Bridging The Gap Between Common And Civil Law Contracts: Analyzing The Use Of UNIDROIT Principles And Lex Mercatoria

by Aditya Krishnamoorthy

Introduction

Although there are several dissimilarities, the study focuses on the concepts of consideration (Common law) and jus causa (Civil law), doctrine of privity of contract and breach. It becomes essential to find a compromise between the two regimes especially in regard to the abovementioned concepts as they form the very building blocks of the subject of contractual relations. The difference between the two legal systems  being that in the case of contracts based on common law there is not much scope for regulation of the contract by an external authority as the principles of good faith and fair dealing are not applicable here. The parties are presumed to be able to assess the risks connected with the transaction and to provide for appropriate regulation of the relationship and allocation of risk.[1] On the other hand, under the civil law regime contracts are subject to the notions of good faith, reasonableness and justice  in order to ensure that the risks arising from the contract are not unevenly distributed in such a manner that the liability wholly rests on the shoulders of one party only to a great extent. In the current commercial climate, most model international contracts are drafted on the basis of the common law system. This creates an issue when law firms, corporate lawyers and international financial institutions apply these common law contracts in civil law jurisdictions resulting in problems of interpretation. The essay aims at bridging the gap by exploring the possibility of using non-state sources of law as potential remedies.

Application of Trans-National Laws In Bringing Uniformity To Contract Law

As we had noted in our Introduction, most international publications collecting model contracts tend to reproduce Common-Law style Contracts. This leads to most law firms and corporate lawyers, in a variety of both civil and common law jurisdictions, drafting contracts on the basis of these models.  International financial institutions, like for instance the European Bank for Reconstruction and Development (EBRD), impose the use of Common Law contracts for the transactions that they are financing, irrespective of the fact that the financed entities do not come from Common Law states (in the case of the EBRD, which finances projects in Eastern Europe, the legal tradition of the financed entity is Civil Law), many of the investors participating in the project are not from Common Law states, and most of the contracts are not to be governed by English law or another system of Common Law[2].

The fundamental difference between both the Common Law and Civil Law system of contracts is that, the common law system places importance on the autonomy of the individual contracting parties. The parties determination of their own best interest’s and the consequences thereof are not interfered in by the legal system, even if it leads to a detriment of justice. The interpreter is expected to understand the intention of the contracting parties on the basis of the wording provided in the document. The wording of the provisions has to be understood according to its plain and literal meaning; even if the interpreter will attempt to read the provisions in a manner that does not lead to absurdity[3] or inconsistency with the remaining provisions,[4] it will not be possible to construe the contract in a manner that runs against the language. The task of a judge in a Common Law jurisdiction is not to try and create an equitable balance between the parties, but rather, enforce the deal that the parties have voluntarily entered into. The same attitude is to be found in the phase of negotiations, prior to the conclusion of the contract: expecting that a party takes into consideration also the needs and expectations of the other party runs counter the very essence of a negotiation, where each of the party positions itself, opens alternative possibilities, and plays the various possibilities against each other to achieve the best economic result for itself[5]. The House of Lords in Walford v Miles[6], stated that

“[…] the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations.”

This essentially results in a lack of duty to act in good faith. Not only can the will of the parties be integrated only to a restricted extent; also the extent to which it may be corrected by applying the principle of good faith is negligible in commercial contracts. Furthermore, as has been discussed earlier, Common Law mandates that a contract, to be enforceable, must contemplate an exchange between the parties, or any form of consideration. However, a judge in a common law jurisdiction is expected to ascertain the formal existence of the consideration, not to examine it’s adequacy. Evaluating the adequacy of the consideration, i.e. verifying whether the contract is fair or not, is considered to be paternalistic and not in compliance with the expectations that English lawyers have in respect of their legal system[7].

On the other hand, in most jurisdictions that follow civil law, the doctrine of good faith plays an important role. For instance, under the German Law of contracts a contract is essentially to be interpreted to establish the common intention of the parties. However, Section 157 of the Bürgerliches Gesetzbuch ( the statute under which German contract law was codified) provides that the principle of good faith shall also inspire the interpretation of a contract. In a famous decision for example, the Supreme Court affirmed that a contract that is silent on a certain aspect has to be integrated with the regulation that the parties would have agreed on in accordance with the principle of good faith, if they had given consideration to that particular aspect[8]. This would have certainly not been the case if the matter had been decided in a Common Law jurisdiction. Furthermore, the rule of good faith is contained in Section 241(2) and Section 242 of the Bürgerliches Gesetzbuch , and provide for a duty of care towards the rights, things and interests of the other party, regulate expressly the performance of the contract, but are extended to the phase of negotiations by § 311. One of the most important obligations that arise in relation to this duty of care is the requirement to inform the other party of material aspects that are relevant to the proper assessment, understanding or performance of the contract[9].

Similar principals can be observed in Italian Law on contracts, namely, Articles 1362 to 1371 of the Codice Civile, which direct the interpreter to establish the intention of the parties primarily on the basis of the text of the contract, though integrated with the parties’ conduct[10]. Therefore, an Italian interpreter is bound by the language of the contract, integrated with the interests of the parties. The purpose of the contract will be taken into consideration, only if the language of the contract is unclear, and considerations of good faith will be made only if the interpretation rules do not have sufficient clarity.

Thus, it becomes clear from the above that, as opposed to Common Law, concepts such as the principle of good faith may be invoked in Civil Law as a means of interpretation of contract. Thus, the application of International contract models (which are commonly based on Common Law), to a jurisdiction that practices Civil Law, would lead to a variety of problems. Common Law contracts require little or no integration, and hence, include clauses expressing the purpose of the contract, duties of the parties, limitation of liability etc. However, these “self-sufficient” contracts would not rely on the rules and principles of the governing law, which in turn, causes a double tension.  Firstly, the tension between the detailed regulation of the contract and the rules of the governing law which are used to regulate such issues, which would consequently lead to the details of contract overlapping with the governing law.[11]  Secondly, a tension may exist between the contract and the principles implicit in the governing law, such as the principle of good faith. The contract may have been drafted on the basis of a structure which denies the relevance of good faith and dealing, and instead places importance on the literal interpretation of the contract[12]. This creates a problem wherein a judge may have to interpret a parties choice of a contractual structure that is based on the exclusion of certain principles which are inherent in the governing law. In this regard, non-state sources or lex mercatoria may aid in diffusing this tension. These trans-national instruments such as The UNIDROIT Principles of International Commercial Contracts[13]; The Principles of European Contract Law (PECL)[14]; and the Vienna Convention on International Sale Of Goods[15] all have differing legal effects. However, the all have a common purpose; to harmonize the law relating to international contracts. These non-binding compilations of principles aim at serving as models for legislators, interpretation tools for international instruments and guidance to both courts and parties while assessing international contracts, and thereby aim at facilitating international commerce.

While dealing with the concept of the principle of good faith, these trans-national systems may be more closely related to the Civilian system. The UNIDROIT Principles contain a series of articles regulating the interpretation of contracts, particularly articles 4.1 to 4.8. Under the Principles the interpreter has to establish the common intention of the parties (or the objective understanding of reasonable persons, art. 4.1(2)) having regard to all the relevant circumstances of the case.[16] Furthermore, Article 4.8 may be used to fill gaps in interpretation, using the following criteria:  the intention of the parties, the nature and purpose of the contract, good faith and fair dealing, reasonableness. The PECL is substantially similar to the UNIDROIT Principles, as evidenced in Article 5:102 of the PECL, which is similar to Article 4.8 of the UNIDROIT Principles and provides the following criterion to fill gaps in the interpretation of contracts, namely: preliminary negotiations and circumstances of the conclusion of the contract, conduct of the parties, even subsequent of the conclusion of the contract, nature and purpose of the contract, practices established between the parties, usages, good faith and fair dealing. Although, there are scattered references to the principle of good faith in these trans-national systems, there is still a large amount of uncertainty regarding their application. Whether these rules may be applied to imply, for example, specific duties of disclosure during negotiations (thereby choosing the Civil Law rather than the Common Law approach) is uncertain. Also the PECL, as the UNIDROIT Principles, are to be interpreted without reference to specific national systems of law, which circumstance renders it hard to ascertain the scope of the principle of good faith, lacking an acknowledged international standard[17].

Conclusion

Through the course of this paper, we’ve analyzed the key differences between both Common law and Civil Law, and how the application of a model contract based on Common Law, would cause difficulties with the governing law in a Civil Law system. However, the question remains. How would the application of non-state laws, aid in bridging the gap between the Common and Civil law systems?

Although at first glance, there seems to be a much greater similarity between the Civil law system and Trans-national laws, largely due to the recognition in both systems of the principles of good faith and fair dealing. The definition of the scope and function of the principle of good faith and fair dealing in these sources is too vague to permit an independent application. On the one hand, this vagueness permits to avoid a direct contradiction between the non-state sources and the Common Law-inspired contract models.[18]

In the modern era, with the increasing use of international contract models based upon the Common Law system, International commerce has gradually adopted the caveat emptor approach to transactions. Trans-national laws offer a standard form of contract which can be adopted without the need for the application of a local governing law. Thus, they can be used to bridge the gap between the predictability of the Common Law system and the notion of equitable justice followed by the Civil Law system. While trans-national systems seem to favour and attach importance to the standards and evaluations set by the Civil Law system, they implement these criteria by detaching them from the legislative, judicial and doctrinal tradition of specific legal system, in favour of more autonomous approach, akin to that of the Common Law system.

Although these trans-national systems face problems specifically with regard to recognition and enforcement, they offer a remedy to the confusion in the sphere of international commercial contracts, and thereby help bridge the gap between the Common law and the Civil law system.


Aditya is a final year student at HNLU


endnotes

[1] Giuditta Cordero Moss (2007) “International Contracts between Common Law and Civil Law: Is Non-state Law to Be Preferred? The Difficulty of Interpreting Legal Standards Such as Good Faith,” Global Jurist: Vol. 7: Iss. 1 (Advances), Article 3. Available at: http://www.bepress.com/gj/vol7/iss1/art3

[2] Moss, Supra note 1

[3]  Investors Compensation Scheme Ltd. v. West Bromwich B.S. [1998]1 W.L.R. 898 (H.L.)

[4] Watson v. Haggit [1928] A.C. 127

[5] Moss, Supra note 1

[6] [1992] 1 All ER 453

[7] Moss, Supra note 1. See, for further references, GORDLEY, The philosophical origins, cit., pp. 146ff.

[8] BGHZ 16, 71.

[9] BGHZ 132, 175, BGH NJW 1973, 542

[10]  Article 1362 CC

[11] Moss, Supra note 1

[12] ibid

[13]  The full text can be found at http://www.unidroit.org/english/principles/contracts/main.html

[14]  The full text of the PECL can be found at http://web.cbs.dk/departments/law/staff/ol/commission_on_ecl/

[15] The full text can be found on the UNCITRAL’s homepage, http://www.uncitral.org , that contains also an updated list of the countries that have ratified it, of the reservations that were made, etc.

[16] Moss, Supra note 1

[17] ibid

[18]ibid

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