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TOPIC 1: CONTRACTS
1.1. CONTRACTS AS INSTRUMENTS TO ENCOURAGE ECONOMIC COOPERATION AND BUSINESS ACTIVITY
A contract is an agreement which is intended to give rise to a binding legal relationship or to have some
other legal effect. In short: an enforceable agreed promise.
Enforceable means that the legal system upholds it: pacta sunt servanda, first basic principle of contract law according to which parties can be held to what they have contracted for, or held the other party liable for the breaking of the contract. Consent mean to express and articulate personal interests. Promise means a forthcoming conduct.
The required elements of a contract would differ according to different legal systems: - Civil law requires: consent, object, cause/function, and sometimes formalities (in writing).
- Common law requires: consent and consideration. Consideration can be anything of value, which each party to a legally binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a binding contract (quid pro quo).
1.1.2. FUNCTIONS OF CONTRACTS A. Why do people enter into contracts? Contracts are entered into when they are mutually beneficial for both parties. A contractual term is in the mutual interest of the parties when and only when it adds more to the value of the contract that it costs, which means enlarging the contractual pie: both parties are better off (pareto efficient implication).
B. Examples of benefits that the parties may secure when they enter into contracts.
Differences in valuation: sales contracts.
If a person values his property in $1000 and someone else assigns a different value, say $2000, any contract by which the owner would sell the property to the buyer for a price between those two figures would be beneficial for both parties.
Advantages in production: work and service contracts.
Contracts allow exchange, which reinforces specialization in production and, thus, productivity.
If a person values the cost of a project in $200, whereas the cost for a specialized party to conduct the same project is just $100. Therefore, the principal may be interested in paying $150 to the agent, and this agent would be willing to accept to do the job for that price.
Complementarities: partnerships, companies.
When the parties can increase their profits (mutually beneficial!) by joining their complementary skills and abilities are in a situation in which entering a contract may be mutually beneficial. Example: investment by business angel companies in start-up companies.
Giving and taking money on loan: loans and financial contracts.
Example: a company may want to start a new project or an individual may want to buy a home. At the same time, individuals and other financial institutions that have cheaper access to capital may be interested in lending money and make a profit from loan interests. In those scenarios, a financial contract may be perceived as a mutually beneficial agreement between the parties and a tool to promote cooperation.
Risk assignment: Insurances Contracts can also be mutually beneficial when distributing risks or contingencies between the parties, especially when the parties differ in their ability or willingness to bear or assume risks. Contracts can work to assign future or hypothetical costs to the superior risk-bearer.
Different expectations: Commodity trade Predictions about house prices, about currency exchanges, market conditions and so on may vary depending on a person’s abilities, knowledge or cognitive biases. If two persons have di fferent expectations about future events, it may be mutually beneficial to enter into a contract. Example: Mr. A is the owner of an apartment in Barcelona and believes that house prices in the city will decrease dramatically in the next years whereas Mr. B believes that the situation would be the reverse. Likewise, one might buy futures in yen with the expectation that it will rise against the dollar, while another party sells these futures.
C. On what do parties bargain? Enlarging the contractual pie Mutually beneficial agreements: increasing welfare The larger the pie, the larger the slice that can be given to each party to the contract and thus the better off each party will be. In practice, the contractual pie is enlarged by including terms that increase the net value of the contract to the parties. A term adds net value to the contract wherever it adds more value for one party than it costs the other party. Case: Early delivery.
Distributing generated contractual pie.
How? Price = The benefited party may compensate the other. It doesn't have to be a 50/50 share, but maybe, if you have a good lawyer you can fight to get a bigger part of the pie. Here, while both parties are better off, you can be relatively better than the other party by negotiating, for example, prices.
Continuing with the Early delivery case: why, exactly, is it in the seller’s interest to agree to delivery? The answer is that the buyer should be willing to raise the price by enough to make the seller consider an early delivery, because the buyer values early delivery more than it costs the seller. New price: something above the seller’s extra cost and below the buyer’s extra value.
Designing proper incentives to nudge other party.
"It’s normally better a carrot than a stick to foster performance of the contractual terms".
Case: suppose that the contract contains a damage clause stating that 20.000€ will be paid for a breach.
This clause may provide an incentive to the other side to breach wherever performing is going to be more expensive (assume 25.000€) than breach the contract. In the Law & Economics literature, it’s known as Efficient Breach Doctrine (=breach of the contract only when necessary to be as efficient as possible).
Allocating risks arising out of troublesome contingences: risk aversion.
Case International sale of goods: What happens if the goods are lost or damaged due to a terrible storm in the sea during carriage? Example: ICC force majeure clauses. In absence of proof or otherwise agreed, the party that's liable in a situation of force major (like, a civil war for example) is the one that's buying the goods.
Bringing about enforceability by third parties: how much verifiable are contractual outcomes.
For a contractual term to be workable, it must be verifiable (you must be able to prove if the contract has been breached or not) at a reasonable cost. Assessing efforts is more difficult than testable results. For instance, imagine the different stages in a manufacturing process, or for example, it's really hard to know someone's effort, but relatively easy to know their results, so you would contract on result, and not on effort.
Articulating mechanism for dispute resolution.
No matter how carefully a contracted is drafted, there is always room for disputes. Then it is well -advised to agree in advance who is to decide and according to which set of rules.
Here, you have to choose between arbitration and court. Arbitration (is a professional party, normally a lawyer, that knows the specific market/parties, and the parties go to them to solve the conflict) holds certain advantages for parties to a contract. It allows them to avoid the expensive and time-consuming legal process of the courts, because the parties can determine the arbitrator and agree to the procedure (generally simplified) in advance. It also allows the parties to have their disputes adjudicated by someone experienced in their field rather than by a judge or jury, who may know little about the subject of their contract and the market. To go to arbitration, you have to put it into the contract.
The other option is choice-of-law provision: a specification of which jurisdiction’s law shall govern in the contract, which means that parties agree that a particular state’s laws will be used to interpret the agreement.
D. Negotiating a contract After all these ideas and understanding, the points mentioned below might seem obvious or intuitive: - Both parties should understand the metaphor of the Pie and, foremost, how to enlarge it. And keep in mind that it is not all about money: A party could, instead, pay (compensate for the beneficial term) the other party by agreeing to include terms that help the other party. Sometimes this alternative will be at least as good for your client as paying a higher price.
- Be greedy but not too greedy when determining how the contractual pie will be split up. The goal is obtaining the largest possible slice of the pie in your favour without preventing the conclusion of a mutually beneficial agreement. (If you are too greedy, the deal will fall through, in which case there will be no contractual pie for either side to enjoy).
1.1.3. FUNCTIONS OF CONTRACT LAW Legal systems usually have a group of norms that govern contracting between individuals, companies and other undertakings. This group of norms, usually known as Contract Law, satisfies one function: Enable people to cooperate by giving cooperative (efficient!) results to originally non-cooperative games.
Therefore, it allows parties to add value = enlarge the contractual pie. It's for giving you reliance that when you contract is going to be true, you'll be able to make the other company do it, or if they don't do it, they'll have to repay → it's a way to enforce the agreed promise. The base is uncertainty. Contract law creates reliance (interdependence), which results in cooperation which results in efficiency, and that's a way to get what's mutually beneficial.
Expectation Damages: when the agent appropriates the investment the principal has made, he has to pay it back and expectation damages, which is the money that the investment could've done if it had gone well.
This arises two questions: - what promises should be enforced not everything is allowed to be done.
- what should be the remedy for breaking them performance, breach and remedies: what exactly you have to give back, how to perform the contract, etc.
1.1.4. LEGAL SOURCES We have multiple sources of contract law: Domestic law is regulated by the Civil Code 1889, and the commercial code; we also have the Catalan civil code; and special rules that govern some particular contracts; and Spanish case law? The civil code says that the supreme tribunal might complement the ordinary law with their jurisdiction.
European Law is regulated by regulations, directives and instructions.
International Law is regulated by the UN Convention on Contracts for the International Sale of Goods: the convention provides uniform framework for contracts of sale of goods between parties whose places of business are in different Member States.
The Transactional scope of the CISG does not apply: o Types of good: consumer sales, auction, shares and stocks…., ships and aircrafts…, electricity.
o Types of contracts: manufacture contracts (who orders goods for production) and labour or services.
o Legal issues left out from the CISG: validity of the contract, effects on property, liability in tort law for death or personal injury (but contract liability?) The Geographical scope of the CISG, which and under what circumstances a national court is obligated to apply the CISG: o The convention applies when the different states in which parties are located are both Contracting States.
o The convention also applies when the forum rules of private international law- essentially conflict of law rules – point to the law of a Contracting State. Consequence: as long as no reservation is made, the convention becomes indirectly applicable to non-contracting states.
o Opting out or derogating from the CISG: some might desire national business law for their transactions.
The Convention might cover 80% of the international trade. It can be said to be a sort of balance between common and civil law. Although it focuses on sales contracts it provides criteria for contract formation, breach of contract and remedies to protect promises in situation of non-performance. Courts in MS have used its norms to interpret contracts.
Both the Spanish Civil Code and Commercial Code have a very similar structure; a group of general rules sets of particular rules for each specific contract.
FOUR BASIC FIELDS: CONRTACT FORMATION, PERFORMANCE, BREACH AND REMEDIES 1.2.1. PRELIMINARY REMARK: PRINCIPLE OF FREEDOM OF CONTRACT FREEDOM OF CONTRACT IS THE BACKBONE OF PRIVATE LAW Private Autonomy: Parties are free to make a contract or other juridical act and to determine its contents, subject to any applicable mandatory rules. Basically, you as an individual can decide which contract you take part on, how are those contracts, their clauses, etc.
It has been recognized as a ‘general principle of civil law’ by the European Court of Justice; it’s been protected by the EU Charter of Fundamental Rights (‘freedom to conduct business’), and it's also preserved in national constitutions.
Relation between Contract and Default system: primacy must be given to the contract→ ‘It is the intent of the parties, rather than the law itself, that binds the parties to the contract’. Meaning, that if something is written in a contract, is more important than the default rules imposed by its legal system. However, mandatory rules are always to be respected. While default rules can be overridden by a contract, so they only fill the gaps of an incomplete contract.
In Spanish contract law we have the civil code, which has a general part and a "special part".
General → We have the basics for all kinds of contracts: how a contract is constructed, the main remedies, etc.; Special → Regulates several different types of contracts: sales, leases, loans, etc. The default rules that fill every gap left in the contract.
For example, Commercial law is a category that sometimes has duplicities with contract law. It also has a general and a special part. The difference is that, if you are a businessman, you fall into commercial, if you are a client, you fall in contract.
EU also has particular legislations for particular contracts, so even though the general part can be applied, this new special regulations are the ones that rule. E.G: insurance is no more in the civil code, there' s a particular block just for this part of the law. In sales of Business to Consumer (B2C) there's also a special category.
RN, we are going to talk about the general part.
FIVE MAIN IMPRINTS OF THE PRINCIPLE OF FREEDOM OF CONTRACT Five main imprints of the principle of freedom of contract; according to this principle, parties are free to: (1). Decide whether to enter into a contract or not.
Here, we have two different situations: - Non-existence or challengeable contract (invalid under Spanish law): o Invalid consent: absence of will void: inexistence of mandatory requisites.
o Impugnable consent: mistake, fraud, coercion… voidable - Mandatory entrance into a contract: in case of monopoly or market failure due to high transaction costs, with commercial enterprises providing goods or services known as necessities of life.
(2). Parties are free to choose with whom they contract.
There are exceptions to curtail with whom to contract: Non-discrimination: limits the right to choose a contractual partner in some settings.
(3). Choose among the different contracts supplied by the legal system (typical contracts).
This means that the contracts that the special part of law provides to individuals are called “typical contracts”; they are regulated and enacted in a law, so the parties can decide if they go for a lease, or for a sale, etc.
(3bis). Parties might modify the different default rules established in the law in order to adapt them to their own interests. Thereby parties may exclude the application of some legal rules, only default rules since they are subject to contractual override; the other rules are mandatory, and they cannot be modified.
Default rules reduce transaction costs: drafting a complete contract would almost always cost more than the contract is worth (a complete contract is unfeasible). So, default rules may be used to complete obligational gaps in the incomplete agreement minimizing transaction costs of contracts.
- Cost of allocating risk > allocating loss x probability = leave the gap.
- Cost of allocating risk < allocating loss x probability = fill the gap.
(4). Create new contracts according to their own interests (atypical contracts).
If there is something that is not foreseen by the law, you can create a contract that would fit your needs, like franchise agreements.
(5). Parties may shape the content of their contract and establish its binding legal relationship (or not).
Limits to content: in Spanish contract law according to contract law an agreement cannot violate mandatory law, morality and public policy, it implies derogation of private autonomy in this fields.
- Mandatory rules Default rules apply when the parties have not established an alternative norm into the agreement. As we have seen, they basically serve as a transaction cost reduction mechanism.
Consequence of infringement of a mandatory rule: invalid agreement or invalid term in the contract? Article 6.(3) Civil Code: “acts contrary to mandatory and prohibitive rules shall be null and void by operation of law; it's radically void → acts as it had never existed.
- Morality repugnance in contracts (e.g dwarf-tossing, some forms of prostitution). The condition is repugnant and void since it’s inconsistent with the right granted.
- Public policy set of principle that are the base of the operation of legal systems in each jurisdiction.
Contracts to perform and obligation in a foreign country but with legal effects that should occur in Spain (eg. Sale of organs).
TO WHAT EXTENT WILL UNREGULATED PRIVATE CONTRACTING LEAD TO UNDESIRABLE SOCIAL CONSEQUENCES? Contract law rules (formation, performance, breach and remedies) should be crafted as to create the incentives for the behaviour of the contracting partners that would maximize the welfare of the parties.
Therefore, contract regulation, interpretation and enforcement of contract should take into account that contracts between private parties are cooperative tools as well as they enter into in order to maximize their joint surplus from the contractual relationship. However, it must also be considered that contracts may affect third-parties. Consequently, economists and other social scientists have highlighted some situations that may support the derogation of the freedom of contract principle.
(1). Harmful externalities to third parties The harm to third parties must tend to exceed the benefits of a contract to the parties themselves for it to be socially desirable not to enforce a contract. Some examples are: - Agreements between competing firms to control prices or exclude entry to competitors.
- Agreements with restrictions on alienation that have the effect of increasing the parties’ wealth at the expense of prospective acquirers or secondary markets.
- Agreements to commit crimes.
- Insurance contracts for fines or liability arising from crime.
(2). Monopolies or market power Example: two firms are made better-off by a collusive agreement that restricts competition, there are good reasons for the Law not to enforce such an agreement and, on the contrary, not to give effect to the parties’ intentions.
(3). Asymmetrical information Contract rules that provide parties with incentives to disclose information. Contracts want to make the most information possible public. Some examples are: - Rules on mistake: In contract law, a mistake is an erroneous belief, at contracting, that certain facts are true. It can be argued as a defence, and if raised successfully can lead to the agreement in question being found voidable, or alternatively an equitable remedy may be provided by the courts.
- Rules on the scope of damages - Minors and incompetents: legal system may refuse to enforce contracts entered into by minors and incompetents because they may result in losses in their welfare.
(4). Cognitive bias or bounded rationality Over-optimism and withdrawal of consent (mainly consumer).
(5). Commodification Commodification is the transformation of goods, services, ideas and people into commodities, or objects of trade. It's often criticized, because it assigns economic value to something not previously considered in economic terms (e.g. education, data). In order to avoid such phenomenon, sometimes legal systems set forth rules on inalienability (Inalienable: Not subject to sale or transfer; inseparable. That which is inalienable cannot be bought, sold, or transferred from one individual to another. The personal rights to life and liberty guaranteed by the Constitution of the United States are inalienable. Similarly, various types of property are inalienable, such as rivers, streams, and highways.) Contract Law also reacts to negative externalities created by contracts throug h making the agreements non-binding and unenforceable. In Civil Law countries, those contracts are held radically null and void, and deprived of any legal -in the sense of contractual- effects.
1.2.2. FORMATION A contract is an agreement. Therefore, a contract is concluded, without any further requirement if: - The parties intend to enter into a binding legal relationship - There is a concurrence between offer and acceptance = consent - Free of invalidity grounds inexistence or defects Consent as basis of the contract is completed from a legal point of view with the meeting of the minds, of offer and acceptance. Contract law is to ensure that the external expression of contractual consent corresponds with the informed internal preference of the contracting parties, which means that the contract that you present must correspond to the intent of the parties when making it.
Consent from free defects: contracts are based upon voluntary consent by the contracting parties.
Therefore, contract law states some rules and doctrines to control and monitor the expression of contractual consent explicitly attempting to ensure that such consent has been formed with an acceptable level of information about the relevant contractual parameters, and free from certain interfering events or undue influence.
Pathologies in consent make the agreement avoidable: - Threats or violence a party may avoid a contract if the other party has induced the conclusion of the contract by the threat of harm or a wrongful act.
- Fraud A party may avoid a contract if the other party has induced the conclusion of the contract by fraudulent misrepresentation, whether by words or conduct, or fraudulent non-disclosure of any information which good faith and fair dealing would required that party to disclose. It's not mutually beneficial if one of the parties is under fraud. There are two ways of committing fraud: (a) Misrepresentation is fraudulent if it is made with knowledge or belief that the representation is false, or carelessly as to whether it is true or false, and is intended to induce the recipient to make a mistake.
(b) Non-disclosure is fraudulent if it is intended to induce the person from whom the information is withheld to make a mistake.
- Mistake A party may avoid a contract for mistake existing when the contract was concluded if (a) the party, but for the mistake, would not have concluded the contract or would have done so only on fundamentally different contract terms and the other party knew or could be expected to have known this; then, it must be a grave mistake, and (b) the other party: ▪ caused the mistake; ▪ caused the contract to be concluded in mistake by failing to comply with any required pre-contractual information duty; ▪ knew or could be expected to have known of the mistake and caused the contract to be concluded in mistake by not pointing out the relevant information, provided that good faith and fair dealing would have required a party aware of the mistake to point it out; ▪ - or made the same mistake (mutual mistake) Undue influence one person taking advantage of a position of power over another person; o Unconscionability: terms that are so extremely unjust, or overwhelmingly one-sided in favour of the party who has the superior bargaining power, that they are contrary to good conscience.
o Unfair exploitation: a party was dependent or had a relationship of trust with the other party and was in an economic distress or had a disadvantage (urgent need, ignorance, inexperience, etc.), and the other party knew or should have known of this and took advantage.
o Duress: deals with circumstances where the consent was obtained by the use of illegitimate pressure.
All these defects in consent are avoidable; which means that if you do nothing, the contract survives, you must bring it to court. Then, avoidance may lead to radically void. Radically void or null means that the law considers the contract never existed. These are the cases with public policy, morality and mandatory rules, the contract is immediately null, you don’t have to do anything.
FIRST STAGE OF THE FORMATION OF A CONTRACT: PRELIMINARY NEGOTIATIONS A person is free to negotiate and is not liable for failure to reach an agreement.
However, there is a mandatory rules that says that a person who is engaged in negotiations has a duty to negotiate with good faith and not to break off negotiations contrary to good faith. It is contrary to good faith, in particular, for a person to enter into or continue negotiations with no real intention of reaching an agreement with the other party.
Developed rule: If during preliminary negotiations one party expresses to the other party a reasonable expectation that the contract being negotiated will be effective in the future and later breaks off negotiations without justification, the party will be held liable and will have an obligation to compensate damages to the other party.
Consequences of going against good faith: A person who is in breach of this duty is liable for any loss (to the extent of Reliance Damages) caused to the other party by the breach = Precontractual liability.
Legal requirements of a breach of good faith: o Creation of a reliance ("hope") situation, a reasonable expectation, trust.
o Unjustified breach of negotiations. Malice or intent to harm the other party is not required. The other party needs to prove a violation of good faith.
o Harm to the aggrieved party.
o Causation link between the created expectation and the harm.
Legal consequences: Pay damages to the extent of Reliance Damages. This means, an amount that intends to restore the injured party to the situation of utility that was enjoyed before the beginning of negotiations. It may include: 1. Expenses for the injured party derived from negotiations or aimed at concluding the contract.
2. Specific investments that the injured party has made in reliance of performance of the contract by the other party.
3. Opportunity cost You end up exactly how you'd been if the negotiations didn't start, not in the situation of if the contract would've ended up in a decision.
SECOND STAGE OF THE FORMATION OF A CONTRACT: OFFER From a general point of view, a proposal becomes an offer if it is intended to result in a contract if the other party accepts it; and if it contains sufficiently definite terms to form a contract. A proposal is sufficiently definite and therefore becomes an offer if it indicates the intention of the offeror to be bound and if it indicates the goods and explicitly or implicitly fixes or makes provision for determining the quantity and the price. If it does not include the former requirements and is not addressed to one or more specific persons, the proposal shall be deemed an invitation to make offers (invitation ad offerendum): Functioning of an offer: 1. An offer becomes effective when it reaches the offeree.
2. Offers may be withdrawn if the withdrawal reaches the offeree before or at the same time as the offer. (Withdrawal also is effective for irrevocable offers).
3. Offers are terminated when a rejection by the offeree reaches the offeror.
THIRD STAGE OF THE FORMATION OF A CONTRACT: ACCEPTANCE From a general point of view, any form of statement or conduct by the offeree is an acceptance if it indicates agreement to the offer. Some requirements are: • If it is intended to result in a contract by way of acceptance; • It must mirror the terms of the offer; no significant modifications are allowed (if not, it will be deemed a counter-offer; • It has to be made before the offer’s expiration /revocation by the other party.
• Silence or inactivity does not in itself amount to acceptance.
• An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective (it would be a contract!).
• In some cases, acceptance should be made within a time period established by the offeror.
However, late acceptances may be effective if without delay the offeror so informs the offeree.
• 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 performi ng an act, such as one relating to the dispatch of the goods or payment of the price, without notice to the offeror, the acceptance is effective at the moment the act is performed, provided that the act is performed within the period of time laid down in the preceding paragraph” What happens if the acceptance does not mirror the terms of the offer? “Counteroffers” and/ or Battle of Forms (deviating business standard forms). The CISG establishes: • A reply to an offer which purports to be an acceptance but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counteroffer.
• However, a reply to an offer which is meant to be an acceptance but contains additional or different terms which do not materially alter the terms of the offer constitutes an acceptance, unless the offeror, without undue delay, objects orally to the discrepancy or dispatches a notice to that effect. If he does not so object, the terms of the contract are the terms of the offer with the modifications contained in the acceptance.
• Additional or different terms relating, among other things, to the price, payment, quality and quantity of the goods, place and time of delivery, extent of one party’s liability to the other or the settlement of disputes are considered to alter the terms of the offer materially”.
Silence or inactivity does not in itself add up to acceptance Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only: • Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer.
• Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.
• This happens typically when the contract is entered into by firms having regular business dealings, because we can reasonably assume that offers are typically welcome, since when two parties hold long-term relationship, the probability that the contract has positive value for both parties is high.
The term withdrawal of an offer refers to such an expression made by an offeror to the offeree to withdraw an offer before or at the same time as the arrival of the offer. The term revocation of an offer refers to such an expression of invalidating the offer made by the offeror to the offeree after the arrival of the offer but before the offeree has despatched an acceptance. Both kind of notices become effective when they reach the other party. Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance. However, an offer cannot be revoked: o if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; o if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer”.
FOURTH STAGE OF THE FORMATION OF A CONTRACT: CONLCUSION Conclusion occurs when there is meeting of the minds or concurrence of offer and acceptance and becomes effective. Purpose: from this moment, onwards the contract becomes effective and the different rights and obligations included therein can be enforced by the parties. Also, parties may begin investing in the contract with a lesser risk of losing their investment.
A contract is not concluded if: ▪ The offer is effectively revoked by the offeror.
▪ The offer is not known by the offeree and the offeror dies or its incapacitated (in Spain).
Four theories for timing of perfection (conclusion) of contractual consent (also known as bargaining inter absentes). There are certain cases where there is a gap (ex intervallo temporis) between the issuance of the offer and its reception by the addressee and between the issuance of the acceptance and its reception by the addressee.
Issuance theory: A contract is perfected when the offeree issues (e.g. they write "yes"; they don't need to have sent it to the offeror) his declaration of acceptance. In accordance to this rule, a revocation of the offer solely avoids the perfection of the contract if it reaches the offeree before he has actually accepted the contractual offer. Conclusion: It creates problems of uncertainty and also problems of evidence in potential litigation.
Sending theory/Dispatching (“mailbox rule”): A contract is perfected when the offeree sends his declaration of acceptance to the offeror. From that moment, it is construed that the offeree has done everything which was under his control to make his acceptance known to the offeror. It’s a traditional rule in America common law. Conclusion: Provide incentives to offeree to invest in the contract and maximize joint surplus.
The rule offers the advantage that from the very beginning it allows the offeree to invest in reliance, increasing the value of the contract.
Reception theory: A contract is perfected when the offeror receives the declaration of acceptance made and sent by the offeree. According to this theory, the moment of perfection of the contracted is the moment the declaration of will of acceptance reaches the sphere of interests of the offeror (e.g., his place of business, his domicile...), regardless of the fact that the offeror has effective knowledge of it or not.
Knowledge theory: A contract is perfected when the offeror has actual knowledge of the declaration of acceptance made and sent by the offeree. It was the traditional rule in many civil codes.
Modern Business Contract Law: attaches to a combined theory, which is equivalent to the Reception Theory (notice becomes effective when reaches the other party irrespective of its actual knowledge) backed-up, in some exceptional instances, by the Dispatch Theory (Mail Box Rule). So, and acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance . To sum up: if the offeree correctly dispatches its acceptance, it can rely on the formation of the contract. This sending of acceptance has the effect of excluding the revocation of the offeror (namely, the offer was effective as it had already reached the other party). However, the contract is deemed to be concluded when the acceptance reaches the offeror.
Internet contracts: if the parties are in different places, there is consent from the moment the party offering knows the acceptance or since having been sent, the party accepting cannot ignore it if acting in good faith.
The contract has been entered into at the place where the offer was made. Using automatic devices there is consent from the moment the acceptance is given.
1.2.3. PERFORMANCE AND BREACH OF CONTRACT PERFORMANCE Performance basically says what the parties have to do; "A has to pay this to B".
A contractual obligation isn’t deemed performed, if the thing and/or the conduct that it imposes on the promisor are not fully and exactly delivered/accomplished→ Pacta Sunt Servanda; lo pactado obliga.
• No se entenderá paga una deuda sino cuando completamente se hubiese entregado la cosa o hecho la prestación en que la obligación consistía.
• A menos que el contrato expresamente lo autorice, no podrá obligarse al acreedor a recibir parcialmente las prestaciones en que consista la obligación.
Exceptions: “other means to give performance to a duty”. “Las obligaciones se extinguen: • Por la pérdida de la cosa debida: Regime of Contractual Risk • Por la condonación de la deuda: the creditor says that you don't have to pay • Por la confusión de los derechos de acreedor y deudor: If I am the creditor and also debtor, you can annul them → you owe someone money, they die and leave you with the inheritance, you cannot owe yourself money.
• Por la compensación: you owe someone 10, they owe you 10 • Por la novación: modificación o extinción de una obligación jurídica o transmisión por parte de otra obligación posterior.
It must be added: • Por la consignación (judicial o notarial): if you need to pay your landlord, but he doesn't want to receive the money, you go somewhere to leave the money and make official that you tried to pay so nothing can happen to you • Por la dación en pago (acción de dar algo para pagar una deuda) y la cesión de bienes para pago1 (abandono voluntario que el deudor hace de todo los suyos a su acreedor o acreedores, cuando, a consecuencia de accidentes inevitables, no se halla en estado de pagar sus deudas)”.
En la cesión para pago, los acreedores deben liquidar los bienes para cobrarse, de manera que sólo cuando la posterior liquidación de los bienes permite cobrar el importe íntegro de la prestación estaremos ante un acto solutorio que implique la extinción de la obligación. Si no se llega al importe íntegro, la deuda subsiste en cuanto al resto. En la dación en pago se transmite la titularidad del bien entregado al acreedor o acreedores, mientras que en la cesión de bienes únicamente se está otorgando un mandato para liquidar dichos bienes.
1 Subjects: Payment (performance) by a third party and reception by a third party. → a third party can pay for your debt.
Time of Performance (Conditions and Periods of Time) → you must pay when you accorded to pay, if you have a delay, you are in breach of contract.
Place of Performance New regime: Conformity Principle: covers everything that deviates from what was contracted at the beginning: - non-performance: impossibility, etc.
- non-conforming tender of performance: time, nature (aliud), content (quality) and extent of it (quantity).
BREACH Difficulties in providing a notion of breach of contract that is valid across history and different legal systems: - Many traditional rules and institutions differ in Civil Law and Common Law jurisdictions, even with those belonging to the same legal tradition.
- However, in Case Law there are some common patterns about the issues that are relevant for finding a breach of contract and for the application of the appropriate legal remedies.
Under Spanish law to have a breach of contract, you need: Objective factors + Subjective factors Existence of breach (deviation from the contract) + attribution of breach (whose fault it is).
a) Objective factors: existence of a breach Spanish Contract Law provides a broad notion of breach of contract, since any behaviour that: ▪ Deviates from the specified behaviour in the contract in any way (time, quality, substance, etc.) ▪ Is not specially justified on legal grounds.
▪ Constitutes a legally relevant breach of contract.
▪ Opens (although not necessarily all of them) legal remedies for breach.
b) Subjective factors: attribution of breach; Breach of contract linked to the conduct of one of the parties: i. Contractual fraud (“Dolo”: including Intentional breach of contract in Spanish law): In Spanish law, it does not require a fraudulent intent to harm the other party, just the presence of intentional breach may affect the validity of liability limitations, and may also influence the scope of liability.
Moreover, the fact that the breach is fraudulent implies that the clauses of absolution of liability are not binding upon the parties, since damages are not limited to those foreseen at the moment of making the contract.
Eg. Let us imagine that in a contract whereby the delivery of a certain good is agreed, the liability of the party who shall perform the delivery is limited to “x” euros for each day of delay in the delivery. Let us also imagine that the party obliged to make the delivery voluntarily delays it. So if the other party can proof that the delay has caused him damage of “x + y”, the limit of “x” which has been mentioned before, shall have no validity.
ii. Negligence or fault (“Culpa o negligencia”): When the defaulting party has not subjected to the preventive measures required in the contracts, in the applicable laws or according to the good faith. If there is fault, for example in the case of negligent delay damages will be limited, so we will apply the clauses of limitation of liability. In certain contractual areas, different standards are applied: ▪ Professional contracts (doctors, lawyers, engineers, architects, auditors): negligence standard (lex artis ad hoc or specialized fault → when you have a contract, because of your profession, skills, education, etc, it's not enough if you comply with the standards of good, you have to accord to the standers of care that comply with your education, etc. So, the standards are higher because of the skills that you have.
▪ Management contracts: breach requires violation of a duty of care or a duty of loyalty.
iii. Strict liability (“Responsabilidad Objetiva”): In contract law, the promisor is typically liable for breach, even though the breach was not his or her fault. In other words, contractual liability is strict. For example, a construction company is liable for late completion of a building, regardless of whether the construction company did its best to meet the deadline. A legally relevant link exists between the breach and one of the parties. Exceptions: 1.
Force Majeure/ “Act of God”. (no strikes).
2. Impracticability/Impossibility/Frustration of purpose.
3. Hardship/Change of circumstances/Rebus sic stantibus. → imagine that the economic circumstances have changed a lot; I have a contract to deliver pens, but from the moment that the contract is signed to the moment of the delivery, ink's price rises 200 times.
REMEDIES As seen elsewhere, “contracts are incomplete”. One of the major tasks of Contract law is to enforce them.
Contributing to complete them by providing (and then enforced by courts) a set of default rules that is labelled “remedies for breach”. The four general remedies for breach are: a) Specific Performance b) Damages (Expectative and reliance measures) c) Fixed Sums (Liquidated damages & Penalty clauses) d) Termination Expressly provided legal remedies but also interim (temporary) remedies. Adding: e) Reduction of price f) Right to withhold performance: Exceptio non –rite– adimpleti contractus —excepción de incumplimiento -defectuoso-; puedes romper el contrato si la otra parte no ha cumplido con su obligación (total o parcial).
Remedies for breach comprise those actions, mechanisms or techniques that an aggrieved contractual party has as to address the ex post scenario and fix the wrong consequences arising out of a breach of contract. There is no a homogenous list: Neither among legal traditions and jurisdictions, nor among different types of contracts: Particular remedies exist for sub-sets of contracts. E.g. Sales.
Sequencing of Remedies: Internal organization of the remedies is different among legal traditions. Germanic oriented legal regimes give preference to specific-oriented remedies (performance preferred). Common law systems are fonder of damages. Modern contract law present remedies on equal footing (nonhierarchical): often providing for rules of cumulation when there is no incompatibility between remedies, sometimes even an explicit principle of choice for the aggrieved party).
Clearly, the remedy of termination, due to its uneconomic and social costs, its nowadays considered as ultima ratio remedy. Avoidance under the CISG is a remedy of last resort, or an ultima ratio remedy, which should not be granted easily. It should be granted only if it would be unconscionable to expect the continuation of the contract by the aggrieved party. The ultima ratio phrase shall only remind that the right to avoid the contract shall be granted reluctantly (de mala gana) and that one should not be too quick to accept a breach of contract as fundamental.
A) SPECIFIC PERFORMANCE Specific performance is a remedy for breach in which a party that didn't do something that was stated in the contract, and then the mediator makes them do it. Specific performance simply consists in granting the aggrieved party the right to request from the Court the performance of the contract which was not performed.
Generally, specific performance or enforcement of monetary obligati ons is easier than non-monetary enforcement (e.g. it's easier to see if a transaction of money has been done, than to prove that some nonmonetary based performance has taken place).
Problems: - Performance when is better breach: Efficient Breach. A specific performance might force a party to perform a contract when it was better/more efficient to breach it.
- Bargaining in the shadow (i.e. under the credible threat of imposing specific performance on the other party), if I know that I can force the other party to specific perform contract and I know that it will be really expensive for the other party to perform specific performance, I can threaten the other party with it.
B) DAMAGES It’s a payment of a sum of money by the breaching party to the aggrieved party in order to compensate the loss resulting from the breach of contract.
Expectation Damages: amount of money that brings the aggrieved contractual party in the situation of utility or welfare in which he/she would be if the contract had been perfectly performed: - It would amount to the valuation –by the creditor- of the good or service minus the contractual price.
- It traditionally –and currently- includes: damnus emergens (loss caused) and the lucrum cessans (lost profit). Traditionally, lost profit is compensated restrictively by Spanish Courts (complexity of furnishing adequate proof).
Expectation damages is the general rule in Spanish Law for breach of contract: - It is the damage measure that accompanies termination for breach.
- It is the replacement measure of specific performance - Exceptionally, it is awarded in cases of pre-contractual fraud that, according to the most recent case law, are equivalent to breach of contracts.
Burden of proof: Plaintiffs who seek for damages have to provide evidence of both the existence and amount of damages. Evidence is not usually assessed by the Supreme Court when examining appeals for cassation (matter of fact).
Limitations that can reduce its scope and amount: (i) Foreseeability rule: a breaching party is responsible for paying only those losses that were foreseeable to them at the time of contracting.
(ii) Duty to mitigate damages: the aggrieved party is under the duty to mitigate damages that the other contracting party has caused with his breach of contract (Supreme Court’s case Law Court). You cannot exaggerate the damage.
(iii) Comparative fault: Comparative responsibility, is a doctrine of tort law that compares the fault of each party in a lawsuit for a single injury. Where fault on the part of the injured person contributes to the occurrence of the damage; to what extent the damage is caused mainly by one or the other part.
Reliance Damages: amount that intends to restore the injured party to the situation of utility that enjoyed before the celebration of the contract. They cover: - Expenses for the injured party derived from concluding the contract.
- Specific investments that the injured party has made in the belief of performance of the contract by the other party.
- In some cases, opportunity cost of entering/negotiating the contract (matter of burden of proof).
In Spanish legal system, reliance damages are awarded in the following cases: Defects in consent (unless pre-contractual fraud) that render a contract void, pre-contractual liability.
Damages for pain and suffering in contracts: The traditional position of the Spanish Supreme Court and Spanish Courts damages for pain and suffering in contracts is: - To accept damages for pain and suffering or emotional distress for breach of contract.
- To award damages for pain and suffering with a relative amplitude and generosity.
- To award damages for pain and suffering with several functions: o To avoid the problems of calculating and justifying (!) the amount of the damage award o To compensate harm in personality rights (right to life, liberty, honor, etc.).
o To compensate non-patrimonial values joined to economic goods and rights (discomfort, inconvenience, disappointment, frustration).
o To punish intolerable or egregious behaviors of breach of contract. Thus, Punitive damages (given when the defendant's behavior is found to be especially Harmful) are used.
Main criticism to the general use of Damages for pain and suffering: they allow courts to avoid –without a serious justification- restrictions to the scope of damages.
C) FIXED SUMS (LIQUITED DAMAGES AND PENALTY CLAUSES Liquidated damages are damages for breach that are not determined ex post by a Court or arbitration panel (adjudicator), but ex ante by the contract parties themselves into the contract: instead of going to court, you just decide the punishment before in the contract - Liquidated Damages: Typically, they replace Court award of damages (“pena sustitutiva”). The parties say which amount of money must be given by the party that breaks the contract. The aggrieved party shall be awarded that sum irrespective of its actual loss, however the sum may be reduced to a reasonable amount when it is excessively or disproportionately large.
- Penalty Clauses: They can be agreed as an added “penalty” for breach (Damages + penalty). (“pena cumulativa” or “sancionadora”). The parties ex-ante chose a sum o "extra"-punish the one that breaches the contract. They can be agreed as a “withdrawal or escape clauses”. It provides a way out of the agreement. (“pena facultativa” or “penitencial”= Obligación facultativa). It provides room for an Efficient Breach; either I perform or I pay and I leave the contract.
A penalty clause is where a sum of money has been fixed not as compensation of pre-estimated loss, but as punishment.
The most important issue across jurisdictions is whether Courts are forced to enforce liquidated damages, or they may disregard, or reduce the amount of the liquidated damages award.
General reasons for allowing liquidated damages clauses in excess of estimated damages from breach: - Freedom of contract.
- Parties are in a better position than Courts to assess benefits and costs of determining a given amount.
- Liquidated damages redress systematic underestimation of damages by Courts.
- Control of agreed damages terms reveals paternalism towards contract parties, especially sophisticated ones (large firms operating with the advice of experts and legal counsel).
Arguments that may lead to control liquidated damages clauses: - Incorrect predictions or forecasts about future outcomes.
- External shocks unforeseen by parties that produce an unexpected increase in the damages payment.
- True “uncertainty” about future costs for one party.
- Over-optimism concerning future performance and costs - Liquidated damages as barriers to entry: an excessive amount is beneficial for the parties to the detriment of a third party who may bid for the services of breaching party.
D) TERMINATION "Killing the contract"; this remedy entitles the aggrieved party to cancel the contractual relationship with the breaching party, eliminating the obligations arising from the terminated contract. Once the contract is terminated: o The parties should give back what was received under the contract, unless the goods are now in lawful possession of a third party (restitution).
o If not possible, the value of the goods would replace the goods themselves (Restitution damages).
o The elimination of the effects of the contract is retroactive: it is considered that the contract did not exist. Exceptions: Long-term contracts, Rights transferred to third parties. Some provisions in the contract may subsist (i.e. Arbitration clauses or choice-of-law for dispute resolution).
Termination does not go alone: it is usually coupled with a damages or liquidated damages.
Should be termination the ultima ratio remedy? Many jurisdictions, legal traditions and reforms of contract law, consider the remedy to avoid (i.e. rescind, terminate) as uneconomic and not socially desirable.
Therefore, as a matter of principle, it should be granted only if and insofar as some particular circumstances are met. So, only in some really "extreme" cases you can go for termination So, essential breach under Spanish law means: 1. Relevance: the breach must affect the central obligations or duties under the contract and not merely ancillary or incidental duties.
2. Duration: the breach should not be merely sporadic or transitory, but likely to be repeated or continuing; (a mere delay, as a general rule, does not amount to an essential breach).
3. Importance: the breach must substantially affect the interests of the non- defaulting party.
4. Innocence of the party terminating the contract: the non-performance on which the terminating party relies must not be a proper or acceptable response to previous nonperformance committed by the terminating party.
TOPIC 2: MARKET REGULATION 2.1. Consumer Protection A. Legislation: Article 51 of the Constitution Most important “1. The public authorities must guarantee the protection of consumers and users, protecting their safety, health, and legitimate economic interests through effective procedures.
“2. The public authorities must inform and educate consumers and users, foster their organizations, and shall be concerned about those issues brought in by consumers which could affect them.
“3. Within the framework of the provisions of the above paragraphs, the law will regulate domestic commerce and the system for licensing commercial products”.
The Consumer Protection Act (Real Decreto Legislativo: RDL1/2007).
On Consumers and Users Protection which develops article 51 above, is the most important Spanish law on consumer protection.
Specific Protection However, there also are a number of other special laws and regulations dealing with consumer protection in specific sectors or activities.
EU Directives Numerous Spanish laws and regulations have been enacted as a result of the implementation of European Union (EU) Directives.
Autonomous Communities Furthermore, as the legislative power is shared between the State and the Autonomous Communities, most of the Autonomous Communities have enacted laws and regulations on consumers’ protection to be applied in their respective territories. E.g: Codi de consum de Catalunya.
B. Enforcement and implementation of consumer rights: Consumers are provided with different courses of action to protect their rights and interests. First and foremost, under article 10 of the Consumer Protection Act, a preliminary renouncement of the rights set out in the Consumer Protection Act is void. Legal consequence, first limit to shaping the content: mandatory norms: all acts carried out in fraud of law are void.
Enforcement in Private Law (i) Civil jurisdiction Consumers (as individuals) may always sue a company before the civil jurisdiction asserting ‘normal’ remedies in torts and contract law.
Besides ‘normal’ remedies, cessation actions are aimed at obtaining a judge’s resolution ordering the company to cease a behaviour in prejudice of consumers and users, and refrain from any future recurrence.
The authority to exercise the cessation action lies with: - The National Consumer Institute (Instituto Nacional de Consumo) and the Autonomous Communities and local entities with authority to protect consumers and users - The associations of consumers and users incorporated under the Consumer Protection Act, or under the Autonomous Communities’ regulations on protection of consumers and users; - Consumers and users associations are of particular relevance. They protect consumers’ and users’ rights, by exercising certain actions on their behalf.
- The Public Prosecutor Office (Ministerio Fiscal); - The entities of other EU countries set up to protect the diffuse and collective interests of consumer and users, which are included in the list published in the Official Journal of the EU.
(ii) Consumer Arbitration Where agreed by the parties in the written contract, consumers and users may address the matter to arbitration: a system to resolve conflicts between consumers and companies out of the law, provided that the reason for the conflict is not intoxication, personal injury, or death and there is no rational proof of crime. The courts comprising the Consumer Arbitration System (Juntas Arbitrales de Consumo) are: The National Court (Junta Arbitral Nacional) and the territorial courts (Juntas Arbitrales territoriales).
Enforcement in Public Law In addition to the private law remedies, from the perspective of public law, where a com pany commits an infraction regulated in the relevant consumer protection administrative regulation, consumers may address the matter directly to the authorities. These authorities shall deal with the infringer through mediation so that it stops and refrains from carrying out the infringing behaviour under the relevant administrative rule. Otherwise, a public sanction may be imposed by the relevant public authority.
In this regard, consumers may reach: a. The local consumer authorities (Oficina Municipal de Información al Consumidor).
b. Those related to the relevant Autonomous Community (Dirección General de Consumo).
c. In addition, companies are obliged to have Claim Forms (Hojas de Reclamación) available for their customers.
2.1.1. Productivity liability Case: The applicant was supplied with a defective product. The defendant is the manufacturer in Spain of that product. The claimant has also proved the damage. And the claimant also proved the causal relationship between the defect and the damage.
Spanish tort law Tort → wrong actions that causes harm or economic damages but is not a consequence of a breach of contract. Tort assumes that there is no contractual relation between the parties. Tort deals with liability rules for accidents. As long as the contract does not cover accidents, it is not considered inside of the contract, the accident is something that falls away.
Under Spanish Tort law, the rules on torts are subject to a Principle of Fault: it means that the wrongdoer has to pay a sum of damages to the victim of a harm wherever the former acted recklessly or faulty.
However, in some instances under Spanish, European or Comparative law, certain activities in the market are subject to Strict Liability (wrongdoer must pay for all accident losses that he/she cause). It applies to activities that create important amounts of risk.
When a product causes damage to users or consumers Compensation for damages: All injured parties have the right to be compensated under the terms set (…) for damages caused by goods or services. The liability regime set forth in this book includes personal injury, including death, and damage to property, provided that these might affect goods or services which are objectively intended for private use or consumption, and have been utilized mainly as such by the injured party.
Tort law for product liability General principle. “Producers shall be liable for damages caused by defects in the products that they manufacture or import”.
a) For the purposes of product liability, product is defined as “any movable good, even if is linked to another movable or immovable good, as well as gas and electricity”.
b) Unsafe product: “A product shall be deemed unsafe where it does not present the safety legitimately foreseeable, taking into account all the circumstances and, specially, their presentation, the use reasonably foreseeable and the time it is marketed. "“A product is unsafe in all cases if it does not present the safety normally presented by the other products of the same series." Actions: in addition to any actions for contractual liability, the consumer or user has the right to claim damages caused by the product or service that is the object of the agreement under the product liability regime provided by the Consumer Protection Act.
Compensation for damages, consumer protection act 1. Compensation for damages that include personal injury and material damages.
2. The producer or service provider may be exonerated from being liable for the product liability only if proven that: a. The product had not yet been marketed; b. Given the circumstances, the product was not unsafe upon the marketing of the product; c. The product has not been manufactured for the sale or any other kind of distribution ; d. The defect was due to the elaboration of the product in accordance with mandatory rules; e. The scientific and technical knowledge existing upon delivering of the product could not appreciate the existence of such defect. It is known as exception of Risks of Development and it does not apply to certain products.
3. Those liable for damages to the consumers, which include the intervention of third parties in the value chain, shall be jointly and severally liable (solidariamente), without prejudice of the later actions between them (regimen interno de la solidaridad). Furthermore, the final seller also will be liable as a producer to the consumer, if it knew that the product was unsafe.
4. If the consumers are found responsible for the cause of the defects, the product liability will be reduced accordingly.
5. Limitation period: the action to claim for product liability shall prescribe within three years from when the damage is caused, either because the consumer became aware of the defect, or the consumer suffered damages. However, the action between and against persons liable because of their participation in the damages will prescribe within one year from the date the consumer or plaintiff user receives compensation for damages.
7. Preclusion deadline: consumer rights will expire within 10 years from when the product is marketed, if the claim for damages was not made within that period of time.
8. Prove of matters of fact: the burden of proof is borne by the consumer (Plaintiff) 2.1.2. Advertising Legal framework Under Spanish legislation, businesses’ commercial practices targeting consumers are mostly governed by The Consumer Protection Act, except if they are advertising alcohol, medicines, health products, housing, and motor vehicles, because those work under different rules. Also, Spanish advertising self-regulation organization (Asociación para la Autorregulación de la Comunicacioón Comercial), whose decisions are only binding for its members.
Illicit Advertisement The General Advertising Act guarantees actions and remedies, making it possible to eliminate illicit advertising, particularly advertising offending personal dignity or infringing rights and values recognized in the Constitution, especially in relation to children, young people, and women.
- Any advertising using images of women in a discriminatory way will be deemed illicit.
- Any illicit advertising under the General Advertising Act shall be considered unfair advertising.
- Any conduct contrary to good faith requirements is unlawful. Also, any conduct contrary to professional due care (conduct that is contrary to honest market practices) that distorts the economic behavior of consumers is unlawful.
Advertising by Comparisons Comparative advertising is regulated by a number of criteria: - Goods or services compared must have the same objective or; - The comparison has to be made objectively between their verifiable and representative characteristics.
In particular, public comparison by explicit or implicit reference to a competitor is appropriate if it observes several conditions (i.e., goods compared must have a similar function; the attributes of both goods must be objectively compared; and products with a guarantee of origin must only be compared with products conveying the same guarantee).
Media Channels for Advertising Advertising channels are restricted, to protect consumers from particularly aggressive commercial practices.
1. Businesses cannot visit consumers’ homes for commercial purposes, if consumers have told them not to do so; 2. Businesses may not repeatedly propose unwanted products by telephone or other media, unless agreed before, and consumers can object to receiving new proposals.
Target Audiences Any advertising directly encouraging children to acquire products or to convince their parents or other adults to acquire products advertised, will be considered unfair.
2.1.3. Contracting with consumers Duties for Pre-contractual Information General duty: Before the consumer is bounded by contract, the entrepeneur must provide him with clear and sufficient information regarding the contract (especially, its legal and financial terms). The consumer must know the main characteristics of the thing purchased, who's he contracting with, the total price (including taxes and charges) and how it'll be paid and the duration of the contract. In Spain, they must be provided with this information in Spanish.
Documentary Confirmation General duty: the consumer must receive a receipt or similar, containing the important terms of the agreement, including the general contractual conditions.
Right of Withdrawal and Cooling-off Periods It is mandatory for the Business party to grant a right to “step out” of the contract after its conclusion. The consumer must be able to renounce to a contract without justification nor penalty in the established time period.
Contracts excluded from the Directive’s scope of application: Healthcare, financial products, gambling, etc, automatic vending machines, auctions, notary’s intervention, etc. Other exceptions where the right to withdrawal does not have to be granted to the consumer: When prices that are dependent on fluctuations in the financial market. Software unsealed by the consumer, newspapers, health or hygienic reasons, services and digital consent rendered with the consumer’s express consent.
Effects of withdrawal: the business seller shall reimburse any payment received from the consumer, whereas the consumer must allow the seller to collect the goods or send them back. All this, within 14 days from the notice of withdrawal.
What if the consumer cannot? In the event it is impossible for the consumer or user to return the contracted goods or services due to loss, destruction or other case, this shall not deprive the consumer of the possibility of exercising the right to withdrawal. In such cases, when the impossibility of return is attributable to consumers or users, these shall be liable for the market value of the goods or services at the time when the right to withdrawal was exercised, except when this values exceeds the purchase price.
Standard Business Terms (Not Individually Negotiated Clauses) a) Incorporation of Non-Negotiated Terms: Whenever parties contract without individually bargaining the clauses but use standard terms of business, things are different; they must follow this requirements.
1. Clarity in the wording, so they can be easily understood 2. Easy to access, so the consumer can understand the contract prior to entering it 3. Good faith and fair balance of rights and obligations between the parties.
b) Control of Content (Substantive Control) of “Unfair Terms”: - General Norm for Control: Good Faith Unfair terms are those things not individually negotiated/without express consent given which may cause an imbalance of the rights and obligations, damaging the consumer.
Specific Remarks: Black and grey lists of clauses.
The terms that bind aspects of the contract to the entrepreneur's will are unfair in all cases, including those that limit the consumer of his rights, in particular those that go against good faith, for example, unfair terms regarding guarantees, lack of reciprocity (forcing the consumer to go with the contract if the entrepreneur breaks it, e.g.), etc.
Consequences: Unfair terms shall be null and void and will be ignored, but the rest of the contract will still stand.
2.1.4. In particular, guaranteed in Consumer Sales (B2C) Scope of application - Subjective Approach: It applies to B2C sales - Objective Approach: It applies to the sale of consumer goods: shall mean any tangible movable item (both new and second-hand goods), with the exception of: ▪ Goods sold by way of execution or otherwise by authority of law ▪ Water and gas where they are not put up for sale in a limited quantity ▪ Electricity Conformity with the contract: The seller must deliver goods to the consumer which are in conformity with the contract of sale. Conformity is crucial standard to assess correct performance of sales contract; lack of conformity is a breach of contract. For conformity, consumers can expect that the goods: ✓ Comply with the description given by the seller.
✓ Possess the qualities of the product which the seller has held out as a sample.
✓ Are fit for the purpose for which goods of the same type are normally used, or any particular purpose for which the consumer requires them and was made known to the seller at the time of conclusion of the contract, and accepted by the seller.
✓ Show a satisfactory quality and performance which a person can reasonably expect from the goods taking into account any description made by the seller Contractual liability The seller shall be liable to the consumer for any lack of conformity which exists at the time the goods were delivered and which becomes apparent within 2 years of the date of delivery. And second-hand products shall be able to agree to be not less than one year following the delivery.
However, attention must be brought to specific time limits: During the first six months from the time of delivery is presumed that the lack of conformity existed at the time of delivery. After six months, consumers would need to prove the lack of conformity. Finally, claims by a consumer should be made within three years from delivery.
Remedies for breach (lack of conformity 1st. Repair/Replacement: the consumer decides whether to ask for a free repair or replacement. However the seller may refuse such remedy if it is disproportionate: a remedy shall be deemed to be disproportionate if it imposes costs on the seller which in comparison with the alternative remedy are unreasonable.
2nd. Reduction of price or termination: if a repair or replacement is not possible or practical. Contract termination shall not be possible where the lack of conformity is minor.
And damages? The bringing of actions for lack of conformity is incompatible with the bringing of actions for compensation for hidden defects in the contract of sale. In all cases, consumers shall have the right to be compensated for damages arising from a lack of conformity.
Additional guarantees Shops or producers will often offer consumers an additional commercial guarantee (a warranty), either included in the price of the product or at an extra cost. They are compatible and can give consumers better protection but they can never replace or reduce the minimum 2-year guarantee, which consumers always have under EU rules.
2.2. Protection of competition 2.2.1 Foreword: Competition Law Constitutional protection of competition: the public authorities guarantee and protect the free enterprise in accordance with the demands of the general economy and the economic planning.
- Competition act: fostering free competition.
- Unfair competition: prohibiting unfair competition.
Both are aimed at protecting the consumers to the same degree that they protect the market operation in itself and the interest of all economic operators.
2.2.2. Antitrust law We have Spanish law + European law.
a) Objectives of antitrust regulation - Guarantee the good functioning of the market processes without excessively disrupting or monitoring the free business decision-making.
- Provide the instruments as well as the optimum institutional structure to protect effecti ve competition in markets.
b) Contents of antitrust law - Practices restrictive of competition o Agreements between undertakings = collusive agreement o Abuse of a dominant position: the law prohibits the abuse of a dominant position by a market agent, but not its existence or creation.
o Misrepresentation of free competition through unfair acts: the law prohibits acts or conducts that may affect eh public interest by distortion of free competition.
- Economic concentrations: the merger of two or more previously independent undertakings may result in forms of concentration. They can lead to monopolies or oligopolies which restrict competition. There are few prohibitions; there’s no authorisation-mechanism but only compulsory notification.
- Matters of public aid: The CNMC may analyse the criteria for awarding public aid in relation to its possible effects on the preservation of effective competition in the markets.
c) Enforcement: National Markets and Competition Commission is the administrative authority in charge of competition and regulatory matters (telecoms, energy, transport).
2.2.3 Unfair Competition Law Objectives Legal framework Unfair competition law and EU Directives - General principle of good faith - List of particular practices or conducts that are deemed to be unfair - Instruments for the repression of unfair acts against competition and in prejudice of consumers.
Unfair competition torts: against companies and other professionals.
- Practices against market functioning: selling at a loss, illicit advertising… - Practices against a certain competitor.
Unfair competition torts: against consumers.
- Misleading practices: pyramid sales practices, means to promote a product in order that the consumer gets a compensation if other consumers enter in the plan.
- Aggressive practices: coercion, harassment, minors… Code of conduct: excursus.
Firms may voluntarily create codes of conduct, that will be well seen in courts.
Enforcement 1st: declaratory action for bad faith (individuals and associations can claim from 1 to 4 th).
2nd: cessation action or injunction against the unfair conduct.
3rd: action to counter: to eliminate the effect produced by the practice.
4th: action to ratify: to correct all consequences left into the market by the practice.
5th: action to damages: damages sustained created by the unfair practice, there must be fraud or fault.
(only individuals can take this action).
6th: action to unjust enrichment.
Prescriben en el transcurso de un año desde que tiene conocimiento y se ejercitó el acto ilícito, y en cualquier caso después de tres años desde el momento de la finalización de la conducta.
TOPIC 5: BANKRUPTCY LAW. FUNDAMENTALS OF SPANISH LAW OF INSOLVENCY 5.1. Insolvency law Definition: in the event of a plurality of creditors where the common debtor cannot fulfil his obligations (state of insolvency), it means it hasn’t got enough assets to pay the whole passive.
A declaration opening the insolvency proceeding shall be appropriate with regard to any debtor whether a natural or legal person. It can be at request of the debtor (within the two months following the date of having known or should have known his state of insolvency) or creditor might also ask for it.
The proceeding has two main goals: - Satisfy the creditors: the debtor is not free to choose to whom it will pay.
- Insofar viable, keep the business alive.
5.2. Pre-insolvency proceedings (out of court) Insolvency proceedings have drawbacks: they are expensive, they are very time consuming and there is a general collapse of the competent courts. Therefore, there are two kinds of out-of-court insolvency proceeding.
Refinancing composition The debtor is free to negotiate a refinancing agreement with creditors, including conversion of debt into shares, assignment of assets or rights to the creditors, etc. If the refinancing agreement is signed by creditors representing the 51% of the financial liabilities, the composition may be judicially homologated meaning that the content of the refinancing agreement is extended to non-signing financial creditors of the common debtor.
Out of court payment composition The common debtor offers and aggregated solution for all of its creditors. It must be negotiated and accepted by the creditors, otherwise the judicial proceedings for insolvency will be opened. If the debtor breaches the payment agreement, the insolvency practitioner must file insolvency proceedings.
5.3. Insolvency proceedings. Declaration, effects and phases Requirements of an insolvency proceeding Subjective aspect The insolvency proceeding is applicable to any debtor (natural or legal person).
Regardless of whether he/she is an entrepreneur or not (civil or commercial nature).
Insolvency might also affect inheritance but never be opened for public law entities.
Objective aspect there must be a common debtor in a situation of insolvency.
Procedural aspect The general rule says that the Mercantil Courts of law are competent to hear and decide on insolvency, mainly for commercial companies. The exception is that the Civil First Instance Courts are competent, wherever the insolvency proceeding is opened for a natural person who do not have the condition of entrepreneur.
Types of insolvency proceedings - Voluntary insolvency proceedings: when the opening is requested by the debtor itself.
- Compulsory insolvency proceedings: when the opening is requested by the non-paid creditors.
Effects of the insolvency proceeding a) Effects on the common debtor The opening insolvency proceedings shall not interrupt the continuation of the debtor’s business activity.
In the event of voluntary: the debtor preserves managing powers under the intervention of the insolvency administrators, via their authorization or approval.
In the event of compulsory, the debtor does not preserve managing powers, which are suspended and substituted by the insolvency administrators.
b) Effects on the plurality of creditors Integration in aggregate liabilities all the creditors shall be integrated in the aggregate liabilities of the insolvency proceedings. So, new declaratory trials cannot be initiated.
c) Effects on Debtor’s contracts The declaration opening the insolvency proceedings shall not affect the validity of contracts with reciprocal obligations pending fulfilment. Exceptions: recession of contracts could be requested if the insolvency practitioners deem it convenient to the interests of the insolvency proceedings. Clauses that establish the right or terminate the contract due solely to a declaration opening insolvency proceedings of the parties shall be deemed non-existent.
d) Effects on Detrimental acts to the aggregate assets Acts that are detrimental (harmful) to the aggregate assets performed by the debtor within the two years prior to the date of declaration may be revoked.
Determination of the Aggregate Assets aggregate assets of insolvency proceedings are the properties, goods and rights forming part of the debtor’s state on the date of declaring the insolvency proceeding open and those acquired until conclusion of the proceedings. They are valuated according to the market value.
List of creditors or aggregate liabilities aggregate liabilities are formed by claims against the common debtor that, pursuant to this Act, are not considered claims against the estate. Creditors shall lodge their claims to make and quantify a creditor’s list. Ranking of credits: 1st preferential claims (claims with special preference since they are secured: mortgages), 2 nd ordinary claims and 3rd subordinated claims (those that the legislator considers to be paid once the preferential and ordinary ones are satisfied, claims having been lodge late, claims for fines, claims held by any person related to the debtor).
Solutions to insolvency proceedings 1. Phase of composition agreement it applies for default. The proposed composition shall be discussed in the creditor’s meeting and if accepted by the majority required, prescribed by law, and they will bind all creditors.
2. Phase of winding-up in the event of no proposal of Composition agreement or none of the proposed is accepted, or after its approval it has been breached, the insolvency proceedings go to the liquidation.
As to payments, the insolvency practitioners shall deduct the properties necessary to pay claims against the state before paying insolvency claims.
Classification phase Insolvency proceedings shall be classified as: - Tortious insolvency when the generations or aggravation of the state of insolvency has involved malicious intent or gross negligence by the debtor or his legal representatives.
- Accidental insolvency arosee in its normal course of business.
Conclusion of the insolvency proceeding The general causes for conclusion of an insolvency p4oceeding are: - The order that revokes rhe order declaring insolvency proceedings is final.
- Onve the order declaring fulfilmnet of the compositiobs is final or the actions to declare its infringment have expired or have been rejected.
- When the insufficiency of the aggregate assets to settle the claims gainst the state is verified.
- When the creditors have been fully paid off by any other means or that there is no longer a situation of insolvency.
- Once the common phase of insolvency proceedings has concluded.