RBC.
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Reasoning
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Majority:
Is the agreement made under seal?
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No, the promisor has to apply his seal to indicate his seriousness. There must be the impression that you want to be bound to a sealed document. There should be some formality preserved (the Bank can’t just apply the seal later).
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“The respective words are merely anticipatory of a formality which must be observed and are not a substitute for it. I am not tempted by any suggestion that it would be a modern and liberal view to hold that a person who signs a document that states it is under seal should be bound accordingly although there is no seal on it. I have no regret in declining to follow this path in a case where a bank thrusts a printed form under the nose of a young man for his signature. Formality serves a purpose here and some semblance of it should be preserved, especially when it is recalled that the common law did not require either a testimonium or an attestation clause to make a sealed instrument enforceable; the operative act was the affixing or adoption of a seal.”
Is there an intention to create legal relations?
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Yes. The brother realized that this was a legal document and that it entailed some risk. Just because he hopes he won’t be held to the contract, doesn’t mean he didn’t intend to create any legal relations. He wanted to help his brother and this was the only way to do it.
Is there an offer?
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Yes. There is a unilateral offer of contract from the brother to the bank. This is where the dissent goes off (because this unilateral offer that the majority reads into the agreement is crap).
Is there an acceptance?
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Yes. The Bank starts to forbear from suing his brother immediately (and thus, the brother cannot revoke this promise at all).
Is there consideration?
1) Is the recital of consideration enough?
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No. Recitals are never enough; this is not a peppercorn. They merely shift the burden of proof – now you must prove you didn’t get anything instead of the other proving he did give you something.
2) Does this pass the Bargain Test?
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Yes. The brother gave a guarantee and in return the Bank performed – they didn’t sue John for a “reasonable” length of time. (compare with Stott – idea of forbearance) The brother may not have personally gained; however, consideration can confer benefit or act as a detriment. The brother bargained for the bank’s detriment (in forbearing to sue John). Consideration must flow from the promisee, but not necessarily to the promisor.
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“No court of common law has ever said that there should be a consideration directly between the persons giving and receiving the guaranty. It is enough if the person for whom the guarantor becomes surety has benefit, or the person to whom the guaranty is given suffer inconvenience, as an inducement to the surety to become guaranty for the principal debtor.“
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“In such a case as this it is not necessary that there should be an arrangement for forbearance for any definite or particular time. It is quite enough if you can infer from the surrounding circumstances that there was an implied request for forbearance for a time, and that forbearance for a reasonable time was in fact extended to the person who asked for it.”
3) Mutuality of obligation?
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Not required for a unilateral contract.
Is the contract enforceable?
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Yes. “Reduced to its simplest terms, what took place was this. The guarantee signed by the defendant, even though not a contract under seal, was an offer of what the defendant was prepared to do in exchange for future action on the part of the plaintiff and was offered to the plaintiff for the purpose of inducing the plaintiff to do some act or refrain from doing some act. At the time the defendant made this offer the plaintiff could have (a) ceased to deal with the brother; (b) demanded repayment and sued to recover the amount due to it by the brother, and (c) realized upon the other security held by it. The defendant's offer was made on or about March 16, 1963, and was not withdrawn down to the date of the institution of this action on or about February 25, 1965. Subsequent to March 16, 1963, the plaintiff for two and a half months refrained from realizing upon the security it held. For an even longer period, at least down to September 17, 1964, when the brother made an assignment in bankruptcy, the plaintiff refrained from instituting action to recover from the brother the money due to it. It is obvious that some forbearance did occur after the offer was made. It is a reasonable inference from the conduct of the plaintiff that there was forbearance.“
DISSENT:
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“It is desirable to note at the outset that the plaintiff's claim is based squarely on a written guarantee, and there is no room for any transformation of the transaction between the parties into an offer of a unilateral contract by the defendant, calling for an act of forbearance by the plaintiff.”
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“The plain fact is that the bank cannot have it both ways. It cannot rely on the subsequent fact of forbearance to bind the defendant (who expected but did not get a promise of forbearance in return for his guarantee) and at the same time sue the defendant on the written document. Indeed, the bank never had forbearance in mind when the defendant signed the guarantee form. What it had in mind was to bind the defendant by a deed.”
Only because they failed to make the person properly seal the document, the judges construct a unilateral contract. The bank had in mind that it would bind Kiska by the deed.
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Ratio
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A formal seal can make the contract absolutely binding even without consideration but the formalities must be followed.
Forbearance to call in a loan is consideration.
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Comments
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Even if the Bank does not actively mislead or put pressure on the Def. Is the knowledge/experience of the Bank superior to such a degree that in light of this inequality of bargaining power it seems unfair for the Bank not to war / inform the inexperienced Def.?
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In other words was the Bank under a Duty to do something? Requirement of Good Faith, banks have a “Fiduciary Duty”
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Contracts are voluntary creations of obligations by consent (“Private autonomy, freedom of will”). When is entering into a contract not a “voluntary act”?
Duress:
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Paradigm of coercion that “vitiates consent” (Actual or threatened violence)
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Modern modification: Economic Duress (Remember the Pre-existing Duty Rule – economic duress fits the policy rationale behind this old rule better, but it’s only recognized in England.)
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Duress is also called VIS COMPULSIVA
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If you put your hand on top of their hand to force them to write their name, this is not even duress, nothing is voluntary. This is VIS ABSOLUTA
Undue Influence:
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“Unconscientous use by one person of power possessed by him over another” – typically, vitiation of consent by the abuse of a relationship of trust and confidence
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One person is in a “position to dominate the will” of another, the other person is not able to act independently
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Such influence is assumed in relationships between doctor and patient, parent and child, attorney and client
Unconscionability:
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One person taking undue advantage of another, by reason of considerable inequality of bargaining power
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Needs to be such an unfair deal that it “shocks the conscience of the Court”
Back to Kiska:
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Duress? No
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Undue influence? Not exerted by the Bank! No evidence of knowledge or even conspiracy
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Unconscionability? No evidence of misrepresentation/persuasion; transaction in itself not shockingly unfair
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All we know is that the Bank did nothing - e.g. inform the Def. about the possible risks/consequences or provide legal advice.
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Even if the Bank does not actively mislead or put pressure on the Def., is the knowledge/experience of the Bank superior to such a degree that in light of this inequality of bargaining power it seems unfair for the Bank not to warn / inform the inexperienced Def.?
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In other words: was the Bank under a DUTY to do something ?
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Requirement of GOOD FAITH – this brings up a spectrum, how far down this road does the bank need to go? Time to read and ask questions, a lawyer, etc
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Bank has a “Fiduciary Duty” to its clients not to give them an unfair agreement (this is somewhere between undue influence and unconscionability)
Institutionalized Protection of Weaker Parties
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Situative: Contract of Adhesion (see, e.g., definition in Art. 1379 CCQ). Like a fly in the flypaper, you are stuck (Leff); you cannot bargain. These are usually standard form contracts. Are these even contracts in the legal sense? Is there still a meeting of the minds? Is yes or no enough? Or is this something else? Are you still able to negotiate parts of the contract?
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Consumer contracts are mostly contracts of adhesion (take it or leave it)
Contracts of Adhesion:
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Horizontal Ordering? The Case of the “contract of adhesion”
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Does a “contract of adhesion? In any way reflect the actual “consensus”? See Art. 1379 CCQ
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What is Leff’s polemic catch phrase supposed to express?
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Should the document “contract” equal the “contract” in the legal sense?
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Art. 1379
A contract of adhesion is a contract in which the essential stipulations were imposed or drawn up by one of the parties on his behalf or upon his instructions, and were not negotiable.
Any contract that is not a contract of adhesion is a contract by mutual agreement.
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Functional: Consumer Contracts (see, e.g., definition in Art. 1384 CCQ). Not necessarily a Contract of Adhesion, but most are.
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Art. 1384, CCQ
A consumer contract is a contract whose field of application is delimited by legislation respecting consumer protection whereby one of the parties, being a natural person, the consumer, acquires, leases, borrows or obtains in any other manner, for personal, family or domestic purposes, property or services from the other party, who offers such property and services as part of an enterprise which he carries on.
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In Europe, need justification to come up with measures to modify private terms on loans contracts, bargains by merchants, time shares – most countries try to adhere to the idea of consumer protection as exceptions – outcry against giving up autonomy through consumer protection.
Structural inequality – completely fundamental to consumer protection – even business savvy consumers are still vulnerable as private persons.
Interpretation contra proferentem – Art. 1432 CCQ (against the person proffering the terms)
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Art. 1432
In case of doubt, a contract is interpreted in favour of the person who contracted the obligation and against the person who stipulated it. In all cases, it is interpreted in favour of the adhering party or the consumer.
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No integration of surprising and unfair terms – Art. 1435
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Fine print terms that say that the offeror is never liable
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These terms need to be very clear (give notice)
Art. 1435
[…]
In a consumer contract or a contract of adhesion, however, an external clause is null if, at the time of formation of the contract, it was not expressly brought to the attention of the consumer or adhering party, unless the other party proves that the consumer or adhering party otherwise knew of it.
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Representation
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If representation is present, if misrepresent then the party proffering the terms cannot rely on the printed contract – the contract might say any oral parts can’t be relied upon therefore not printed terms
Arthur Allen Leff, “Contract as Thing” on Adhesion – CB p. 325
Contract as Contract
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Contract developed as a way to identify certain “contemplated trading transactions” for a particular and predictable treatment
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Developed as part of the free-enterprise, free-will, free-market economic system
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Different elements that might be part of identifying something as a “contract”:
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Species of interpersonal behaviour (between two people, rather than between a person and a thing)
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Communicative behaviour
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Mostly expressed in future tense, subject is future behaviour and expected role of parties
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Dealing with bargain or trade, rather than gifts and gratuitous matters
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Limited terms, limited relationship between parties (not entering into close interpersonal relationships)
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Process: joint creative effort
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Result: not an expression of the will of any one of the parties – a combination of both of their wills
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Result: most often a piece of paper with words on it that express the terms of the agreement
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Most likely that if all of the above elements are present, the agreement will be classified as a “contract”
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However, certain transactions have split off from this series of identifying elements – e.g. labour contracts, insurance contracts, and sales transactions – each of these developed a different set of identifying criteria
Contract as Contract of Adhesion
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One party gives the other a piece of paper with terms of the deal, the other party has to take it or leave it
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The “joint creative effort” is missing
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“Joint creative effort” did not necessarily create fairer terms, but rather lessened the probability of “monolithic one-sidedness”
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This became difficult in sectors of commerce where one party could impose most of its own terms – nothing to prevent highly disproportionate contracts from being created
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Terms imposed by one party, not by both parties or by custom
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Law tried to deal with these
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Regulation of insurance policies (textual)
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Interpretation in the court – against the actual meaning of the contract
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Fraud and duress stretched
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Consideration doctrine expanded
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Thorough and systematic solution very difficult
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Creation of a new category: contracts of adhesion
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Practical application of this category of contract is “a disaster” – why? no legal theory that is sufficient to deal with one-sided consumer deals
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Leff postulates that “Contracts of Adhesion” are not actually contracts at all!
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All that is left of the elements of a contract from before are:
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They are still communicative
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Still mercantile
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Still bounded (relationship at arm’s-length)
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However, process is missing
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Phrase “contract of adhesion” focuses on the fact that an adhered-to document gives no protection against the over-reaching and unfair terms that would be avoided by a process of negotiation
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Doesn’t answer the question of WHEN to enforce contracts of adhesion, and when not to
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What separates a bad contract of adhesion from a good one?
Contract as Thing
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Leff suggests that pre-fabricated, mass-produced goods that are purchased by a person who has no way of knowing whether the goods are defective are “goods of adhesion” rather than goods crafted in the presence of the buyer, who has the opportunity to object when he disagreed with the process
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Leff uses this as a metaphor for contracts contracts of adhesion are more like “goods” than they are “contracts”
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They are produced by one side and either “bought” or “rejected” by the other
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The government acts as the “quality control” for contracts of adhesion
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When goods are dangerous or worthless, the government intervenes
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So when a contract is too unfair or too unsafe, the government steps in
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Problems with this approach:
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Paternalism
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Government interfering too much with the free market, that has natural self-correcting mechanisms? (Is this true?)
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Shouldn’t people be allowed to make bad deals if they want to?
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Leff suggests that direct efforts to regulate quality of contracts are less effective than freely providing good-quality information for people to make their decisions
Form Requirements
Common Law: Consideration AS form; in certain cases additional requirement for agreements to be in writing:
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Statute of Frauds (1677) – still applies in Canada?
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Contracts in consideration of marriage
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Contracts which cannot be performed within one year
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Contracts for the transfer of an interest in land
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Contracts by the executor of a will to pay a debt of the estate with their own money
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Contracts for the sale of goods above a certain value
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Contracts in which one party becomes a surety (acts as a guarantor) for another party’s debt or other obligation
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Consumer Protection Acts, Family Law Acts
Civil Law: no requirement of “consideration”, in certain cases requirement of notarial form (e.g. Art. 1824 CCQ – see Qc. Notarial Act; Art. 931 CC; s. 311b BGB) or writing (e.g. Qc. Consumer Protection Act)
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Art. 1824
The gift of movable or immovable property is made, on pain of absolute nullity, by notarial act en minute, and shall be published.
These rules do not apply where in the case of the gift movable property, the consent of the parties is accompanied by delivery and immediate possession of the property.
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Agreements in Writing
How does the written document, the physical object “contract” relate to the juridical construct “contract”?
What are the reasons to put an agreement in writing?
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Written document may be required for evidence
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Written document may be useful as record for the parties, even in the absence of litigation
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Written document may be useful in achieving consistency and certainty in recurring transactions
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Written document in necessary to plan complex transactions
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Written document might be useful to impose one’s own terms
However, judges still add implied terms or treat the contract as an offer, etc, sometimes. They have to translate the contract into the language of contract law.
1.1.1.1.1Contract Planning: MacNeil, “A Primer of Contract Planning”
One step back: is contract the instrument of choice?
Horizontal coordination = exchange coordination
Vertical coordination = command coordination
Nature of the Relationship (Macneil)
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Sliding scale – criticism of traditional conception of “on/off” switch – whole contract can be captured in the nature of the relationship rather than in the written contract itself
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Relational Theory of Contracts: contracts are always defined through the relationship. One of the main problems he points out with the 19th century contract law arsenal of rules is that every transaction is viewed as the same kind of action – too limited
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E.g. Contract Formation: pinpointing the exact moment of contract formation; rules regarding non-performance; stages of planning also crucial
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The closer the relationship between the parties, the more need there is for careful contract planning
Problem: Dealing with the contingency of future events
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Planning/non-planning
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Performance/risk planning
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“What happens if this contract fails?”
How do parties choose how much to put into a written contract?
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Nature of the relations between the parties
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The closer the relationship, the more difficult it is to put terms into writing
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Costs of negotiating every single detail
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Virtues of leaving some aspects unwritten
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Acceptance or rejection of default rules
Typically, civil law contracts rely more heavily on default rules and are simply shorter!
Performance/Risk Planning
Describing Performance:
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Primary Duties/Rights
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Boilerplate Terms, e.g.: Place of performance, Means of transportation
Dealing with Risk:
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Remedial side (what are the remedies? Who is liable for what?)
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Boilerplate Terms, e.g.: Force majeur, Forum, Arbitration
“Contract” v. “Contract”
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Translating “contract as thing” (the written document) into “contract as juridical construct” in general: Does a certain term contain a “promise” in a legal sense?
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Should every term of the written agreement be integrated into the legal construct “contract”?
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A term that one party did not know about, that was in a different document but referred to in the contract, a term that was very difficult to understand
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Should the law take oral communication etc. external to the written agreement into account?
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To what extent is the written contract a reduction of negotiated terms into exclusively what the parties wanted to be understood as legally binding
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Civil Law: Art. 1436 CCQ: “In interpreting a contract, the nature of the contract, the circumstances in which it was formed, the interpretation which has already been given to it by the parties or which it may have received, and usage, are all taken into account.”
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Common Law: Parol evidence rule (a written agreement that seems complete on its face is not intended to allow recourse to other kinds of evidence) – this is why common law contracts are so exhaustive
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To what extend can judges re-write the contract in court?
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Burden of proof
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Art. 1436
In a consumer contract or a contract of adhesion, a clause which is illegible or incomprehensible to a reasonable person is null if the consumer or the adhering party suffers injury therefrom, unless the other party proves than adequate explanation of the nature and scope of the clause was given to the consumer or adhering party.
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