Table of contents

Drafting contracts

(a) Legal cultures and determinative interpretation factors

Three main legal traditions. Three approaches to legal practice can be distinguished, each representing the characteristics of the legal culture behind it:

  • The Roman legal culture;
  • The Germanic legal tradition; and
  • most visibly impacting the size of a contract, the common law.

Other legal families. Also other cultures can be identified, such as the Scandinavian ‘family’, the (former) socialist countries, Arab (or Islamic) legal culture, the Hindu tradition and various mixtures: the Scottish and South African legal systems are somewhat of a mixture between common law and civil law; Japanese law has been influenced by both U.S. common law and German law; Turkish law by the Swiss codification of around 1900; Russian law by several European legal systems including the Dutch re-codification of 1992[9].

Roman and Germanic traditions. In both legal cultures, courts will come to their decisions by reverting to systematic codifications of the law (i.e. a civil or a commercial code), the meaning of which is elaborated on in parliamentary materials, doctrinal opinions and case law. These codifications have a rather abstract character, building on general principles such as ‘good faith’, ‘reasonable’, ‘fair dealing’, ‘justifiable’, ‘duty to co-operate’, which are familiar tools for each lawyer. These principles require that a party exercising its rights under a contract observes standards of proportionality and subsidiary.
In the Roman and Germanic legal traditions, courts are not strictly bound to their precedents and, exceptionally, even able to set aside unfair consequences of a law or regulation. Lawyers from common law jurisdictions would probably reject such source of uncertainty about explicit provisions, but the practical consequences are not as sweeping as it may seem. Remedies in case of breach of contract are not limited and will typically include specific performance or an otherwise effective remedy.
The two legal traditions are fundamentally different as regards contract interpretation (although the difference may seem to be of a philosophical, academic nature rather than of practical meaning). In the Roman legal culture, the rather subjective consensus between the parties is determinative for the scope and nature of the parties’ mutual obligations. This means that not the written contract but the mental, ‘common intentions’ are relevant and that a written agreement is rather a welcomed (but important) piece of evidence. In the Germanic legal tradition, an objective approach prevails in the interpretation of contracts and legal acts: important is what, under the circumstances, a reasonable and informed person in the same position would deem reflects most accurately how the parties are bound. Also in this approach, the written contract is a good starting point. Efforts to articulate a common core of European contract law resulted in the following general principle of contract interpretation (CFR):

II. – 8:101: General rules

(1)  A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words.
(2)  If one party intended the contract, or a term or expression used in it, to have a particular meaning, and at the time of the conclusion of the contract the other party was aware, or could reasonably be expected to have been aware, of the first party’s intention, the contract is to be interpreted in the way intended by the first party.
(3)  The contract is, however, to be interpreted according to the meaning which a reasonable person would give to it:
(a)  if an intention cannot be established under the preceding paragraphs; or
(b)  if the question arises with a person, not being a party to the contract or a person who by law has no better rights than such a party, who has reasonably and in good faith relied on the contract’s apparent meaning.

II. – 8:102: Relevant matters

(1)  In interpreting the contract, regard may be had, in particular, to:

(a)  the circumstances in which it was concluded, including the preliminary negotiations;
(b)  the conduct of the parties, even subsequent to the conclusion of the contract;
(c)   the interpretation which has already been given by the parties to terms or expressions which are the same as, or similar to, those used in the contract and the practices they have established between  themselves;
(d)  the meaning commonly given to such terms or expressions in the branch of activity concerned and the interpretation such terms or expressions may already have received;
(e)  the nature and purpose of the contract;
(f)   usages; and
(g)  good faith and fair dealing.

(2)  In a question with a person, not being a party to the contract or a person such as an assignee who by law has no better rights than such a party, who has reasonably and in good faith relied on the contract’s apparent meaning, regard may be had to the circumstances mentioned in sub-paragraphs (a) to (c) above only to the extent that those circumstances were known to, or could reasonably be expected to have been known to, that person.

The above CFR articles give a well-balanced principle of contract interpretation, which would even encompass English law. It is fair to say that each European jurisdiction is somehow represented in the expressed concepts and that none is contradicted. Note that the literal meaning of contractual words is not necessarily decisive.

Common law. In the common law systems, vast codifications of private law have never been developed or, at least, they never achieved an authority given to it on the European continent. For the U.S., for example, codifications have been made for corporate law, partnership law, various types of transactions in movable property (embodied in state codifications of the Uniform Commercial Code) and federal topics such as competition law, intellectual property law, arbitration, securities laws and regulations and bankruptcy law (‘Chapter 11′). Subject matters that are not covered by these codifications have often been developed in the common law (i.e. case law). Accordingly, legal concepts such as ‘mistake’ or ‘set-off’ are based on court precedents. The influence of legal doctrine is, at least in the U.S. state laws, very limited if relevant at all. To state that legal concepts such as ‘good faith and fair dealing’ can be excluded contractually is exaggerated, but to say that the typical common law attorney is well able to appreciate its scope often contradicts practical experience.
Other than in the Roman and Germanic traditions, the default remedy in common law systems is payment (in cash) of damages. Whether or not an injunction or specific performance may be awarded may depend on the adjudicated court, except that parties can always contractually provide for remedies.
Although this is not the place to elaborate on differences between legal systems, it may be helpful to cite a few relevant provisions of the U.S. Restatement (Second) of Contracts[10], an academic reflection of the mainstream U.S. principles of contract law.

§ 201. Whose meaning prevails

(1)  Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.
(2)  Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made:
(a)  that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or
(b)  that party had no reason to know of any different meaning at­tached by the other, and the other had reason to know the meaning attached by the first party.
(3)  Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

§ 202. Rules in aid of interpretation

(1)  Words and other conduct are interpreted in the light of all the circum­stances, and if the principal purpose of the parties is ascertainable it is given great weight.
(2)  A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together.
(3)  Unless a different intention is manifested:
(a)  where language has a generally prevailing meaning, it is interpret­ed in accordance with that meaning;
(b)  technical terms and words of art are given their technical meaning when used in a transaction within their technical field.
(4)  Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.
(5)  Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.

Of course, U.S. state laws may deviate on details, but the key message here is that the differences with European contract laws are not as significant as it may seem.

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Drafting contracts

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