Contracts:

Basic Principles; International

Commercial Contracts
Instructor: Ted Gleason
 Before we begin…
• A disclaimer…
• Contract fundamentals vary between countries. I will
do my best to speak generallyhave something to add
based on your backg, but if you round, please SPEAK
UP!!!! I want to hear about it!

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 Why do we use Contracts?
• A contract is an agreement creating obligations
enforceable by law

• Reasons of security, clarity and consistency

• Contracts are promises that the law will enforce.

– The law provides remedies if a promise is breached or

recognizes the performance of a promise as a duty.

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 How are contracts formed?
• That depends on the jurisdiction
– In most jurisdictions an oral contract can be
perfectly valid.
• May depend on the subject matter
• The issue with an oral contract is in proving its
existence.
 Formation, cont.
• In some circumstances the law insists on the presence of
writing.
– Form of the writing can be formal, or informal (even potentially
an exchange of emails)
• E.g., notarial act in civil law jurisdictions

• In the U.S. Certain contracts must be in writing

– Sale of goods over $500, real property, pre-nuptials, etc.

• In France, if the sum involved is 762 Euros (5 000 francs), a signed

written document must be produced

• The Chinese Contract Law does not make requirement about contract
forms and a contract can be concluded in any form, however in
practice a written contract is important
 Elements of a Contract
– Mutual Assent
• Offer (including a defined object)
• Acceptance

– Consideration/Cause/Intent

– No Defenses to Formation
• Capacity
• Legality
• Writing
• Many more…
 Breach of Contract
• The violation of a contractual obligation.

• One may breach a contract by repudiating a promise, failing

to perform a promise, or interfering with another party's
performance.

– A legal claim that one party failed to perform as required under

a valid agreement (written or oral) with the other party.

– For example you might say, "The roofer breached our contract
by using substandard supplies when he repaired my roof."

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What happens when there is a breach?
• One side to a contract proves that the other side
breached the contract in court.

– They use admissible evidence to prove to the Court

that a contract existed, the terms of the contract, and
breach of the contract
• What evidence is admissible depends on the jurisdiction

• The non-breaching party is entitled to recover its

damages.

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Damages Rules for Ordinary Contracts
• General measure of damages
– The injured party is entitled to recover an amount
that would put him in as good a position as if the
contract had been performed

– This is referred to as Expectation Damages

• The basic measure of damages for breach of contract
actions

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 Consequential Damages
• Also called special damages
– Damages suffered because of the injured party’s circumstances
– To be recoverable the damages must be a foreseeable result of
the initial act.

• Consequential damages include injury to person or property

and lost profits resulting from the breach
– The breaching party is only liable for losses resulting from the
breach that a reasonable person would have foreseen could
result from the breach at the time of entry into the contract
• Hadley v. Baxendale

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 Example of Consequential Damages
• L contracts with F to lease a harvesting
machine for $2,000.
– L breaches.
– F is able to lease another harvesting machine for $2000 but
sustains $400 in damages to his crops because of the delay in
harvesting.
– Can F recover this $400 from L?

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 Example, cont.
• Yes…this $400 in damages to the crops is a
foreseeable consequence of L’s breach.

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 International Commercial Contracts
• There is no general international law for
commercial contracts which is applicable by
default
– Keep in mind there are treaties for certain subject
matters, e.g. Sales contracts

• Generally, parties to such contracts choose the

law of one of their countries to govern

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 UNIDROIT Principles of International
Commercial Contracts
• A good source of basic contractual principles
and rules for international commercial
contracts can be found in the UNIDROIT
Principles of International Commercial
Contracts

– The intent of the Principles is to create general

rules for international commercial contracts.

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 UNIDROIT Principles 2010
• The Principles can be adopted by international parties
as the law governing their commercial relationship
through a choice of law provision in a contract, or as a
supplement to the law governing their contractual
relationship.

• The Principles can also be referred to by courts and

arbitration tribunals when the parties have not made a
specific choice of law.

• The Principles have been said to embody concepts

within the lex mercatoria.

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 UNIDROIT Principles 2010
• The UNIDROIT Principles are simply a statement of
general contract principles with 11 Chapters covering
basic contract law concepts such as the formation of a
contract and the performance obligations of the
parties to a contract.

– Contract law principles can be quite different from country

to country, and the UNIDROIT Principles provide users with
a solid legal framework for contracts in an international
commercial context.

– The Principles are not law , they are private rules.

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 Selected UNIDROIT Provisions related to
formation of contracts
• Art. 1.1 (Freedom of Contract)
– The parties are free to enter into a contract and to determine its
content.

• Art. 1.2 (No form required)

– Nothing in these Principles requires a contract, statement or any
other act to be made in or evidenced by a particular form. It
may be proved by any means, including witnesses.

• Art. 2.1.1 (Manner of formation)

– A contract may be concluded either by the acceptance of an
offer or by conduct of the parties that is sufficient to show
agreement.

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 Selected UNIDROIT Provisions related
to formation of contracts
• Art. 2.1.2 (Definition of offer)
– A proposal for concluding a contract constitutes an offer if it is sufficiently definite and
indicates the intention of the offer or to be bound in case of acceptance.

• Art. 2.1.6 (Mode of acceptance)

– (1) A statement made by or other conduct of the offeree indicating assent to an offer is an
acceptance. Silence or inactivity does not in itself amount to acceptance.
– (2) An acceptance of an offer becomes effective when the indication of assent reaches the
offeror.
– (3) However, if, by virtue of the offer or as a result of practices which the parties have
established between themselves or of usage, the offeree may indicate assent by performing
an act without notice to the offeror, the acceptance is effective when the act is performed.

• Art. 3.1.2 (Validity of mere agreement)

– A contract is concluded, modified or terminated by the mere agreement of the parties,
without any further requirement.
 Selected UNIDROIT Provisions related to
negotiations…
• Art. 1.3 (Binding Character of Contract)
– A contract validly entered into is binding upon the parties. It can only be
modified or terminated in accordance with its terms or by agreement or as
otherwise provided in these Principles.

• Art. 1.7 (Good Faith and Fair Dealing)

– (1) Each party must act in accordance with good faith and fair dealing in
international trade.
– (2) The parties may not exclude or limit this duty.

• Art. 2.1.15 (Negotiations in bad faith)

– (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.

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 Selected UNIDROIT Provisions related to
interpretation of contracts
• Art. 1.9 (Usages and Practices)
– (1) The parties are bound by any usage to which they have agreed and by any
practices which they have established between themselves.
– (2) The parties are bound by a usage that is widely known to and regularly
observed in international trade by parties in the particular trade concerned
except where the application of such a usage would be unreasonable.

• Art. 4.1 (Intention of the parties)

– (1) A contract shall be interpreted according to the common intention of the
parties.
– (2) If such an intention cannot be established, the contract shall be interpreted
according to the meaning that reasonable persons of the same kind as the
parties would give to it in the same circumstances.

• Art. 4.6 (Contra proferentem rule)

– If contract terms supplied by one party are unclear, an interpretation against
that party is preferred.

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 Selected UNIDROIT Provisions related to
interpretation of contracts
• Art. 7.1.1 (Non-performance defined)
– Non-performance is failure by a party to perform any of its obligations under
the contract, including defective performance or late performance.

• Art. 7.4.1 (Right to damages)

– Any non-performance gives the aggrieved party a right to damages either
exclusively or in conjunction with any other remedies except where the non-
performance is excused under these Principles.

• Art. 7.4.2 (Full compensation)

– (1) The aggrieved party is entitled to full compensation for harm sustained as
a result of the non-performance. Such harm includes both any loss which it
suffered and any gain of which it was deprived, taking into account any gain to
the aggrieved party resulting from its avoidance of cost or harm.
– (2) Such harm may be non-pecuniary and includes, for instance, physical
suffering or emotional distress.

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 Selected UNIDROIT Provisions related
to interpretation of contracts
• Art. 7.4.3 (Certainty of harm)
– (1) Compensation is due only for harm, including future harm,
that is established with a reasonable degree of certainty.
– (2) Compensation may be due for the loss of a chance in
proportion to the probability of its occurrence.
– (3) Where the amount of damages cannot be established with a
sufficient degree of certainty, the assessment is at the discretion
of the court.

• Art. 7.4.4 (Foreseeability of harm)

– The non-performing party is liable only for harm which it
foresaw or could reasonably have foreseen at the time of the
conclusion of the contract as being likely to result from its non-
performance.