Alternatives to Legal Contracts: The Gentlemen’s Agreement
S. Macaulay, “Contract Law Among American Businesses” CB 220 -
Talks about the pervasiveness of “non-contractual practices”
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Conducts an empirical study of contract law and saw that most people did not use contract law
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Not into legalistic terms rather speak in first name basis in order to secure a good relationship for the future
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Only resort to legal devices once a party feels he is being defrauded or the other party is bankrupt
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Business world is conscious of the human factor
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Doing bad business has consequences on reputation, internal mechanisms for sticking to the bargain
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Parties don’t plan contracts with contract law in mind (cynical about role of lawyers)
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There is a pervasiveness of non-contractual practices
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Most parties don’t resort to contract law to solve problems (rely on customary dealings btwn parties) – this tends to uphold business relationships and commercial utility
Bernard Rudden, “The Gentleman’s Agreement in Legal Theory in Modern Practice” (1999) CB 209 -
People sometimes see the legal system as inefficient and costly
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Main criticism is lacking efficiency of enforcement (Kleinwort Benson)
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Parties sometimes choose to carefully draft agreements that deliberately opt out of the legal system, two types
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“A gentleman’s agreement is an agreement which is not an agreement entered into between two persons, neither of whom is a gentleman, with each expecting the other to be strictly bound while he himself has no intention of being bound at all.”
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One step further: Drafting agreements beyond the law
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Contextual No-Law: i.e. contraception (too private), soldiers (too public), and religious matters (too Godly)
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Deliberate No-Law ever: Gentleman’s Agreement (i.e. Kleinwort Benson’s comfort letter)
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Deliberate No-Law yet: preliminary stage of creating a contract (negotiation stage); some elements of the contract are missing so the binding aspect of the contract is suspended. Language includes “subject to contract,” “letter of intent”
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This includes:
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Statement of a proposed agreement: Letter of Intent (includes nonbinding part of deal about the substance the parties have in mind, and the binding part about how they are going to go about making the deal)
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Agreement complete, legal effects deliberately postponed: “subject to contract”
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No final agreement reached yet: “Agreement to agree”
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Common Law rule: unenforceable.
Does Freedom of Contract mean Freedom from Contract?
Not always. Consumer Protection Act, Employee Protection, etc. If one company has conditions that exclude these acts, then these conditions are deemed not written as against public order.
Also discusses types of contracts that can be opted out of (“Freedom from Contract” and in Civilian “rules of public order”) examples include:
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Limiting someone’s liability in specific cases (i.e. harm intentionally inflicted – public order)
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Slavery cannot be contracted
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Consumer protection acts (idea that a stronger party can strong arm the terms)
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Employer and employee relationship – labour law created to help the structurally weaker party
Alternative Dispute Resolutions
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Parties have opted for arbitration by a private tribunal that makes the final decision on the dispute, the advantage is that the parties have a say on the judge (someone they choose together who knows about business context, and is internal) process is less adversarial, more discussion, save costs on expert witnesses
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Another method is mediation which involves a mediator who talks and helps relationship (family law)
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Diamond Dealing – smoothly working system that doesn’t go to the state or to law, instead all dealers are members of the Diamond Dealer’s Club – to be a member you must follow the rules, if you don’t your photograph will be posted around the world shaming your trading house and company – very effective method of enforcement
The Option Contract
Generally one can revoke a promise until it is accepted § 25 Restatement (Second) of Contracts says “A promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.”
Option Contract – one is bound and cannot revoke it and the other party is without obligation
Option contract has a question of consideration – what does the party gain by the second promise
Some modifications in the UCC §2-205 and §45 Restatement (second) of contracts to create option contracts or “firm offers”
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UCC §2-205
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
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Restatement (second) Section 45 – Option Contract Created by Part performance or Tender (way of circumventing problem of unilateral contract - thus offerer cannot revoke as soon as performance begins – option contract is born)
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Restatement (second) Section 45 §90
1)Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.
2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.
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CCQ Art. 1396, 1397 “promesse unilatérale de contracter” – attaching remedies to a breach of promise
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Art. 1396
An offer to contract made to a determinate person constitutes a promise to enter into the proposed contract from the moment that the offeree clearly indicates to the offeror that he intends to consider the offer and reply to it within a reasonable time or within the time stated therein.
A mere promise is not equivalent to the proposed contract; however, where the beneficiary of the promise accepts the promise or takes up his option, both he and the promisor are bound to enter into the contract, unless the beneficiary decides to enter into the contract immediately.
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Art. 1397
A contract made in violation of a promise to contract may be set up against the beneficiary of the promise, but without affecting his remedy for damages against the promisor and the person having contracted in bad faith with the promisor.
The same rule applies to a contract made in violation of a first refusal agreement.
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CVL – Cere c. Neely, [1980] C.S. 1160: CB 206 |
Jurisdiction
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USA
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Facts
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Defendant had sold plaintiff an option (for $200, but the cheque was never cashed) to purchase a plot of land for $4000, with a term of two years. When the plaintiff decided to exercise his option, he found that the defendant had already sold the land to a third party for $9000.
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Issues
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Was the promise to sell a legally binding obligation, the breach of which entitles the plaintiff to damages?
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Holding
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Yes Cere.
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Reasoning
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Frenette J:
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The promise in question is a unilateral contract, in which the promisor is bound to sell during the term specified, while the promisee is not bound.
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The sale is valid in law – the plaintiff cannot claim the property because it is now in the hands of the third party, but he can claim for lost profits. He cannot claim for notary fees or court fees because he would have paid these if he had been able to exercise his option (he cannot get both the lost profits and the expenses incurred).
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Ratio
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If the promisor of an option of sale sells the property to a third party during the term of the option, he is liable in damages (1397 CCQ).
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Comments
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In common law, there must also be consideration – there must be something given in exchange for the option, otherwise the obligation is not enforceable.
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