Apuntes Contracts (parte de Civil Law) (2017)

Apunte Inglés
Universidad Universidad Pompeu Fabra (UPF)
Grado Derecho - 2º curso
Asignatura Contracts
Año del apunte 2017
Páginas 133
Fecha de subida 24/11/2017
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Apuntes de Derecho Contractual (Contracts) en Inglés, parte: Civil Law contracts (133 pgs.)

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CONTRACTS – CIVIL LAW TEMA 1. Contracts and cooperation. Classifications of contracts 1.1 Contracts as tools to promote economic cooperation. An outline of the legal origins theory.
We’ve two types of contracts: civil and commercial, because of historic reasons. The first one includes the most extensive regulation.
A tale of two hunters, Jean Jacques Rousseau.
Rosseau’s tale is about the case of two hounters who need food to survive. They can choose cooperation to get a dear, or choose not to cooperate and hunt, by themselves, a rabbit.
Nash equilibrium à the best strategy that a player may engage in considering the strategy followed by the other player.
In this case, the equilibrium (5,5) is pay off dominant and equilibrium 2,2 is risk dominant: because the best option would be cooperation to get the dear (pay-off dominant), but if the players do not trust enough the other one (or don’t know what decision is going to make), they probably choose not to cooperate and hunt the rabbit (risk dominant).
Why contract law is important? 1. It’s useful to trust if then we win the best equilibrium for both contractual parts.
2. It’s useful to eliminate negative consequences of decisions.
Example of the developer and the investor Developer (Gary) ® Gary is a highly skilled computer programmer. He is specialized in videogames for iOs and Android.
Investor (Jen) ® Jen has funds to invest in the marketing and advertising of apps or in other business.
(dispone de fondos para invertir en la comercialización y publicidad de aplicaciones).
- If they cooperate ® they may end up marketing a successful videogame with profits of 15 for each one.
- If Jen invests but Gary does not cooperate (he leaves with the money) ® Jen gets 0u, while Gary obtains 30u.
- If Jen do not invest ® Each one receives 10u with their individual activities.
1 The solution that Contract Law gives is: if Jen invests and Gary does not cooperate, profits equals: - Jen = $0 - Gary = $30 But if, for example, by norms and rules (or other measures) Gary is banned to take that choice or is sanctioned (for instance, forcing him to pay a 20$ fine), he would have more incentives to cooperate with Jen instead of not, and this way the system can get the more efficient equilibrium for both.
This way, through contracts (and with cooperation), they become enforceable obligations.
We may add that, in some case, it can be a spontaneous cooperation without the need of formal contracts (even in extreme situations).
¿In which cases can it happen? Economists and social scientists have identified some of the principle mechanisms to achieve cooperation among contractual law: - Kinship (parentesco) - Altruism (altruismo) - Reciprocity in long-term relationships – repeated itinerance (Reciprocidad a largo plazo, que se da varias veces) - Relational contracts (contratos relacionales) 2 - External mechanisms that may enforce cooperation farther than the law: social norms, reputation, shaming, ostracism (normas sociales, reputación, vergüenza, ostracismo).
Why cooperation is important? – Enlarging the “contractual pie” Example of the buyer and the seller - Buyer and Seller entered into a contract for the sales of goods. They specified that goods would be delivered to Buyer’s premises on October 30th.
- Buyer’s valuation of having the goods delivered earlier (on September 30th): 3,000€.
- Cost to the Seller of delivering the goods earlier: 1,000 €.
Un comprador y un vendedor firman un contrato para la venta de bienes. En este, acordaban que las mercancías se entregarían al vendedor el 30 de octubre. El vendedor valora positivamente que las mercancías se entreguen con un mes de anterioridad: 3000€ de beneficio.
Para el comprador, entregar la mercancía un mes antes supone un coste de 1000€.
3000 – 1000 = 2000€ “Contractual pie” = surplus (superávit) created by this possibility of cooperation = 2,000€ This way, parties will have incentives to negotiate a contractual modification and establish a new date for delivery of goods to Buyer.
Contract Law as a coordination or cooperation device Economic theory generally supports the idea that good legal institutions (clear and value-promoting rules, high quality courts) facilitate cooperation and therefore economic growth: Economic growth (surplus obtained by cooperation) crucially requires investment (of effort, of capital) with non-immediate returns.
These investments require ® - Rules that protect Liberty, property and contract (libertad, propiedad y contrato).
- Good independent courts that enforce contracts, liberty and property, and by doing so encourage investments which are crucial for economic development. Buenos tribunales independientes que hagan cumplir los contratos, la libertad y la propiedad. Además, al hacerlo, fomentan las inversiones cruciales para el desarrollo económico.
However, causation may work both sides: 1. Economic growth is likely to increase demand for good legal rules and high-quality courts or other institutions to enforce them 2. In turn, improvements in the quality of the law are likely to facilitate increases in growth, which will further increase demand for high-quality legal infrastructure Sin embargo, y pese a los indicios que hacen creer que la teoría es cierta, podría también funcionar en ambos lados: 1. Es probable que las mejoras en la calidad de la ley faciliten el aumento del crecimiento, lo que aumentará aún más la demanda de infraestructura jurídica de alta calidad.
2. A su vez, es probable que el crecimiento económico aumente la demanda de buenas normas jurídicas y tribunales de alta calidad u otras instituciones para hacerlas cumplir.
3 Legal Origins Theory In the last two decades a thesis has been developed under the “Legal Origins Theory” label which argues that the historical origin of a country’s law is highly correlated with economic outcomes or, in short, that common law is more efficient than civil law (el derecho común es más eficiente que el derecho civil).
This literature has produced significant policy measures, essentially through World Bank-led or inspired projects and initiatives (esencialmente proyectos e iniciativas dirigidos o inspirados por el Banco Mundial) It is based upon the following foundations: - Law and legal outcomes are measurable - Legal systems can be ascribed to legal origins or legal families that are markedly different (common law, civil law, subfamilies… - Legal origins have a deep impact on the laws and legal institutions of countries and these, in turn, produce important effects in economic outcomes (Los orígenes legales tienen un enorme impacto en las leyes e instituciones de los países y éstos, a su vez, producen efectos importantes en los resultados económicos).
Substantial implications according to this literature: - Confirmation of Efficiency hypothesis of the Common Law - Judge-made law is more efficient than statutory law (la ley de juicio es más eficiente que la ley estatuaria) - Common law courts are more effective in protecting individuals and firms from government’s bad behaviour than civil law courts (Los tribunales del derecho común son más eficaces en la protección de los individuos y las empresas del mal comportamiento del gobierno que los tribunales civiles) Results: 1. Common law is better than Civil law (with differences between the Scandinavian, German and French origins, the latter clearly the worst according to the legal origins thesis).
El Derecho Común es mejor que el Derecho Civil (pero teniendo en cuenta las diferencias entre los orígenes escandinavos, germanos o franceses, pues está demostrado que si se tiene origen francés los resultados son peores).
2. Regression analyses show the effects of legal origins on important legal and economic variables both at: - Micro level® financial markets, credit protection and contract enforcement, entry of firms, government ownership of banks and media labor markets, legal formalism, etc. (los mercados financieros, la protección del crédito y la ejecución de contratos, la entrada de empresas, la propiedad gubernamental de los bancos y de los mercados de trabajo de los medios de comunicación, formalismo legal, etc.) 4 - Macro level® growth, development, rule of law, quality of judiciary (crecimiento, desarrollo, estado de derecho, calidad del poder judicial) Results: - For all the above variables, there is a clear and significant positive effect of having a Common law legal origin and a clear and significant negative effect of having a Civil law, especially French, origin: § § Common Law origin is linked to more and better investor and creditor protection, less government regulation, more judicial independence and less formalistic and more creative courts Civil law origin is linked to the reverse of -- Criticisms or arguments challenging the legal origins theory 1. Can Law and legal institutions be reliably measured? - ¿La ley y las instituciones legales se pueden medir de manera fiable? - How can you measure “constitutional acceptance of case law”, for instance? Or even “contract enforcement”? (Por ejemplo, ¿cómo se puede medir la “aceptación constitucional de la jurisprudencia”? ¿Y la “ejecución de contratos”?) - Is measuring “Law in the books” the same as measuring “Law in action”? (¿“Medir la ley en libros” es lo mismo que “medir la ley en acción”?) 2. One-size-fits-all critique - Una crítica de talla única - Legal systems are not monolithic: for example, the French legal system and the Italian legal system are not completely equivalent.
- Legal systems evolve over time in different ways and subject to different influences - Dimensions of legal institutions affecting legal and economic outcomes are varied and have different origins and bases 3. Static vision critique - Crítica estática de la visión - Legal systems change significantly over time, but effects on outcomes are determined at just one moment, the present time.
- Legal origins theory fails to identify the permanent elements that have not evolved and are in fact influencing current outcomes. Some elements may be just circumstantial.
4. Alternative theories - Teorías alternativas The true explanatory variable is not legal origin but some other one correlated with the former (la verdadera variable explicativa NO es de origen legal, sino que otra correlacionada con la anterior) - Culture: prevailing cultural values and practices are the true substance behind the differences in "legal cultures". Different legal cultures are a by-product of those other, deeper, cultural variations that explain the economic outcomes (los valores y prácticas culturales predominantes son lo que verdaderamente crea una diferencia en las culturas jurídicas. Las diferentes culturas jurídicas son un subproducto de esas otras variaciones culturales más profundas que explican los resultados económicos) - Religion: closely linked to the cultural explanation above, but with an emphasis on religion, and religion-inspired social values and practices (Weber) - Politics is the key explanatory variable behind the identified diversified economic performance of countries: 5 § § § Pro-government biases in given polities Influence of social democratic grand policies deeply affecting the economy and the role of government at certain moments Political views about the relationship between political power and Law: Courts as political actors; legal control of political power 5. History matters - La historia importa - Economic outcomes and performance changes and even reverses over time: the debate concerning financial market development in early XXth century and the relative advantage of Civil Law jurisdictions (Los resultados económicos y los cambios en el desempeño e incluso los cambios en el tiempo: el debate sobre el desarrollo del mercado financiero a principios del siglo XX y la ventaja relativa de las jurisdicciones de Derecho Civil) - Dramatic historical events are overlooked (the inter-wars period, WWII and its aftermath) that had a profound impact on XXth century policies and economic outcomes (Se pasan por alto los acontecimientos históricos dramáticos (el período de entre guerras, la II G.M. y sus secuelas) que tuvieron un profundo impacto en las políticas y en los resultados económicos del XX).
6. Problems with econometric specifications - Problemas con las especificaciones econométricas 7. Correlations found do not ensure causality - Las correlaciones encontradas no garantizan la causalidad 8. Problems in explaining why some mixed legal systems have not shifted to it -Problemas para explicar por qué algunos sistemas jurídicos mixtos, fuertemente influenciados por el derecho común, no se han desplazado a él Quebec and Luisana 1.2. The concepts of contract As we have seen, a contract is a cooperative solution between 2 or more persons that helps them to maximize the welfare or surplus created by their cooperation. Contractual surplus is created because they can transfer or assign resources among them, to perform specific conducts, or to allocate risks among them.
When on top of that, those persons may resort to the State (recurrir al Estado) (for instance, to the courts) to enforce the promises included in the contracts, we may then refer to legally enforceable contracts or contracts that are honored by the legal system.
An entity other than a state-authorized court (a decision-making body within a firm, a trade association or a religious group, or an arbitration organization) could serve as a tribunal and sometimes enforce contracts.
Legal concept of a contract è A contract is an agreement which is intended to give rise to a blinding legal relationship or to have some other legal effect.
Un contrato es un acuerdo que tiene por objeto dar lugar a una relación jurídica vinculante o tener algún otro efecto jurídico.
Required elements of a contract They can differ according to different legal systems. In Spanish Law (art. 1261 CC): · Consent – Mutual agreement between the parties.
· Object – It must be valid and legal 6 · Cause – Function · Formalities - Some agreements need formalities (as public deed - escritura pública) to be valid Legal notions of a contract tend to emphasize: - Consent as the basis of the contract - Legal effects and legal enforceability (Efectos jurídicos y aplicabilidad jurídica) ® “relación jurídica vinculante” – “binding legal relationship” Pacta sunt servanda (contract must be fulfilled): basic principle of Contractual Law.
The binding character of a contractual agreement presupposes that an agreement has actually been concluded by the parties and that the agreement reached is not affected by any ground of invalidity. (El carácter vinculante de un acuerdo contractual presupone que un acuerdo ha sido efectivamente concertado por las partes y que el acuerdo alcanzado no se ve afectado por ningún motivo de nulidad.) Spanish Contractual Law: Art. 1091 CC ® “Las obligaciones que nacen de los contratos tienen fuerza de ley entre las partes contratantes, y deben cumplirse al tenor de los mismos”.
Art. 1258 CC ® “Los contratos se perfeccionan por el mero consentimiento, y desde entonces obligan, no sólo al cumplimiento de lo expresamente pactado, sino también a todas las consecuencias que, según su naturaleza, sean conformes a la buena fe, al uso y a la ley”.
Economic concept of a contract “A contract is a specification of the actions that named parties are supposed to take at various times, as a function of the conditions that they obtain” (Kaplow/Shavell) “Un contrato es una especificación de las acciones que se supone que las partes deberán tomar en varias ocasiones, en función de las condiciones que obtienen” Economic approaches (enfoques económicos) to contracts focus on these conditions (important): - Contract as a voluntary interaction: parties prefer to enter into the contract than the alternative - Contract determine future actions of parties - Contract sets future actions based on contingencies or future states of the world - External verifiability of actions and contingencies 1.3. Roles of contracting – Funciones de la contratación Why do people enter into contracts? Contracts are entered into when they are mutually beneficial for both parties Pareto-Efficiency (eficiencia de Pareto) Ideally, the contract cannot be modified so as to raise the well-being (the expected utility, la utilidad esperada) of each of the parties to it.
® Examples of benefits for the parties (incentives to celebrate it) 1. Differences on valuation – Diferencias en la valoración If a person values his property in € 1,000 and someone else assigns a different value to it (€ 2,000), any contract by which the owner would sell the property to the buyer for a price between those two figures, for example, € 1,500, would be beneficial to both parties.
7 Si una persona valora su propiedad en 1.000€ y otra persona le asigna un valor diferente (2.000€), cualquier contrato por el cual el propietario vendería la propiedad al comprador por un precio entre esas dos cifras (ej.: 1.500€) sería beneficioso para ambas partes.
2. Advantages in production - Ventajas en la producción A person values the cost of a project if it has to be conducted personally 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. Ex.: distribution agreements.
Una persona valora el coste de un proyecto si tiene que realizarse personalmente en 200€, mientras que el coste para un partido especializado para llevar a cabo el mismo proyecto es de sólo 100 €. Por lo tanto, el principal puede estar interesado en pagar 150 € al agente, y este agente estaría dispuesto a aceptar para hacer el trabajo por ese precio. (Ej.: acuerdos de distribución).
3. Complementarity - Complementariedad When the parties can increase their profits 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. Ex.: partnerships, companies.
Cuando las partes pueden aumentar sus beneficios uniéndose a sus habilidades y habilidades complementarias se encuentran en una situación en la que entrar en un contrato puede ser mutuamente beneficioso. Ejemplo: inversión por parte de empresas ángel de negocios en empresas de nueva creación. (Ej.: sociedades, empresas).
4. Giving and taking money on loan - Dar y tomar dinero prestado 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.
Una empresa puede querer iniciar un nuevo proyecto o un individuo puede querer comprar una casa. Al mismo tiempo, los individuos y otras instituciones financieras que tienen acceso más barato al capital pueden estar interesados en prestar dinero y obtener un beneficio de los intereses del préstamo. En esos escenarios, un contrato financiero puede percibirse como un acuerdo mutuamente beneficioso entre las partes y un instrumento para promover la cooperación.
5. Risk assignment - Asignación del riesgo 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. Example: insurance contracts; media rights in sports events.
Los contratos también pueden ser mutuamente beneficiosos cuando se distribuyen riesgos o contingencias entre las partes, especialmente cuando las partes difieren en su capacidad o voluntad de asumir o asumir riesgos. Los contratos pueden trabajar para asignar costos futuros o hipotéticos al portador de riesgo superior. Ejemplo: contratos de seguro; los derechos de los medios de comunicación en los eventos deportivos.
6. Different expectations - Diferentes expectativas 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 different expectations about 8 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.
Las predicciones acerca de los precios de la vivienda, los cambios de divisas, las condiciones del mercado, etc., pueden variar dependiendo de las habilidades, conocimiento o prejuicios cognitivos de una persona. Si dos personas tienen expectativas diferentes sobre eventos futuros, puede ser mutuamente beneficioso celebrar un contrato. Ejemplo: El Sr. A es el propietario de un apartamento en Barcelona y cree que los precios de la vivienda en la ciudad disminuirán drásticamente en los próximos años, mientras que el Sr. B cree que la situación sería la inversa.
1.4. Functions of Contractual Law Legal systems usually have a group of norms that govern contracting between individuals, companies and other undertakings.
This group of norms (known as Contractual Law) satisfies different functions: · To establish which agreements merit protection by the State and might be enforced by public authorities: - Formalities - Consent requirements - Validity requirements (In Spain, objeto jurídico (legal object) and causa) · To reduce transaction costs - Supply of a catalogue of contracts - Default rules To furnish interpretation rules (Proporcionar reglas de interpretación) · · To offer tools aimed at reducing informational asymmetries between the parties (Promover herramientas que permitan reducir las asimetrías informacionales entre las partes) · To offer tools aimed at preventing or minimizing cognitive biases For instance, providing consumers or other parties with cooling-off periods within they may decide to withdraw consent to a contract. Formalities may play the same role. (por ejemplo, el hecho de proporcionar a los consumidores u otras partes períodos de reflexión dentro de ellos puede retirar el consentimiento a un contrato. Las formalidades pueden desempeñar el mismo papel.) · To establish remedies for breach in order to protect an aggrieved contract party. (Establecer vías de recurso para el incumplimiento a fin de proteger a una parte contratante perjudicada.) 1.5. Sources of contractual law - Fuentes del Derecho contractual A) Spanish law · Código Civil, Civil Code (1889) · Código de Comercio, Commercial Code (1885) Both the Spanish Civil Code and Commercial Code have a very similar structure: a group of general rules (articles 1254 to 1314 CC, and articles 50 to 63 CdC) and sets of particular rules for each specific contract.
· Código Civil Catalán, Catalan Civil Code - regalos o donaciones [gifts or donations] (2006); contratos de vendas [sales contracts] (2007) 9 · Special rules that govern some particular contracts: among others, urban leases, non-urban leases, agency contracts, agreements to create a company, administrative contracts, labor contracts. (Normas especiales que gobiernan algunos contratos particulares: entre otros, arrendamientos urbanos, arrendamientos no urbanos, contratos de agencia, acuerdos para crear una empresa, contratos administrativos, contratos de trabajo) Examples (this is not an exhaustive list): - Llei 56/1968, de 27 de juliol, reguladora de les percepcions de quantitats anticipades en construcció i venda d'habitatges.
- Llei 50/1980, de 8 d'octubre, de contracte d'assegurança.
- Llei 19/1985, de 16 de juliol, canviària i del xec.
- Llei 34/1988, d'11 de novembre, general de publicitat.
- Llei 3/1991, de 10 de gener, de competència deslleial.
- Llei 12/1992, de 27 de maig, sobre contracte d'agència.
- Llei 29/1994, de 24 de novembre, d'arrendaments urbans.
B) International Law · United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (CISG) The CISG was developed by the United Nations Commission on International Trade Law (UNCITRAL), and was signed in Vienna in 1980. The CISG is sometimes referred to as the Vienna Convention The Convention provides a uniform framework for contracts of sale of goods between parties whose places of business are in different Member States.
The Convention has, as of September 2017, been ratified by 87 States, which come from all legal traditions, have very different economies, and together account for over two thirds of global commercial exchanges (en conjunto, representan más de 2/3 de los intercambios comerciales mundiales). It can be said to be a sort of balance between the civil law tradition and the common law one. (especie de equilibrio entre el Derecho Común y el Derecho Civil tradicional) 10 Although the CSIG focuses on the sales contract, it provides general criteria on issues such as contract formation, breach of contract and remedies to protect creditors in situations of non-performances (sobre cuestiones tales como la formación de contratos, el incumplimiento de contrato y los recursos para proteger a los acreedores en situaciones de incumplimiento.) Courts in member States, such as the Spanish Supreme Court, have used its norms to interpret contracts different than sales.
C) Other non-legal enforceable texts · Principles of European Contract Law (PECL) or Lando Principles Drafted by an expert committee appointed in 1980. Revised in 1998 and 2002.
The PECL includes basic and general rules of contract law aimed at providing lawmakers and contracting parties with a regulatory framework for contractual legal issues (destinado a proporcionar a los legisladores y partes contratantes un marco regulatorio para cuestiones jurídicas contractuales).
Each article in the PECL is accompanied by a commentary as well as with supplementary footnotes describing and surveying case-law (jurisprudencia) and development in national jurisdictions.
The PECL aimed at strengthening the single market and at facilitating cross-border trade in Europe, by way of preventing or minimizing time, effort and other transactions costs. (tiene por objeto reforzar el mercado único y facilitar el comercio transfronterizo en Europa, a fin de prevenir o reducir al mínimo los costes de tiempo, esfuerzo y otros gastos de transacción).
· The Principles of International Commercial Contracts (PICC) of 2010 or UNIDROIT Principles The Principles set forth general rules which are basically conceived for “international commercial contracts”.
They have been drafted by the International Institute for the Unification of Private Law (UNIDROIT).
UNIDROIT is an independent intergovernmental Organisation with its seat in Rome.
Functions: 1. Its principle purpose is to study needs and methods for modernising, harmonising and co-ordinating private and commercial law.
2. The UNIDROIT Principles apply when the parties have agreed that a contract be governed by them, or when the parties have agreed that their contract be governed by general principles of law, by lex mercatoria or use similar expressions.
3. The UNIDROIT Principles are also intended to be used to interpret or supplement international uniform law instruments or national law.
Finally, they are also conceived as a model code for national and international lawmakers.
- Draft Common Frame of Reference (Marco Común de Referencia) Drafted by two groups of Scholars: StudyGroup on a European Civil Code (the “Study Group”) and the Research Group on Existing EC Private Law (the “Acquis Group”), which in 2009 presented a final text with Principles, Definitions and Model Rules of European Private Law (texto final con Principios, Definiciones y Reglas Modelo de Derecho Privado Europeo) It has a more ambitious scope than the previous documents, since it does not focus only in the provision of a general regulation of contracts and rules for specific agreements, but also it sets forth rules on matters 11 such as the law of obligations, acquisition of property, trusts, unjust enrichment and others. (Tiene un alcance más ambicioso que los documentos anteriores, ya que no se centra sólo en la disposición de un reglamento general de contratos y normas para acuerdos específicos, sino que también establece normas sobre cuestiones como el derecho de las obligaciones, la adquisición de bienes, fideicomisos, enriquecimiento injusto y otros) 1.6. Classifications · B2B ® contracts between companies or businesses. Commercial transactions.
Contratos entre compañías o empresas. Transacciones comerciales.
· B2C ® contracts between a business and a consumer. Consumer Law.
Contratos entre empresario y consumidor. Derecho de consumo · C2C ® contracts between two individuals Contratos entre dos individuos · C2B ® labour contracts.
Contratos laborales Traditional distinctions: (1) Onerous / Gratuitous (2) Bilateral / Unilateral (3) Regulated / unregulated: nominated / non-nominated (típicos/atípicos) (4) Formal / Informal 12 TEMA 2. Freedom of contracts. Elements of contracts 1. Freedom of Contract Freedom of contract = private autonomy: Parties are free to make a contract or other juridical act and to determine its contents, subject to any applicable mandatory rules.
Las partes pueden decidir entrar en el contrato + determinar su contenido (con el límite de las normas obligatorias) · It has been recognized as a ‘general principle of civil law’ by the European Court of Justice (Tribunal Europeo de Justicia) · It has been protected by article 16 of the European Union Charter of Fundamental Rights (‘freedom to conduct business’) (libertad de empresa) · It is very important on contract law, because this issue defines the scope of the subject and marks the boundaries between public and private lawmaking. (Este punto es de suma importancia en derecho contractual, puesto que marca los límites entre legislación pública y privada).
Article 1.1. UNIDROIT Principles.
“The parties are free to enter into a contract and to determine its content”.
Article 6 CISG “The parties may exclude the application of this Convention or, subject to article 12, derogate from or vary the effect of any of its provisions”.
Article 1255 Civil Code.
“The contracting parties may establish any covenants, clauses and conditions deemed convenient, provided that they are not contrary to the laws, to morals or to public policy”.
Different views of freedom of contracts 1. Legal or moral principle (autonomy of the will) The justification for contractual obligations is found in the free choice (will) of the individuals that enter voluntarily into a contract.
Influenced by liberal philosophical positions (Rosseau, Kant) ® Free development of personality, self-determination, autonomy.
2. Economic principle (market mimicking) The goal of freedom of contracts is to ensure that legal and commercial institutions are applied in a way that support a free and open market and to facilitate market transactions.
To what extent will unregulated private contracting lead to desirable social consequences? ¿Hasta qué punto la contratación privada no reglamentada dará lugar a consecuencias sociales deseables? 13 · Punto de vista normativo Contract Law rules should be crafted as to create the incentives for the behavior of the contracting partners that would maximize the welfare of the parties affected by the contract ® regulation, interpretation and enforcement of contracts should consider that contracts between private parties are cooperative tools that are entered into by the parties in order to maximize their joint surplus from the contractual relationship.
Las normas de derecho contractual deben elaborarse de modo que generen incentivos para maximizar el bienestar de las partes, y por tanto la regulación, interpretación y ejecución de estos debe tenerlo en cuenta.
However, it must also be considered that contracts may affect third-parties: [Example: if an agreement between two parties restricts competition the Law has a good reason not to enforce the agreement, so it doesn’t give effect to the parties intentions.] Economists and other social scientists have highlighted some situations that may support the restriction of the freedom of contract principle (at list a little). Perfect markets do not exist in practice because of: a) Harmful externalities to third parties § Agreements between competing firms to control prices or exclude entry of a new competitor in a market. (Acuerdos entre empresas competidores para bloquear la entrada al mercado o controlar los precios.) § Agreements with restraints on alienation that have the effect of increasing the parties' wealth at the expense of prospective acquirers or secondary-markets. (Acuerdos con restricciones sobre la enajenación que tienen el efecto de aumentar la riqueza de las partes a expensas de posibles adquirentes o mercados secundarios) § Agreements to commit crimes; § Insurance contracts for fines or liability arising from crime. Contratos de seguros por multas o responsabilidad derivada de delitos.
b) Monopolies or market power c) Asymmetrical information Contract rules that provide parties with incentives to disclose information, like: - Rules on mistake - reglas sobre el error - Rules on the scope of damages – reglas sobre el alcance de daños y perjuicios (art. 1107 CC) In this sense legal systems may refuse to enforce contracts entered to by minors and incompetents because they may result in losses in their welfare.
d) Cognitive biases or bounded rationality (sesgos cognitivos o racionalidad limitada) - Over-optimism and withdrawal of consent (retirada del consentimiento) - Over-optimism and reduction of liquidated damages (reducción de daños y perjuicios) - Endowment effects and market damages (efectos de dotación y daños al Mercado) e) Commodification (mercantilización) It describes the assignment of economic value to something not previously considered in economic terms.
Sometimes legal systems set forth rules on inalienability to avoid this phenomenon.
® Grounds (motivos): paternalism, culture, religion, politics.
® Examples: sales of human organs, prostitution, surrogacy agreements (analysis of an example): the typical arguments for that sales of human organs must be undesirable are: 1. Some individuals will sell their own organs (such as kidneys - riñones) without realizing the harmful consequences for themselves. Enforcing the agreement may make the contracting parties worse off due to a problem of lack of information.
14 2. Some individuals will not receive the care they need. Enforcing the agreement may make the contracting parties worse off due to the contract-induced behaviour.
3. The very existence of a market for human organs might be conceived by some citizens as eroding norms of respect (normas erosivas de respeto) for human life.
Three general consequences of freedom of contract in Contract Law Parties are free to: i.
Decide whether to enter into a contract and establish binding legal relationships (or not).
Choose among the different contracts supplied by the legal system [typical contracts] and modify or fine-tune the different default rules established in the law (to adapt them to their own interests) ® parties may exclude the application of many legal rules.
Create new contracts according to their own interests [atypical or unnominated contracts].
1. Freedom to enter into a contract Exceptions: - Invalid consent: absence of will. (because of mistake, fraud, coercion/duress) - Monopoly or market failure due to high transaction costs.
Example: In traditional common law, for instance, some businesses are designated as common carriers and are obliged to enter into exchange on standard terms with anyone who wishes. Modern statutes have expanded such duties in a variety of ways: for instance, the essential-facilities doctrine in antitrust law requires vertically integrated firms to make certain stages of production available on a contractual basis to their non-integrated competitors.
En la ley común tradicional algunas empresas son designadas como transportistas comunes y están obligadas a entrar en el intercambio en términos estándar con cualquier persona que desee. Los estatutos modernos han ampliado tales funciones de varias maneras: por ejemplo, la doctrina de las instalaciones esenciales en el derecho antimonopolio requiere que las empresas verticalmente integradas hagan ciertas fases de producción disponibles sobre una base contractual a sus competidores no integrados.
- Non-Discrimination: it limits the right to choose a contractual partner in some settings. (Ejemplo de los dueños de hotel que negaban a las parejas homosexuales las habitaciones con doble cama y de la compañía Sanitas que no quería asegurar a un niño con síndrome de Down.) What about choosing a particular contractual partner in the sharing economy? o Quasi-contracts: an obligation that the law creates in the absence of an agreement between the parties. It is usually invoked in situations where unjust enrichment, which occurs when a person retains money or benefits that in equity belong to another, would exist without judicial relief.
Unjust enrichment, management of another's affairs (gestión de asuntos ajenos), or payment of a thing not due (pago de una cosa no debida).
o Outside contract law: Necessity (rewards for rescue); takings of property.
2. Freedom to modify the content of contracts provided by the legal system Mandatory rules/default rules Some rules of contract law supply default terms that are subject to contractual override; other rules of contract law are mandatory à they can’t be modified by the contract.
Algunas reglas del derecho contractual proveen condiciones por defecto que están sujetas a una anulación contractual; otras normas del derecho contractual son obligatorias Example of mandatory rule: 15 è Articles 7.1 and 1258 CC create a duty to act in good faith. These are mandatory rules, because such duty cannot be disclaimed (rechazada) by a contractual provision.
Example of default rule: è Article 1465 CC: “delivery expenses of the things sold shall be borne by the seller, and transport or freight expense shall be borne by the purchaser unless parties agree otherwise.” Si las partes no pactan otra cosa diferente, la regla que aplica por defecto en este caso es que los gastos de transporte correrán a cargo del comprador.
It isn’t always clear whether a given rule is one or the other: the usual tipoff is language like: - “unless the contract provides otherwise” (a menos que el contrato diga otra cosa) - or “absent and agreement to the contrary”. (ausencia y acuerdo en contrario) Default rules reduce transaction costs: drafting a complete contract would almost always cost more than the contract is worth à a complete contract is unfeasible (inviable) and they never exist. We only have “incomplete” contracts. Default rules may be used to complete “obligational gaps” in the incomplete agreement.
- Las reglas por defecto reducen los costos de transacción (porque crear un contrato casi siempre supondrá más costos de ese tipo) - Además, prácticamente no existen “contratos completes”, y en ese sentido este tipo de reglas son de ayuda para completar las brechas/vacíos (gaps) que falten.
Differences between mandatory and default rules à - Mandatory norms can’t be derogated by the parties - Default rules can be derogated in case the parties provide a different alternative One of the problem with the default rules is paternalism. Why to use one default rule and not the reverse? (¿Por qué la regla por defecto debe ser ESA y no otra distinta?) - Majoritarian perspective (perspectiva mayoritaria): to stablish the usual behaviour as default - Informational penalties (sanciones informativas): in order to create default rules, the Civil Code has got a function that is to provide incentives to parties to eliminate asymmetries of information between them.
El CC tiene la función de ofrecer incentivos a las partes para eliminar las asimetrías de información entre ellas.
- Increase of social welfare: a) Libertarian paternalism b) Eric j. Johnson and Daniel Goldstein Example à Organ donations in countries with an opt-out system (default rule: every citizen is a donor unless he’s opted out) are substantially higher than in countries with an opt-in system (default rule: only citizens that have opted in by agreeing to be donors are considered donors).
Las donaciones de órganos en países con un sistema de opt-out, donde la regla por defecto es que los ciudadanos son donantes a no ser que digan lo contrario, son mayores que en países con un sistema opt-in, donde la regla por defecto es que sólo donaran las personas que hayan pedido ser donantes.
3. Freedom to create new contracts “numerus apertus” vs. “numerus clausus” in property rights.
Atypical contracts in Spanish Law (those that don’t have a specific regulation): 16 - Sponsoring and merchandising agreements (Contratos de patrocinio y merchandising) - Naming rights agreements (contratos sobre derechos de denominación) - Bank safe-deposit box agreements (contratos de caja de seguridad bancaria) - Franchise agreements (contratos de franquicia) Limits to private autonomy: an agreement cannot violate (art. 1255 CC): 1. Mandatory norms: Legal systems comprise (incluyen) mandatory rules and default 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.
Las reglas por defecto sirven básicamente sirven como un mecanismo de reducción de costos de transacción.
Example of mandatory norm: minimum-practice fixation in distribution or technology transfer agreements: “the restriction of a party’s ability to determine its prices when selling products to third parties, without prejudice to the possibility of imposing a maximum sale price or recommending a sale price, provided that it does not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties.
“La restricción de la capacidad de una parte para determinar sus precios cuando vende productos a terceros, sin perjuicio de la posibilidad de imponer un precio de venta máximo o recomendar un precio de venta, siempre que no sea un precio de venta fijo o mínimo como resultado de presiones o incentivos ofrecidos por cualquiera de las partes.” à Consequence of infringement of a mandatory rule: invalid agreement or invalid term in the contract? Art. 6.3 CC: “acts contrary to mandatory and prohibitive rules shall be null and void by operation of law, except when such rules provide for a different legal effect in the event of violation”.
“los actos contrarios a las normas obligatorias y prohibitivas serán nulos y sin efecto por efecto de la ley, salvo cuando dichas normas prevean un efecto jurídico diferente en caso de violación".
There are three possibilities: - Invalid agreement (Contrato nulo) - Invalid term (Invalidez de un término del contrato) - Invalid term indirectly prompts the agreement’s invalidity. (Invalidez de un término del contrato que por su esencialidad induce la nulidad del contrato) Usual term included in contracts: Severability or “salvatorius” provisions (disposiciones de separación) A provision in a contract which states that if parts of the contract are held to be illegal or otherwise unenforceable, the remainder of the contract should still apply. Sometimes, severability clauses will state that some provisions to the contract are so essential to the contract’s purpose that if they are illegal or unenforceable, the contract (as a whole) will be voided.
Disposición del contrato según la cual à si hay partes del contrato consideradas ilegales (o de otra manera inaplicables), el resto del contrato debe seguir aplicándose. A veces, las cláusulas de separación declararán que 17 algunas partes del contrato son tan esenciales para el propósito del mismo que, si son ilegales o inaplicables, el contrato ENTERO será anulado. (invalid term indirectly prompts the agreement’s invalidity).
Example: “If any provision of this Agreement is held illegal or unenforceable in a judicial proceeding, such a provision shall be severed and shall be inoperative, and the remainder of this Agreement shall remain operative and binding on the Parties”.
2. Morality Repugnance in contracts 3. Public policy Body of principles that underpin (sustentan) the operation of legal systems in each jurisdiction; contracts to perform an obligation in a foreign county but with legal effects that should occur in Spain.
Conjunto de principios que sustentan el funcionamiento de los sistemas jurídicos en cada jurisdicción; contratos para ejecutar una obligación en un país extranjero, pero con efectos jurídicos que deberían producirse en España.
Example: sale of organs or gestational surrogacy.
Mandatory elements of contracts - Art. 1261 CC: a contract does not exist unless it comprises the following elements (MOLT IMPORTANT): 1- Consent by the parties 2- Certain and legal object 3- “causa”: legal cause or socioeconomic purpose of the agreement 4- [formalities] Certain and legal object A) The object must be determined or determinable: · Art. 1273 CC: the object has to be determined as to its kind (en su género). Indeterminacy as to quantity does not affect the contract’s validity if it can be established without a new contract.
((en cuanto a su cantidad, la indeterminación no afectará a la validez si se puede establecer sin un nuevo contrato) · Level of quality does not need to be determined (default rule obligation to deliver medium quality goods).
(Existe una regla por defecto de “entregar productos de calidad media”, así que la calidad tampoco necesita ser determinada) · Possibility of determination left to a third party (or even to one of the parties) B) The object must be possible: · Traditionally, initial impossibility amounted to the contract’s invalidity. Modern approach: breach of contract by the party promising an impossible object.
(Si una parte promete un objeto imposible, de acuerdo con la concepción actual está incumpliendo el contrato) 18 C) The object must be lawful (lícito) (res intra commercium).
“Causa”: - No legal definition in the Spanish Code.
Article 1274 CC ® “en los contratos onerosos se entiende por causa, para cada parte contratante, la prestación o promesa de una cosa o servicio por la otra parte; en los remuneratorios, el servicio o beneficio que se remunera y en los de pura beneficencia, la mera libertad del bienhechor”.
è Luis Díez-Picaso: “the concept of causa, within the theory of contract, is for sure one of the most obscure, misleading, and difficult to apprehend institutions in civil law”.
è Most legal systems do not use this institution to discipline contracts.
After the 2016 reform, new article 1128 of the French Civil Code requires only three conditions: consent, capacity to contract, and that the contract has content which is lawful and certain. There is no longer any reference to “causa”.
El CC Francés ha dejado de contener la “causa” entre sus condiciones para la validez del contrato, y la mayoría de los sistemas civiles tampoco la contemplan. El CC español la contempla, pero sin embargo no la define, no deja claro qué es).
§ European harmonization projects and trends show how Causa or similar institutions in other legal systems (consideration in common law) are not considered as requirements of contracts.
§ § Many legal scholars in Spain advocate for the eliminator of such requirement.
Approximate definition of “causa” à Socioeconomic purpose that the parties aim to attain when concluding the contract. (Objetivo socioeconómico que las partes pretenden alcanzar al concluir el contrato) Roles of Causa in Spanish law: i) Assessing that the contracting parties actually had a purpose when concluded the contract.
ii) Assessing that the purpose that was aimed by the contracting parties was licit.
iii) Assessing that the purpose that was aimed by the contracting parties merited to be honoured by the State.
I) Assessing that the contracting parties actually had a purpose when concluded the contract: Article 1275 CC: “contracts without a cause or with an illicit one do not create legal effects...” Lack of cause à absolute simulation (si NO HAY CAUSA = simulación absoluta del contrato): The contracting parties just created an apparent contract but they lacked any intention to be bound legally by the agreement. (carecían de intención de quedar legalmente obligadas por el contrato).
For instance: A is the owner of dwelling in Barcelona where he has his residence. In order to escape potential liability and the risk of losing the apartment to creditors, A enters a sales contract with his daughter B. The agreement includes a price which is actually never paid by B to A. A still lives in his apartment and B has no possession whatsoever of the dwelling.
19 A es el propietario de la vivienda en Barcelona donde tiene su residencia. A fin de escapar de la responsabilidad potencial y el riesgo de perder el apartamento a los acreedores, A entra en un contrato de venta con su hija B. El acuerdo incluye un precio que en realidad nunca es pagado por B a A. A todavía vive en su apartamento y B no tiene ninguna posesión de la morada.
False cause à relative simulation (si hay una causa falsa, se trata de una simulación relativa del contrato) The contracting parties create an apparent contract in which they pretend to attain a purpose that is not the actual one that would lead them to be bound legally by the agreement. (El objetivo que proponent las partes en el contrato no es el que realmente pretenden, el que les llevaría a estar legalmente obligados por el acuerdo).
For instance: A is the owner of a dwelling in Barcelona and wishes to donate it to his daughter B. donations in Spain are subject to a tax that is higher than the one established for sale. In order to avoid paying the higher tax, A and B draft a sales contract which is included in a public deed (“escritura pública”) and pay the lower tax for sales.
A es el propietario de una vivienda en Barcelona y desea donarlo a su hija B. Las donaciones en España están sujetas a un impuesto que es más alto que el establecido para la venta. A fin de evitar pagar el impuesto más alto, A y B redactan un contrato de venta que está incluido en una escritura pública y pagan el impuesto más bajo por las ventas.
Consequence: the true cause shall prevail, and therefore the courts should deem the agreement a donation.
La causa real debe prevalecer, así que los tribunales deberán considerar dicho contrato como donación y no como compraventa, lo que supondrá que los contratantes paguen el impuesto correspondiente (el cual es más alto que el que querían pagar).
Art. 6:103 DCFR à simulation “When the parties have concluded an apparent contract, which was not intended to reflect their true agreement, as between the parties the true agreement prevails” "Cuando las partes han celebrado un contrato aparente que no pretendía reflejar su verdadero acuerdo, entre las partes prevalece el verdadero acuerdo" However, in the last years the Supreme Court has held that the deed used to include the sales contract cannot be understood as a valid substitute for the donation deed. (sostienen que la escritura pública no puede entenderse como un sustituto válido de la escritura de donación).
Therefore, since the donation deed is a mandatory formality for a donation to be valid, the agreement would not meet all the legal requirements and therefore would not produce legal effects. (así pues, ya que la escritura de donación es una formalidad obligatoria para que una donación sea válida, el acuerdo NO produciría efectos).
II) Assessing that the purpose that was aimed by the contracting parties was licit.
Article 1275: “Contracts without a cause or with an illicit one do not create legal effects…” 20 III) Assessing that the purpose that was aimed by the contracting parties merited to be honoured by the State.
Some authors have highlighted that some promises, despite being licit and consented by the parties, shall not be enforce by courts (no serán aplicadas por los tribunales). Examples: domestic relationships, friendships and other social promises.
Formalities in expressing consent: Article 11 CISG ® “a contract of sale need not be concluded in or evidenced by writing and is not subject to any other requirement as to form. It may be proved by any means, including witnesses.” "Un contrato de compraventa no tiene que ser concluido o evidenciado por escrito y no está sujeto a ningún otro requisito de forma. Puede probarse por cualquier medio, incluidos los testigos ".
Art.1278 CC ® “Contracts shall be binding no matter the way in which the contract was formalized, provided that the essential conditions for its validity are met”.
"Los contratos serán vinculantes independientemente del modo en que se haya formalizado el contrato, siempre que se cumplan las condiciones esenciales para su validez".
Freedom from formalities is a good general starting point from an economic perspective à if a contract is usually agreed, it is because it increases contracting parties’ welfare and therefore, the Law should not erect barriers, except when justified on other grounds, to prevent these welfare-enhancing interactions from taking place.
However, in most legal systems a non-trivial set of contracts require certain formalities. Some contracts require a public deed: prenuptial agreements; donation of real property; sales of real property; mortgages, corporations and limited liability companies usually also require public deeds. (contratos prenupciales, donación de benes inmuebles, ventas de bienes inmuebles, hipotecas, corporaciones y sociedades de responsabilidad limitada…) Other agreements have to be made in writing (publishing contracts – contratos de publicación) Consequence of failure to comply with formalities à invalidity of contract; but in some cases just a remedy to summon the other party to put the agreement in writing (en algunos casos, sólo un recurso para convocar a la otra parte a poner el acuerdo por escrito) (example: publishing contracts in the Copyright Act).
Many formalities are required only when one of the contracting parties is a consumer (B2C): - The requirement that the contract is made in writing with one copy for the consumer (door to door sale contracts, time sharing contracts) [contratos de venta Puerta a Puerta, contratos de tiempo compartido, ventas a distancia] - The requirement of a minimum content, informative of contractual rights of consumer (consumer credit, distance sales) [crédito al consume, ventas a distancia] - The right of withdrawal (derecho de retractación), thereby the consumer can walk away from the contract within a legally specified time from signing the contract (door to door sale contracts, time sharing contracts, distance sales).
Roles or use of formalities: · Increase the level of information of contracting parties.
21 · · · Offering opportunities for reducing biases: time would be needed before the formality is completed and the contracting party may decide to step back (similar to cooling-off periods – períodos de reflexión) Reductions of costs in future litigation: written contracts can facilitate evidence about the existence and validity of consent; the content of the contract agreed between the parties….
Increased information for third parties. Mortgage agreements (contratos de hipoteca) 22 TEMA 3. Contract Formation. Precontractual Liability Contract formation · A contract is concluded, without any further requirement, if the parties intend to enter into a binding legal relationship and there is a concurrence between offer and acceptance (art. 1262 CC).
Si las partes tienen intención de entrar en una relación jurídica vinculante y existe una concurrencia entre oferta y aceptación · Consent as basis of the contract is completed from a legal point of view with the meeting of the minds, of offer and acceptance. (con la reunión de las mentes, de la oferta y de la aceptación).
Preliminary negotiations è A person is free to negotiate and is not liable for failure to reach an agreement. (no es responsable por no llegar a un acuerdo) è A person who is engaged in negotiations has a duty to negotiate in accordance with good faith and not to break off negotiations contrary to good faith [This duty may not be excluded or limited by contract ® mandatory rule].
La buena fe es un requisito indispensable de los contratos.
è A person who is in breach of this duty is liable for any loss caused to the other party by the breach ® Precontractual liability (Responsabilidad precontractual) è 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. (No tener voluntad real de celebrar ese contrato es contrario a la buena fe.) Precontractual liability ® Example: Supreme Court Judgment of May 16th, 1988: the case of the employee at BBVA Bank.
Facts: 1. An employee at BBVA and the bank started negotiations that resulted in a preliminary agreement according to which the employee would be transferred to the bank’s office in Miami (USA).
2. The promise was not binding (vinculante), but repeated efforts by the employee to get a transfer had occurred in the past and they finally were well received by senior managers at the Bank.
3. The employee was induced to believe that the transfer to the Miami office was alrelady agreed and that it would be imminent. (Realmente pensaba que lo transferirían a Miami y que había un acuerdo inminente) 4. Faced with the imminent transfer, the couple sold their house, their car, and the employee’s wife applied for a voluntary leave of her job as a nurse in a public hospital.
5. Finally, the Bank broke off negotiations.
6. The couple suffered some economic losses as a consequence of the breach of negotiations.
The Supreme Court held the Bank partially liable for the losses suffered by the plaintiffs in the case (damages award: €24,000). (Lo declaró parcialmente responsable) If during preliminary negotiations one party conveys (transmite) 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 (será declarada responsable) and will have an obligation to compensate damages to the other party.
23 - Culpa in contrahendo (Rudolph von Ihering) [1818-1892]).
- Extracontractual liability (art. 1902 CC): “The person who, as a result of an action or omission, causes damage to another by his fault or negligence shall be obliged to repair the damaged caused”.
"La persona que, como resultado de una acción u omisión, cause daño a otro por su culpa o negligencia estará obligada a reparar el daño causado".
Legal requirements 1. Creation of a reliance situation (situación de dependencia): reasonable expectation, trust.
2. Unjustified breach of negotiations (violación injustificada). Malice or intent to harm the other party is not required. The other party needs to prove a violation of good faith.
3. Harm 4. Causation link between the created expectation and the harm.
Damages Damages ® An amount that intends to restore the injured party to the situation of utility that was enjoyed before the beginning of negotiations Reliance damages (daños por dependencia) ® o Expenses for the injured party derived from negotiations or aimed at concluding the contract. (Gastos para la parte lesionada derivados de negociaciones o destinados a la conclusión del contrato.) o Specific investments that the injured party has made in reliance of performance of the contract by the other party. (Inversiones específicas que la parte lesionada ha hecho en dependencia de la ejecución del contrato por la otra parte) 24 1st. Offer · From a general point of view, a proposal amounts to an offer if (una proposición equivaldrá a una oferta cuando): - It is intended to result in a contract if the other party accepts it (se pretende dar lugar a un contrato si la otra parte acepta) - It contains sufficiently definite terms to form a contract. (contiene términos suficientemente definidos para formar un contrato) Art. 14.1 CISG ® “A proposal for concluding a contract addressed to one or more specific persons constitutes an offer if it is sufficiently definite and indicates the intention of the offeror to be bound in case of acceptance. A proposal is sufficiently definite if it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and the price”.
"Una propuesta para celebrar un contrato dirigido a una o más personas específicas constituye una oferta si es suficientemente definida e indica la intención del oferente de estar obligado en caso de aceptación. Una propuesta es suficientemente definida si indica las mercancías y fija, expresa o implícitamente, o establece la determinación de la cantidad y el precio ".
If it DOES NOT include the former requirements, the proposal shall be deemed an invitation to make offers (invitation ad offerendum): Si no cumple dichos requisitos, la propuesta se entenderá como una invitación a hacer ofertas.
Art.14.2 CISG ® “A proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal”.
"Una propuesta distinta de una dirigida a una o más personas concretas debe considerarse meramente como una invitación a hacer ofertas, a menos que el contrario esté claramente indicado por la persona que hace la propuesta".
However, in the case of CISG we must take into account article 55: “Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned”.
"Cuando un contrato haya sido válidamente celebrado, pero no fija ni previene expresamente ni implícitamente la determinación del precio, se considerará que las partes, salvo indicación en contrario, habrán hecho referencia implícitamente al precio generalmente momento de la celebración del contrato para tales mercancías vendidas en circunstancias comparables en el comercio en cuestión ".
· An offer becomes effective when it reaches the offeree. (cuando alcanza al destinatario) · Offers may be withdrawn (retiradas) if the withdrawal reaches the offeree before or at the same time as the offer. Withdrawal also is effective for irrevocable offers.
· Offers are terminated when a rejection by the offeree reaches the offeror.
2nd. Acceptance From a general point of view, any form of statement or conduct by the offeree is an acceptance if it indicates assent to the offer. (siempre que indique que se acepta la oferta) - it is intended to result in a contract by way of acceptance; - it has to mirror the terms of the offer; no significant modifications are allowed (if not, it will be deemed a counter-offer); (tiene que reflejar los términos de la oferta puesto que, de lo contrario, estaríamos hablando de una contraoferta).
25 - it has to be made before the offer’s expiration or revocation by the other party. (debe hacerse antes de la expiración o revocación del oferente).
silence or inactivity does not in itself amount to acceptance.
Art. 18.1 CISG ® "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." "Una declaración hecha por u otra conducta del ofertante que indica el consentimiento a una oferta es una aceptación." El silencio o la inactividad no supone por sí mismo la aceptación. " Art 18.2 CISG ® "An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. An acceptance is not effective if the indication of assent does not reach the offeror within the time he has fixed or, if no time is fixed, within a reasonable time, due account being taken of the circumstances of the transaction, including the rapidity of the means of communication employed by the offeror. An oral offer must be accepted immediately unless the circumstances indicate otherwise." "La aceptación de una oferta entrará en vigor en el momento en que la indicación de asentimiento llegue al oferente. Una aceptación no es efectiva si la indicación de asentimiento no llega al oferente dentro del tiempo que ha fijado o, si no hay tiempo, teniendo en cuenta las circunstancias de la transacción, incluida la rapidez de los medios de comunicación utilizados por el oferente, y una oferta oral debe aceptarse inmediatamente, a menos que las circunstancias indiquen lo contrario ".
Art. 18.3 CISG ® "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, 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”.
"Sin embargo, si, en virtud de la oferta o como resultado de las prácticas que las partes han establecido entre sí o de uso, el destinatario de la infracción puede indicar la conformidad mediante la realización de un acto, como el relativo al envío de las mercancías o el pago del precio, sin previo aviso al oferente, la aceptación es efectiva en el momento en que se realiza el acto, siempre que el acto se realice dentro del plazo establecido en el párrafo anterior ".
· Counter-offers (contraofertas): Art. 19.1 CISG ® “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 counter-offer.” "Una respuesta a una oferta que pretenda ser una aceptación pero que contiene adiciones, limitaciones u otras modificaciones es un rechazo de la oferta y constituye una contraoferta".
Art. 19.2 CISG ® “However, a reply to an offer which purports 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.” "Sin embargo, una respuesta a una oferta que pretende ser una aceptación pero que contiene términos adicionales o diferentes que no alteran sustancialmente los términos de la oferta constituye una aceptación, a menos que el oferente objete verbalmente la discrepancia o remite una notificación a tal efecto. Si no se opone así, los términos del contrato son los términos de la oferta con las modificaciones contenidas en la aceptación ".
Art. 19.3 CISG ® “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”.
"Se consideran alterados los términos adicionales o diferentes relativos, entre otras cosas, al precio, al pago, a la calidad ya la cantidad de los bienes, al lugar y al momento de la entrega, al grado de responsabilidad de una parte frente a la otra o a la solución de controversias".
26 · · An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective. (la aceptación puede retirarse si el retiro llega antes o al mismo tiempo que la propia aceptación).
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. (a veces la aceptación deberá dares en un período de tiempo cerrado, pero incluso en este caso el oferente puede decidir aceptar una aceptación tardía).
3rd. Conclusion or perfection of contract Meeting of the minds, or concurrence of offer and acceptance.
Art. 23 CISG ® “A contract is concluded at the moment when an acceptance of an offer becomes effective in accordance with the provisions of this Convention”.
"El contrato se celebra en el momento en que la aceptación de una oferta surta efecto de conformidad con las disposiciones de la presente Convención".
Art. 1262.I CC ® “El consentimiento se manifiesta por el concurso de la oferta y de la aceptación sobre la cosa y la causa que han de constituir el contrato”.
Exception ® a contract is not concluded if: A) The offer is effectively revoked by the offeror.
B) The offer is not known by the offeree and the offeror dies or is incapacitated (in Spanish law).
It is important to determine the time of the contract perfection. Why? - Because from this moment onwards the contract becomes effective, and it means that the different rights and obligations included therein can be enforced by the parties. (A partir de la perfección los derechos y obligaciones incluidos podrán ser ejecutados) - When the contract has been perfected the parties may begin investing in the contract with a lesser risk of losing their investments. (cuando el contrato se ha perfeccionado, las partes pueden invertir con menor riesgo) - Because from this moment onwards a revocation by the offeror shall be deemed ineffective.
(porque desde ese momento la revocación por parte de la parte ofertante será ineficaz).
Article 16 CISG Art. 16.1 CISG ® “Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance.” "Hasta que se concluya un contrato, una oferta puede ser revocada si la revocación llega al destinatario antes de que haya enviado una aceptación".
Art. 16.2 CISG ® “However, an offer cannot be revoked: a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or b) 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”.
Asimismo, una oferta no podrá ser revocada: a) si indica, sea indicando un tiempo fijo para la aceptación o no, que es irrevocable; o b) si fuera razonable que el ofertante se basara en la oferta como irrevocable y que el beneficiario hubiera actuado con arreglo a la oferta ".
Timing of perfection of contractual consent Although in many cases the existence and timing of such an event concurrence (la existencia y el momento de la concurrencia de un evento) is self-evident since both acts take place simultaneously (physical oral exchange, simultaneous signature of a written memorandum or document, or a public deed), there are 27 certain cases where there is a gap between the issuance (emisión) of the offer and its reception by the addressee (destinatario) and between the issuance of the acceptance and its reception by the addressee.
Technology has mitigated this problem of different taming of the perfection between the parties, but legal systems have provided several solutions to identify when a contract is concluded.
® Different theories or solutions: A) Issuance theory (teoría de la emisión) B) Sending theory: mailbox rule (teoría del envío: regla del buzón) C) Reception theory (teoría de la recepción) D) Knowledge theory (teoría del conocimiento) A) Issuance theory A contract is perfected when the offeree issues his declaration of acceptance. Pursuant 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.
Según esta teoría, el contrato se perfecciona cuando el destinatario emite su aceptación. De este modo, una revocación de la oferta evitaría la perfección del contrato.
® Failure of the theory: it creates problems of uncertainty and also of evidence in potential litigation.
Ejemplo del problema: Imaginemos que el oferente envía la carta con la oferta, y el ofertante la recibe el día 1 de febrero. El ofertante acepta la oferta, pero decide hacer y enviar la declaración el día 3 de febrero y esta es recibida por el oferente el día 4 de febrero. Según esta teoría, la perfección del contrato se habría dado el día 1 de febrero.
PERO: a la vez que todo esto ocurría, el oferente ha recibido una MEJOR OFERTA de un tercero, y ha enviado una revocación al ofertante el día 2 de febrero. Según la teoría de la emisión, la revocación sería invalida porque el contrato se habría perfeccionado el día 1, en un momento en que el oferente ni siquiera sabía qué había ocurrido.
B) Sending theory: “the 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 (ofertante, a quién se le ha hecho una oferta) has done everything which was under his control to make his acceptance known to the offeror (oferente, el que hace la oferta) El contrato se perfecciona cuando el ofertante envía su declaración de aceptación. Siguiendo el ejemplo anterior, en este caso el contrato perfeccionaría el día 3 de febrero.
This is the traditional rule in American Common Law. The theory provides incentives to offeree to invest in the contract and maximize joint surplus. (la teoría da incentivos para maximizar el superávit conjunto) Is it the most efficient rule in commercial transactions? C) 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 (like his place of business, his domicile...), regardless of the fact that the offeror has effective knowledge of it or not.
El contrato se perfecciona cuando el oferente recibe la declaración de aceptación por parte del ofertante, pero independientemente de que la conozca (es decir, el contrato puede perfeccionarse cuando la carta llega al domicilio del oferente, pero este está en el trabajo y no tiene conocimiento alguno de si el ofertante ha aceptado o no). En el ejemplo anterior, el contrato perfeccionaría el día 4 de febrero.
Art. 1262.2 CC ® “Hallándose en lugares distintos el que hizo la oferta y el que la aceptó, hay consentimiento desde que el oferente conoce la aceptación o desde que, habiéndosela remitido el aceptante, no pueda ignorarla sin faltar a la buena fe”.
28 It means that in our civil legal system we used to have the knowledge theory (which we will see right away), and it adds that the offeror cannot ignore the answer of the offeree without failing the good faith. Se ha derogado!! D) 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 (for example, derogated article 1262 CC).
El contrato se perfecciona cuando el oferente tiene conocimiento real sobre la declaración del ofertante.
CISG (Vienna Convention) sets forth a mixed system in which elements from the reception theory and the sending theory are combined: Art. 18.2 CISG ® “An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror…” “La aceptación de una oferta entra en vigor en el momento en que la indicación de asentimiento llega al oferente ..." Art. 16.1 CISG ® “Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance”.
“Hasta que se celebre un contrato, una oferta puede ser revocada si la revocación llega al destinatario antes de que haya enviado una aceptación".
Es decir: la teoría vigente en la Convención de Viena mezcla las teorías de la recepción y del envío, de modo que, según este modelo: - La perfección del contrato se da cuando el oferente recibe la declaración de aceptación de la otra parte - En cuanto a la revocación, esta puede utilizarse efectivamente siempre y cuando llegue al destinatario ANTES de que el mismo haya enviado una aceptación Cabe añadir que, si el oferente decide no abrir el sobre (para aprovecharse de la situación), la regla que se aplica es la teoría de la recepción Exercise 1. Mr. Albert and Mr. Ben began negotiations aimed at concluding a sales contract according to which Mr. Albert would buy a piece of artwork owned by Mr. Ben's.
2. On April the 28th 2013, Mr. Albert received a letter from Mr. Ben according to which the latter offered to sell his artwork for a price of € 200,000.
3. On April the 28th 2013, Mr. Ben was informed that Mr. Charles was also interested in buying the artwork and that he would be willing to pay a sum of € 300,000 for it.
Accordingly, Mr. Ben decided to revoke the offer made to Mr. Albert and sent him a letter on April the 28th 2013.
4. On April the 29th 2013, Mr. Albert sent a letter to Mr. Ben informing him of his acceptance to pay the € 200,000 price for the piece of art. This letter reached Mr. Ben on May the 5th 2013.
5. The revocation letter sent by Mr. Ben to Mr. Albert was received on May the 2nd 2013.
Questions: 1. According to the CISG regulations, has a contract been formed in the case between Mr. Albert and Mr. Ben? 2. If your answer is in the affirmative, from which date the contract is effective? A) 28 / 4 / 2013 29 B) 29 / 4 / 2013 C) 2 / 5 / 2013 D) 5 / 5 / 2013 3. According to the Spanish Civil Code, has a contract been formed in the case between Mr. Albert and Mr.
Ben? 4. If your answer is in the affirmative, from which date the contract is effective? A) 28 / 4 / 2013 B) 29 / 4 / 2013 C) 2 / 5 / 2013 D) 5 / 5 / 2013 Maluma on contracts Questions: Felices los 4 […] Y si con otro pasas el rato Si conmigo te quedas Vamos a ser feliz, vamos a ser feliz O con otro tú te vas Felices los 4 No me importa un carajo Te agrandamos el cuarto Porque sé que volverás Yo te acepto el trato Y si con otro pasas el rato Y lo hacemos otro rato Vamos a ser feliz, vamos a ser feliz Lo nuestro no depende de un pacto Felices los 4 […] […] Tranquila que no creo en contratos (Y tú menos) 1. Maluma states that he is “accepting” the deal. But is there really a prior offer by an offeror than can be accepted by an offeree? 2. Would an agreement to arrange a “romantic” relationship among four persons be honoured by the State? Does a valid and lawful cause underlie such an agreement? 3. Maluma finally states that he and his partner do not believe in contracts. May this fact be relevant in considering whether a contract has been truly formed? Silence Silence or inactivity DOES NOT in itself amount to acceptance. The mere omission of conduct is not construed as an acceptance of the contract. However, in certain circumstances, silence may be deemed relevant to indicate contractual consent.
Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only (excepciones donde el silencio puede ser válido como consentimiento): a) 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. (cuando el ofertante le ha dado razones al oferente para entender que acepta la oferta a través del silencio o la inacción) 30 b) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept. (cuando, por acuerdos anteriores o de otra manera, es razonable entender que acepta porque, de otro modo, habría notificado su decisión de no aceptar) 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 or frequent contractual relationship, the probability that the contract has positive value for both parties is substantially high (surplus, welfare!!) It also may happen that a particular contract is regulated in the legal system in a way that does not allow to understand silence as a way of acceptance under no circumstance.
In the field of distance consumer sales, for instance, in Spanish Law, art. 99 of RDL 1/2007, November 16th, on consumer protection, establishes that in distance sales, under no circumstances, will silence be interpreted as assent: “in any case shall the lack of response to the distant sale offer be considered an acceptance to it”.
Unilateral acts as source of obligations A contract arises through the obligation of only one party as soon as the other party knows it. Example: promises of a reward, because afterwards the offeror cannot change the prize he promised.
If a TV Show promises a house in front of the sea as a prize for the winner of that show at the end of the season, the winner of the show has right to request a house in front of the sea, and not a bungalow or a caravan.
Surge una obligación unilateral en cuanto la otra parte tiene conocimiento de ello, por ejemplo, cuando una parte solicita el premio de un concurso en el que la otra parte había ofrecido dicho premio.
Defects on consent Contracts are based upon voluntary consent by the contracting parties.
There exist some rules and doctrines that 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.
Defects on consent are given basically when parties are entering into a contract that is understand to be mutually beneficial, but where there is asymmetry of information or one party is forced to enter into the contract.
Los defectos en el consentimiento se dan cuando las partes no han entrado voluntariamente en el contrato o hay asimetría de información entre ellas.
Typically, most legal systems consider those anomalies under the following headings: violence, fraud, mistake and undue influence (or unconscionability, unfair exploitation).
1. Threats or violence – Amenazas o violencia A party may avoid a contract if the other party has induced the conclusion of the contract by the threat of wrongful, imminent and serious harm, or of a wrongful act.
Podrá anular el contrato si este se debe al uso de amenazas de un daño injustificado, inminente y grave, o de un acto ilícito.
2. Fraud – Fraude 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, or any precontractual information duty, required that party to disclose.
La parte podrá anular el contrato si: - La otra parte ha inducido la conclusión de este por falsa representación - La otra parte ha inducido la conclusión de este por la no divulgación, de manera fraudulenta, de cualquier información que la buena fe, el trato justo o cualquier obligación de información precontractual obligaban a dar.
31 A) When is misrepresentation fraudulent? Misrepresentation is fraudulent if it is made with knowledge or belief that the representation is false, or recklessly (precipitadamente) as to whether it is true or false, and is intended to induce the recipient to make a mistake. (cuando se hace a sabiendas de que la representación es falsa, o precipitadamente sin saber si lo es o no, y tiene la intención de inducir al destinatario a cometer un error) B) When is non-disclosure fraudulent? Non-disclosure is fraudulent if it is intended to induce the person from whom the information is withheld to make a mistake (cuando se hace para inducir a la persona a la cual se le está reteniendo información a que cometa un error).
3. Mistake – Error A party may avoid a contract for mistake existing when the contract was concluded if: 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; (la parte no habría concluido el contrato o lo habría hecho con términos esenciales de este de manera muy distinta si no hubiera sido por el error) + (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; - made the same mistake (mutual mistake).
4. Unfair exploitation – explotación injusta A party may avoid a contract if, at the time of the conclusion of the contract: A) - that party was dependent on, or had a relationship of trust with, the other party (esa parte dependía de [o tenía una relación de confianza con] la otra parte) - was in economic distress or had urgent needs (estaba en apuros económicos o tenía necesidades urgentes - was improvident, ignorant, or inexperienced; (era imprevisora, ignorante o inexperta) + B) the other party knew or could be expected to have known this and took an excessive benefit or unfair advantage (la otra parte sabía o se podía esperar que lo supiera y obtuviera un beneficio excesivo o una ventaja injusta).
32 TEMA 4. Standard Form Contracts Standard form contracts contain terms which are not negotiated, but proposed by one party (usually the professional) to the other party (usually the consumer) often on a ‘take it or leave it’ basis.
They are used commonly not only in everyday transactions (ex: public transport, utilities, mobile phone contracts, car renting services, parking tickets, dry-cleaners, gyms) but also in more complex situations (ex: mortgage loans; insurance contracts, financial services).
They are used in: B2C transactions ® Business to consumer B2B transactions ® Business to business (problem: when two companies enter in a contract and both have standard form contract) People do not generally read these standard form contracts and this is a rational response. Why? - Because reading them involves time and people do not want to lose it meaninglessly.
- If they read the small print or boilerplate, they would probably not understand them.
- If they understood them, they would not have a possibility to amend or modify their content. The only thing that the addressee of the contract can do is to adhere to it without possibility to modify it, even when its content is unfair or abusive.
Therefore, the most rational strategy is to ignore standard contracts and pay attention to the elements that are relevant or fundamental in the agreement, basically the price and the characteristics of goods and services (object, cause-consideration).
Companies will try to focus on elements that may be of interest to customers. Therefore, their efforts would be addressed to make price and features more attractive to customers. It is with these elements that competes in the market.
Better prices or better features of products and services involve costs for the firms. Firms will try to offset these costs by reducing other expenditures ® a way to reduce such costs is by lowering the quality of standard form contracts (for instance, by way of offering worse ancillary services). Firms do not compete with standard form contracts.
Los esfuerzos de las empresas se centrarán en mejorar el precio y las características de los productos (para poder competir en el mercado), y ello supone un coste adicional que es reparado a través de, por ejemplo, una peor calidad de los contratos de forma estándar.
As we’ve seen, companies have incentives to use this kind of unfair and abusive contracts, and because of that legal systems have hindered (han puesto trabas) to this type of contract.
This problem involves an information asymmetry, a market failure which cannot be solved by market competition alone: legal intervention is required. How do they solve those problems? By basically offering tools that can be used to control the content of agreements concluded through standard form contracts.
These mechanisms allow judges to decide that some provisions or obligations included in a standard form contract are not effective and not to be enforced against adherents.
El problema representa una asimetría de información entre las partes que el mercado, por sí solo, no puede solucionar: entonces intervienen los sistemas legales, y lo hacen ofreciendo herramientas que puedan usarse para controlar este tipo de contratos + permitiendo a los jueces decidir qué disposiciones de los contratos son válidas (y producen efectos) y cuáles no.
Potential imbalance between parties The party using a standard form contract has certain advantages over the other party, such as: · Information advantage ® the standard form contract user knows exactly what is in the contract, whilst the other party must analyze the standard form contract to identify potential pitfalls; 33 · Transaction costs advantage ® the standard form contract user pays only once (ex: to a lawyer) to draft the standard form contract which it will use for multiple transactions, whereas the other party must analyze such a pre-formulated contract on a one-off basis. (con un solo contrato y los costes que habrá supuesto hacerlo, la empresa puede concluir múltiples tratos) Traditional lawyers (but also the European Court of Justice and the Spanish Supreme Court) have highlighted that these two advantages lead to an imbalance between the standard form contract user and the other contracting party. This imbalance may also coincide with a general imbalance of bargaining power between the parties, especially if: - The standard form contract user is a trader and the other party is a consumer, or - The standard form contract user is a large enterprise and the other party is an SME.
Esta situación puede darse especialmente si el usuario del contracto formal estándar es una empresa y la otra parte un consumidor, o bien si el usuario es una gran empresa y la otra parte es una PYME (pequeñas y medianas empresas).
Imposition of unfair terms There is also a risk that the standard form contract user will impose disadvantageous, unfair terms on the other party which will often accept them, because of lack of: - Awareness (falta de conciencia) ® many consumers do not think of the risk at the time of buying a good or service - Time ® consumers do not wish to spend time reading the standard form contract - Knowledge ® ‘small print’ terms are too difficult to understand without specialist expertise - Bargaining power (poder de negociación) ® even if the consumer wants to negotiate, the trader will refuse - Choice ® all traders offering a given good or service use similar terms in their contracts Positive elements of standard form contracts Despite the risk of unfairness, standard form contracts entail several advantages: - Reduction of transactions costs that would otherwise arise from negotiating and drafting contracts.
(reducción de los costes de transacción) - Coordination of tasks and the division of labor is facilitated within business organizations. (mayor coordinación y division del trabajo) Example: employees at a firm may resort to standard form contracts to know how after-sale services are provided, the content of warranties for goods or the insurance coverage.
- They allow companies to assess the expected liability costs that they may face against customers.
(permiten a las empresas calcular los costos de responsabilidad esperados que pueden enfrentar contra los clientes) - They increase legal certainty (seguridad jurídica). This role is highly debated. Some scholars believe that they can be conceived as a sort of usage or custom (“soft law”) that supplements legal rules (“hard law”) or that provides a more complete and systematic regulation than hard law.
(Algunos estudiosos creen que pueden concebirse como una especie de uso o costumbre ("ley blanda") que complementa las reglas legales ("ley dura") o que proporciona una regulación más completa y sistemática que la ley dura.) - Discourage opportunistic behavior by consumers. (desalentar el comportamiento oportunista de los clientes).
34 B2B transactions In the case of B2B transactions, the advantages are the same of B2C transactions (which we just described), but there are some different problems of standard form contracts in B2B transactions, because the principle pacta sunt servanda between companies is usually very strong, so, in most of the cause, they don’t need to do an exhaustive control of the contract and the problems reduce to: - Assess whether the standard terms were clear and transparent and thus are binding. (Evaluar si los términos estándar fueron claros y transparentes y, por lo tanto, son vinculantes) - Solve interpretation problems (ex: battles of forms: a battle of the forms arises when two businesses are negotiating the terms of a contract and each party wants to contract on the basis of its own standard terms).
Resolver problemas de interpretación (por ejemplo, batallas de formas: una batalla de las formas surge cuando dos empresas están negociando los términos de un contrato y cada parte desea contratar sobre la base de sus propios términos estándar) Because of that sometimes the standard terms are ambiguous (Battle of forms), legal systems employ different solutions to the problem: 1st solution à “knock-out rule” The judge will decide not to apply what is establish in both contracts and will apply a default rule 2nd solution à “last shot rule” the most common solution, employed in Spanish law, you have to apply the last solution established.
Sources in Spanish Law · · · Act 7/1998 on Standard Form Contracts (Ley 7/1998, de 13 de abril, sobre condiciones generales de la contratación) (LCGC).
Consolidated Act for the protection of consumers and users approved by Royal Legislative-Decree 1/2007 (Real Decreto Legislativo 1/2007, de 16 de noviembre, por el que se aprueba el texto refundido de la Ley General para la Defensa de los Consumidores y Usuarios y otras leyes complementarias) (TRLGDCU) [Implementing Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, into Spanish Law].
Concept of Standard Terms This article gives a definition of an Standard form: Art. 1.1 LCGC ® “Son condiciones generales de la contratación las cláusulas predispuestas cuya incorporación al contrato sea impuesta por una de las partes, con independencia de la autoría material de las mismas, de su apariencia externa, de su extensión y de cualesquiera otras circunstancias, habiendo sido redactadas con la finalidad de ser incorporadas a una pluralidad de contratos”.
This provision sets forth three characteristics: 1. Unilaterally drafted terms: one of the parties drafts the standard form contract and the other party can just accept them. (una parte crea el contrato formal estándar y la otra sólo puede aceptarlo o no aceptarlo) 2. Non-individually negotiated terms: there is no possibility for the other party to negotiate the terms. (no hay posibilidad, para la otra parte, de negociar los términos) 3. Generality: standard terms are intended to apply to a plurality of transactions (generalidad, referida a que estos contratos se aplican a una pluralidad muy amplia de transacciones).
35 Scope of application (ámbito de aplicación de la ley) The law applies to contracts containing terms and conditions entered into between a professional (user of standard terms) and any natural or legal person (consumers, professionals, businesses, and so on) ® B2B and B2C contracts.
The Act does not apply to some special contracts: La ley NO se aplica en algunos contratos especiales: - Government contracts (Contratos gubernamentales) - Employment contracts (Contratos de trabajo) - Agreement to create a company (Contratos para crear una empresa) - Family Law Agreements (Contratos de Derecho de Familia) - Contracts mortis causae (Contratos mortis causae) When are standard terms enforceable between the parties? (Article 5 LCGC) 1. Terms should be drafted in a transparent, clear, accurate, and understandable way If not, terms would not be included in the contract: according to art. 7, non-readable, ambiguous, obscure or incomprehensible terms shall not be deemed a part of the agreement.
In B2C contracts, moreover: Art. 80.1.b TRLGDCU ® “En ningún caso se entenderá cumplido este requisito si el tamaño de la letra del contrato fuese inferior al milímetro y medio o el insuficiente contraste con el fondo hiciese dificultosa la lectura”.
The hole contract will be invalid if an essential part of it is obscure or ambiguous (like the object or the price). If it is an element that affects the price, judges will have the possibility to solve this gap.
B2B contracts: if a term is not clear, it can be eliminated of the contract but this will only affect the company who claimed it and not the others.
In the case of consumers, we have: - A single consumer who brings the claim à the judgment will only affect that particular consumer for some courts, but other says that it affects all the consumers - If it is claimed by a group of consumers à it will be eliminated.
2. Information provided to the other party and knowledge: Written contracts: User of standard terms shall inform the other party about the existence of standard terms and may provide him a copy when requested.
When the contract itself refers to standard terms, they are then deemed to be accepted by the other party if the contract is signed by both parties.
Necesitan explicar la existencia de los términos de uso + una copia de estos Non-written contracts: User of standard terms shall inform the other party about the existence of standard terms, for instance by including a post in the store (e.g.: drycleaners).
Necesitan explicar la existencia de los términos de uso Click-wrap agreements Those are license agreements that appear as an icon during the setup of a software or online service and must be clicked on to agree to its terms.
36 The company has the obligation of having a link to the standard form term on the Internet agreements at the moment of choosing between accepting or declining: Art. 80.1 TRLGDCU ® “consumers should be provided with access to standard forms in advance or simultaneously to the agreement text.” Example: ECJ Judgment of 21 May 2015, C-322/14, Jaouad El Majdoub v CarsOnTheWeb. Deutschland GmbH.
Plaintiff located in Cologne (Germany) purchased an electric car for a very good price from the defendant’s website, whose registered office is in Amberg (Germany).
Later on, the seller refuses to honour the sale and to deliver the electric car. Plaintiff brings a lawsuit in Germany.
The seller replies that the plaintiff clicked to agree to an online contract which contained an agreement conferring jurisdiction on a court in Leuven (Belgium).
Un usuario en Colonia (Alemania) compró un coche eléctrico en un sitio web con domicilio social en Amberg (Alemania). Más tarde, el vendedor se negó a honrar la venta y entregar el coche, y el comprador interpuso una demanda (en Alemania). El vendedor respondió que el demandante hizo clic en aceptar un contrato en línea que contenía un acuerdo que confiere jurisdicción a un tribunal en Lovaina (Bélgica).
ECJ: The method of accepting the general terms and conditions of a contract for sale by ‘click-wrapping’, concluded by electronic means, which contains an agreement conferring jurisdiction, constitutes a communication by electronic means which provides a durable record of the agreement, where that method makes it possible to print and save the text of those terms and conditions before the conclusion of the contract.
El comprador tenía la opción de descargar, guardar e imprimir el texto de términos y condiciones del contrato ANTES de la conclusión del mismo, puesto que este método de aceptación en los contratos de ventas así lo permite.
Browse-wrap agreements A browse-wrap agreement can be formed by use of a web page or a hyperlink or small disclaimer (exención de responsabilidad) on the page. It may only be enforced if the browsing user assents to it. For assent to occur the browse-wrap agreement should be conspicuous (visible), state that there is an agreement, and provide where it can be located.
Courts examine the enforceability of browse-wrap agreements on a case-by-case basis, and there are no "bright-line" rules on whether a given agreement is sufficiently conspicuous.
Los tribunales examinan la aplicabilidad de los acuerdos de exploración y envoltura caso por caso, y no hay reglas de "línea clara" sobre si un acuerdo dado es suficientemente visible.
When you visit a particular website that contains a message that says: “in case you continue using this website, you are accepting all our terms of use”. It is accepted on some legal systems, like the UK, but not on most of the European jurisdictions (including Spain).
Example: Ryanair case Spanish Supreme Court Judgment num. 630/2012, October the 30th (RJ 2013\2273): Ryanair brought a lawsuit (demanda) against eDreams, an online travel agency, alleging that eDreams had used web scraping techniques with robots or other software to extracting information from Ryanair’s website, including basically flight times and prices.
37 Besides other legal grounds (otros motivos legales) (infringement of Ryanair’s computer programs and the database right), Ryanair alleged that web-scraping by eDreams was a breach of contract (violación del contrato) because the website’s terms of use (TOUs) included a provision according to which use of robots was forbidden. Ryanair alleged that the use or navigation in its website by any user was to be deemed an acceptance of the TOUs.
Ryanair alegó que el uso o la navegación en su sitio web por parte de cualquier usuario debía considerarse una aceptación de las TOU The Spanish Supreme Court held that the use or navigation of a website cannot be understood as valid consent to be bound by any provisions set in the TOUs. It would have been necessary for eDreams to assent by clicking an acceptance button or by any other similar means.
El TS de España sostuvo que la navegación y uso de su web no se podía entender como un consentimiento válido para hacer vinculantes las disposiciones que Ryanair incluyó en sus términos de uso, pues para que eso pudiera suceder de ese modo, eDreams debería haber aceptado clicando la opción de “aceptar los términos de uso”.
Exception on Spanish Law à if it appears a message to confirm that the user accepts their cookies, like: “By navigating and staying on this website you are consenting to the use made of the aforementioned cookies” Question Firm A informs in its contracts that some standard terms would apply to after-sale services, warranties and other issues and a QR code is included in the contracts.
Customer, Firm B, may use a smartphone to scan the QR code and convert it to a readable form through which it would be able to know the terms.
Are the standard terms legally incorporated in the contract between A and B? Jo crec que sí, perquè fins i tot en el cas que el client (l’empresa B) no disposés d’un smartphone amb una aplicació per llegir codis QR, l’Empresa A havia advertit prèviament que els termes d’ús es podien obtenir mitjançant aquest codi QR (que també havia proporcionat), i per tant podria haver aconseguit un lector abans d’acceptar el contracte (però no sé si es així m’ho acabo de patillar!!!!!) 3. Terms shall not be against mandatory norms or public policy If such were the case, the term shall be deemed null and void. (nulos y sin efecto) According to the LCGC, one of such situations occurs in B2C transactions when a term is contrary to the regulation on unfair terms in consumer contracts (assessment of fairness – evaluación de equidad) B2B contracts B2C contracts Very limited control of content: It can’t be contrary to mandatory rules and public policy.
More extensive than B2B contracts: It can’t be contrary to mandatory rules and public policy and it can’t contain unfair terms in consumer contracts (not applicable to essential elements).
38 Rules of interpretation According to Art. 6 LCGC when there is conflict between the standard terms and the provisions included in the contract, the latter shall prevail except when the standard terms would be more beneficial for the party that accepted them.
Prevalecerán las provisiones incluidas en el contrato excepto cuando los términos de uso pudieran suponer un mayor beneficio para la parte que los acepta.
- In cases of ambiguity of standard terms (where are several interpretations of a term), interpretative doubts should be decided against the user of the standard form contract (contra proferentem rule).
- Other general rules of interpretation apply: arts. 1281 to 1289 CC - Battle of forms (e.g.: article 19 CISG).
The content control: assessment of fairness PREGUNTA TEST EXAMEN!!! à Unfairness only applies in B2C contracts, not in B2B contracts (on where only mandatory rules and public policy applies) Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts Art. 3.1 ® “A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer” “Un término contractual que no haya sido negociado individualmente será considerado injusto si, contrario al requisito de buena fe, provoca un desequilibrio significativo en los derechos y obligaciones de las partes que surgen en virtud del contrato, en detrimento del consumidor ".
Analysis of the article: - Not individually negotiated term: not necessarily a term included in a standard form contract. That is, although a contract may have been written from scratch between a firm and a consumer, some terms may be imposed to the latter on a take-or-leave-it basis which may be unfair. (aunque un contrato puede haber sido escrito desde el principio entre una empresa y un consumidor, algunos términos pueden imponerse a este último en una base de "take-or-leave-it" que puede ser injusto).
- Where any seller or supplier claims that a standard term has been individually negotiated, the burden of proof in this respect shall be incumbent on him. (cuando cualquier vendedor o proveedor afirme que un término estándar ha sido negociado individualmente, la carga de la prueba a este respecto le incumbirá).
- Significant imbalance in rights and obligations: legal concept, not involving a difference in the distribution of contractual surplus. It cannot be limited to a quantitative economic valuation of the contract and the benefits obtained by each party therein. (no puede limitarse a una valoración económica cuantitativa del contrato y los beneficios obtenidos por cada una de las partes) Article 4.1 ® “Without prejudice to Article 7, the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.” “Sin perjuicio de lo dispuesto en el artículo 7, la injusticia de un término contractual se evaluará teniendo en cuenta la naturaleza de los bienes o servicios para los que se celebró el contrato y remitiendo, en el momento de la celebración del contrato, a todas las circunstancias que concurren la conclusión del contrato y todos los demás términos del contrato o de otro contrato de los que depende.” 39 Art. 4.2 ® “Assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on the one hand, as against the services or goods supplies in exchange, on the other, in so far as these terms are in plain intelligible language.” “La evaluación de la naturaleza injusta de los términos no se relacionará con la definición del objeto principal del contrato ni con la adecuación del precio y la remuneración, por un lado, en contra de los servicios o suministros de bienes a cambio, en el otro, en la medida en que estos términos estén en un lenguaje sencillo e inteligible.” Unfairness only applies to some of the terms. Unfairness would apply to those terms that has nothing to do with the definition of the subject matter of the contract. If the standard form term has to do with the main elements of the contract (and price) unfairness would not be controlled.
Typical cases of unfairness in consumer contracts Both the Directive and the TRLGDCU establish: - A "blacklist" of terms that are presumed to be unfair in all cases - A list of “grey terms”, that may be unfair in some circumstances Arts. 85 to 90 TRLGDCU include a catalogue of such terms: · Terms that have the goal of making the contract binding dependent on the firm’s will. (Los términos que tienen el objetivo de hacer que el contrato vinculante dependa de la voluntad de la empresa) · Terms that limit the basic rights of users and consumers. (Términos que limitan los derechos básicos de los usuarios y consumidores.) · Terms that entail a lack of reciprocity between the contracting parties. (Términos que conllevan una falta de reciprocidad entre las partes contratantes.) · Terms that limit consumers’ guarantees by imposing disproportionate requirements or unduly shifting the burden of proof. (Términos que limitan las garantías de los consumidores imponiendo requisitos desproporcionados o cambiando indebidamente la carga de la prueba.) • Terms that affect conclusion and performance of contracts. (Términos que afectan la conclusión y el desempeño de los contratos.) • Terms affecting jurisdiction and applicable law. (Términos que afectan la jurisdicción y la ley aplicable.) Also the Annex to the Directive includes a blacklist of terms that are considered to be unfair to consumers: “Terms which have the object or effect of: (a) excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier; (b) inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations, including the option of offsetting a debt owed to the seller or supplier against any claim which the consumer may have against him; (c) making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to a condition whose realization depends on his own will alone; (d) permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract; (e) requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation; (f) authorizing the seller or supplier to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer, or permitting the seller or supplier to retain the sums paid for services not yet supplied by him where it is the seller or supplier himself who dissolves the contract; (g) enabling the seller or supplier to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so; 40 An extraordinary case of unfairness: problems of transparency which distort actual knowledge of the contract’s economic impact on the consumer (problemas de transparencia que distorsionan el conocimiento real del impacto económico del contrato en el consumidor) Created in Spain by STS, 1st, 9.5.2013. Floor clauses in mortgage contracts (contratos hipotecarios) (“Cláusulas suelo”).
It can be used to assess standard terms referred to “the definition of the main subject matter of the contract or to the adequacy of the price and remuneration”.
Se puede utilizar para evaluar los términos estándar referidos a "la definición del tema principal del contrato o la adecuación del precio y la remuneración".
The Court has expressly said that non- transparent terms which may lead average consumers to be misled or misrepresented about the contract’s main conditions are deemed abusive, and therefore null (consequences of unfairness – not consequences of assessment of inclusion).
How does this control work? Transparency is not limited to formal transparency (legibility, use of typefaces, grammar correction…) (legibilidad, uso de tipografías, corrección de gramática ...).
Terms that are not clear and surreptitiously (subyacentes) affect the subject matter of the contract or the adequacy of the price and remuneration, thus depriving an average consumer of his or her possibility of comparing other offers in the market do not entail actual knowledge and therefore are unfair. (Privando así a un consumidor medio de su posibilidad de comparar otras ofertas en el mercado, no conlleven conocimiento real y, por lo tanto, son desleales.) The test is not whether the price or remuneration was fair or not –whether it was excessive or not-, but whether if an average consumer would have understood ex ante its economic impact in a way he or she would be able to compare it with the economic impact of other offers in the market. (Que un consumidor medio hubiera comprendido ex ante su impacto económico de una manera que él o ella podría compararlo con El impacto económico de otras ofertas en el mercado).
- Only in B2C contracts (STS, 1st, Plenary, 3.6.2016).
The “double control of standard form contracts: (IMPORTANT!!) 41 Consequences of nullity of terms: are courts entitled to create a substitutive clause for the invalid term? (integración): B2B contracts Art. 10.1 LCGC ® “La no incorporación al contrato de las cláusulas de las condiciones generales o la declaración de nulidad de las mismas no determinará la ineficacia total del contrato, si éste puede subsistir sin tales cláusulas, extremo sobre el que deberá pronunciarse la sentencia.” Art. 2 LCGC ® “La parte del contrato afectada por la no incorporación o por la nulidad se integrará con arreglo a lo dispuesto por el artículo 1258 del Código Civil y disposiciones en materia de interpretación contenidas en el mismo.” Art. 1258 CC ® “Los contratos se perfeccionan por el mero consentimiento, y desde entonces obligan, no sólo al cumplimiento de lo expresamente pactado, sino también a todas las consecuencias que, según su naturaleza, sean conformes a la buena fe, al uso y a la ley.” The goal here is basically to achieve the best situation for the two parties, because suppose that the contract is maximizing the welfare of both of them.
B2C contracts Art. 83 TRLGDCU ® "Nulidad de las cláusulas abusivas y subsistencia del contrato. Las cláusulas abusivas serán nulas de pleno derecho y se tendrán por no puestas. A estos efectos, el Juez, previa audiencia de las partes, declarará la nulidad de las cláusulas abusivas incluidas en el contrato, el cual, no obstante, seguirá siendo obligatorio para las partes en los mismos términos, siempre que pueda subsistir sin dichas cláusulas." Nullity: - Retroactive effects (ex tunc) ® if parties have made payments based on their particular term (en función de su término particular), all these payments will have to be returned.
- Restitution - Ex officio control ® it means that the judges may unilaterally decide that a particular term is unfair without needing a claim from one of the parties. (sin necesidad de que una de las partes reclame).
ECJ Judgment 14 June 2012, in Case C-618/10, Banco Español de Crédito SA v. Joaquín Calderón Camino On 28 May 2007, Mr Calderón Camino entered into a loan agreement for the sum of EUR 30 000 with Banesto in order to purchase a vehicle. The nominal interest rate was 7.950%, the APR (Annual Percentage Rate of Charge) 8.890% and the rate of interest on late payments 29%.
In September 2008, Banesto decided to ask for reimbursement of 7 monthly repayments that had not yet been made. In this regard, on 8 January 2009, it submitted, before the Juzgado de Primera Instancia No 2 de Sabadell (Court of First Instance, No 2, Sabadell), an application for an order for payment in the amount of EUR 29 381.95, corresponding to the unpaid monthly repayments plus contractual interest and costs.
The Court of First Instance understood that a 29% rate of interest on late payments was unfair. In concluding that, it took into account, inter alia, the Euribor (‘Euro interbank offered rate’) and European Central Bank (ECB) rates of interest, and the fact that the rate of interest for late payment in the agreement was more than 20 points greater than that of the nominal interest rate.
Then, the Court fixed that rate at 19%, referring to the statutory rate of interest and to the rates of interest for late payment included in national budget laws from 1990 to 2008, and ordered Banesto to recalculate the amount of interest for the period at issue in the dispute before it. In reaching that conclusion, the Court applied article 83.2 TRLGDCU: “The part of the contract which has been deemed void shall be modified in accordance with the provisions of Article 1258 of the Civil Code and with the principle of good faith”.
The judgment was appealed and the Court of Appeals in Barcelona decided to stay the proceedings and submit a reference for a preliminary ruling to the ECJ. Among other questions, the Court of Appeals asked the ECJ whether such article was in accordance to the Council Directive 93/13/EEC of 5 April 1993 on unfair terms in 42 consumer contracts. To sum up, where the courts entitled to decide that a term was void and then use a default rule in the legal system to amend it.
The ECJ concluded that: “Directive 93/13 cannot be understood as allowing the national court, in the case where it finds that there is an unfair term in a contract concluded between a seller or supplier and a consumer, to revise the content of that term instead of merely setting aside its application to the consumer”.
Rationale: If such modification of the agreement were permitted, sellers or suppliers would have incentives to include unfair terms in their commercial practices. Whilst the seller or supplier possibly has grounds to fear that, by virtue of a finding that a term is not binding, he will continue to be bound by an agreement which may be less favorable for him, a modification along the lines described above ultimately results in the terms of the agreement being modified in accordance with the law and thus to a state which is acceptable to the seller or supplier.
Justificación: Si se permitiera dicha modificación del acuerdo, los vendedores o proveedores tendrían incentivos para incluir términos injustos en sus prácticas comerciales. Si bien el vendedor o el proveedor posiblemente tienen razones para temer que, en virtud de la constatación de que un término no es vinculante, seguirá estando obligado por un acuerdo que puede ser menos favorable para él, una modificación a lo largo de las líneas descritas anteriormente resulta finalmente en los términos del acuerdo que se modifica de acuerdo con la ley y, por lo tanto, a un estado que sea aceptable para el vendedor o proveedor.
ECJ Judgment 30 April 2014, in Case C-26/13, Árpád Kásler and Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt.
“On 29 May 2008, Mr Kásler and Ms Káslerné Rábai concluded a contract for a mortgage denominated in a foreign currency with a Hungarian bank. The bank granted the borrowers a loan of 14 400 000 Hungarian Forints (HUF) (approximately €46 867).
The contract stipulated that the fixing in Swiss francs of the amount of the loan was to be made on the basis of the buying rate of exchange of that currency applied by the bank on the day the funds were advanced. In accordance with that term, the amount of the loan was fixed at CHF 94 240.84. However, under the contract, the amount in Hungarian forints of each monthly instalment to be paid was to be determined, on the day before the due-date, on the basis of the rate of exchange applied by the bank to the sale of Swiss francs.
Mr and Mrs Kásler brought an action before the Hungarian court challenging the term, which authorizes the bank to calculate the monthly instalments due on the basis of the selling rate of exchange of the Swiss franc.
They rely on the unfairness of that term, in so far as it provides, for the purpose of repayment of the loan, for the application of a rate different from that used when the loan was made available.
The Kúria (Hungarian Supreme Court) hearing the case on appeal, asks the Court of Justice whether the term concerning the exchange rate applicable to a loan contract denominated in foreign currency concerns the main subject matter of the contract or the quality/price ratio of the goods or services supplied. It also wishes to know whether the contested term may be regarded as being in plain, intelligible language, so that it is not subject to an assessment of its fairness pursuant to the directive. Finally, the Hungarian court wishes to know whether, if the contract cannot continue in existence if the unfair term is deleted, the national court is authorized to amend or supplement the contract.
The Court recalls, first of all, that the prohibition on determining the unfairness of terms relating to the main subject-matter of the contract must be interpreted strictly and may be applied only to terms laying down the essential obligations of the contract. It is for the Kúria to determine whether the contested term constitutes an essential obligation of the contract concluded by Mr and Ms Kásler.
Furthermore, the Court notes that the examination of the unfairness of the term at issue cannot be avoided on the ground that that term relates to adequacy of the price and the remuneration on one hand as against the services or goods supplied on the other. That term merely determines the conversion rate between Hungarian forints and Swiss francs for the purpose of calculating the repayments, without the lender providing any foreign exchange service. In the absence of such a service, the financial costs resulting from the difference between the 43 buying and selling rates of exchange, which must be borne by the borrower, cannot be regarded as remuneration due as consideration for a service.
Second, the Court states that a term defining the main subject matter of the contract is exempt from an assessment of its unfairness only if it is in plain, intelligible language. In that connection, the Court states that that requirement is not limited to clarity and intelligibility from a purely structural and grammatical point of view. To the contrary, the loan contract must set out in a transparent fashion the reason for and the particularities of the mechanism for converting the foreign currency. Thus, it is for the Kúria to determine whether the average consumer, who is reasonably well informed and reasonably observant and circumspect, on the basis of the promotional material and information provided by the lender in the course of negotiating the loan contract, would not only be aware of the existence of the difference between the selling rate of exchange and the buying rate of exchange of a foreign currency, but also be able to assess the consequences arising from the application of the selling rate of exchange for the calculation of the repayments and for the total cost of the sum borrowed.
Finally, the Court observes that, if the deletion of an unfair term renders the contract unenforceable, as in the present case, the directive does not preclude the national court from substituting the contested term with a supplementary provision of national law. Such an approach enables attainment of the aim of the directive, which consists in re-establishing a balance between the parties while preserving, as far as possible, the validity of the contract as a whole.
If such a substitution were not allowed and if the court were obliged to annul the contract, the dissuasive nature of the penalty of nullity and the objective seeking to protect consumers might be jeopardized. In the present case, such an annulment would have the consequence that the whole of the outstanding sum would become due.
That is likely to be in excess of the consumer’s financial capacities and, as a result, to penalize him rather than the lender who, in the light of that consequence, might not be dissuaded from inserting such terms in its contracts” (Press Release issued by the ECJ).
44 TEMA 5. Interpretation of Contracts Incompleteness of contracts Contracts are significantly incomplete. Contracts typically omit some variables and contingencies that might be of potential relevance to contracting parties. (muchas veces omiten variables que podrían ser de gran relevancia para las partes).
Reasons: 1. Transaction costs: anticipating possible contingencies, bargaining about their resolution (given that they are anticipated), and then describing them adequately in the agreement is costly for the parties. (anticipar contingencias, negociar su resolución, describirlas bien en el contrato… supone costes).
Therefore, parties will tend not to specify terms for low probability events (eventos de baja probabilidad), because the expected loss from this type of exclusion will be minimal, whereas the cost of including the terms would be borne with certainty: lots of potential events with a minimal probability of occurring would make drafting contracts prohibitive (muchos eventos potenciales con una probabilidad mínima de ocurrir harían que los contratos de redacción fueran prohibitivos.) - If contract drafting was costless, parties would then exhaustively detail all contingencies and thus interpretative error would be minimized. (detallarían al máximo su contenido, el error interpretativo sería mucho menor) - Bounded rationality (racionalidad limitada): limits on information search and information processing.
According to George Stigler, an actor invests in search of information until the expected cost of further search equals the expected marginal return from further search. (un actor invierte en búsqueda de información hasta que el costo esperado de búsqueda adicional sea igual al retorno marginal esperado de la búsqueda posterior). Therefore: an actor’s decision to end information search and processing is rational even though it turns out ex post that a further search would have produced valuable information.
2. Enforcement costs: They involve the subsequent cost of enforcing a contractual term. If, for instance, the cost of providing evidence to the courts that a relevant contingency or condition has occurred is sufficiently large, then the parties will not have incentives to include the term into their agreement. (implican el costo subsiguiente de hacer cumplir un término contractual. Si, por ejemplo, el costo de proporcionar evidencia a los tribunales de que ha ocurrido una contingencia o condición relevante es suficientemente grande, entonces las partes no tendrán incentivos para incluir el término en su acuerdo.) If parties did not incur in costs when gathering (reunir) and presenting evidence to the courts (and courts could hear all relevant and material evidence in all cases brought before them), parties would then exhaustively include such contingencies and thus interpretative error would be minimized as well.
3. Unverifiable variables Some variables cannot be verified by courts or can only be verified with a lot of effort and consequently with a high probability of error.
Examples: the defendant alleges that his lack of performance was due to a stomachache or to technical production difficulties. If parties included such a contingency in the agreement, then one of the parties would generally find it in his interest to make opportunistic claims about the contingency or the variable and would raise enforcement costs.
45 Expected consequences of incompleteness may not be very harmful to contracting parties. There are different alternatives that may be used to ameliorate this problem: a) Interpretation made by a judge or arbitrator.
b) Completing incomplete agreements by a judge or arbitrator (interpolation of terms, gap-filling, lacunae): Art. 1258 CC ® “Los contratos se perfeccionan por el mero consentimiento, y desde entonces obligan, no sólo al cumplimiento de lo expresamente pactado, sino también a todas las consecuencias que, según su naturaleza, sean conformes a la buena fe, al uso y a la ley”.
Contracts bind the parties: - To perform the promises expressly agreed therein - To perform other obligations that, on the basis of the contract characteristics, may arise from good faith, usage or the law.
(c) Renegotiation of contracts, for example, by deleting the problems. Sometimes renegotiation is not possible and this solution would be not the best one to dress with incompleteness.
(d) Damages (understood as a price to opt out the contract – precio para excluir el contrato). If the parties do not really understand what are their respective obligations in the contract and they don’t want to renegotiate the contract, one party can decide to breach and pay the damages to the other party.
Gap filling and ambiguity, despite being different, share some features: - In practice they both require some sort of interpretation.
- Sometimes ambiguity or gaps will be deliberate: § In order to ease the bargaining process, parties decide to include open terms.
§ Due to future uncertainty, parties decide to include open terms that would require interpretation (or renegotiation).
- Interpretation ® Delegation to judges or arbitrators.
- Cost tradeoff between drafting and litigation: the more the parties invest at the first stage, the lower the expected cost at the second stage.
Scope of interpretation - Content of contracts (gaps / ambiguity).
- Whether a contract has been formed: whether one statement was a declaration of acceptance or a counter-offer, whether a declaration was an offer or an invitation to offer; interpretation of conducts –in cases where consent is not expressed in words (raising a hand in a public auction) Formation of contracts, in particular interpretation, ends here analyzing whether a particular statement between de parties is an offer, is an invitation to make offers, it is an acceptance… the scope of interpretation here does not ends with the obligation of the party, but change the proposals between them.
- Whether a communication between the parties issued after the contract was entered into can be interpreted as an amendment.
46 Once the contract has been concluded and performed by the parties, some problem of communication will exist and, parties, because of this, may renegotiate some aspects or obligation of the contract and then the judge interpret it as an amendment.
Problem: divergent understanding by the parties There are at least two parties in a contract and they may have a divergent interpretation of the agreement.
It is too costly to consider that when a divergent understanding occurs, the contract should be invalid ® it would deprive contracts all value as cooperative tools (privaría a los contratos de valor). Legal systems have to protect that party that had a “correct” understanding of the agreement and relied in the contract as a cooperative tool.
Invalidity or avoidance should be understood as the LAST RESORT REMEDY (in case of mutual mistake).
Even when both parties of a contract are mistaken about an essential element of the contract, the court shall attempt to find a reasonable interpretation from the context of the agreement before it will void it.
Raffles v Wichelhaus [1864] EWHC Exch J19 The claimant entered into a contract to sell 125 bales of cotton to the defendant. The contract specified that the cotton would be arriving in Liverpool on the ship Peerless from Bombay.
However there were two British ships named Peerless arriving in Liverpool from Bombay, one departing in October and another departing in December.
Due to volatility of cotton prices, the defendant argued that it was relevant that the cotton should be sent on the October ship while the claimant thought the contract was for the cotton on the December ship. When the December Peerless arrived, the claimant tried to deliver it to the buyer and the buyer repudiated the agreement.
Suda es una merda d’exemple -- Possible solutions to interpretation: Adjudicators (courts/arbitrators) should: 1. Determine the parties’ intentions from all possible evidence (subjective theory, contextualism).
à The most important one. The main goal of this approach is to identify the actual parties intentions in the contract, so to find what the parties were really intending when they accept and agree the contract. This takes in account the context in which the contract was concluded.
2. Pick an economically efficient or reasonable solution, assuming that this would probably be what the parties intended or would have intended if they’d thought about the contingency.
à More theoretical approach, used basically by schoolers. We have an incomplete contract, so let’s find a contract to reach a possible solution that parties would agree to.
3. Focus exclusively in the text written by the parties (objective theory – textualism, formalism).
à Focuses on the final written agreement write by the parties. The only agreement that the judge considers or wants is the one written statements that was signed by the parties.
4. Treat the case as a toss-up and use a rule for breaking ties: à Interpretation rules are not sufficient to discover the actual meaning of the contract, the actual intention of it, and in these cases the judges or the law stablishes some rules to break ties and solve it.
§ Decide the case against the plaintiff seeking enforcement (decidir el caso en contra del demandante que busca la ejecución) § Decide the case against the author of the ambiguous term (contra proferentem rule). (decidir el caso contra el autor del término ambiguo) Freedom of contract as the starting point The relevance of the parties’ intentions to be bound by the contract: interpretation of contracts should take into account that contracts between private parties are cooperative tools that are entered into by the 47 parties in order to maximize their joint surplus from the contractual relationship. (entran libremente en el contrato) The main role of contract interpretation is to ascertain (determinar) the intentions of the parties, regardless of their purposes (independientemente de sus propósitos) ® no control of reasonableness of their intentions or goals ® contracting parties may have acted irrationally when contracting.
Stat Pro Ratione Voluntas: “The will stands in place of a reason”.
"La voluntad se impone en lugar de una razón".
It might be deemed contrary to freedom of contract to impose “reasonable” solutions upon the parties.
Only when the actual or hypothetical intentions of the parties cannot be identified, a reasonable standard may apply. !!! Rules: Art. 8.1 CSIG ® “For the purposes of this Convention statements made by and other conduct of a party are to be interpreted according to his intent where the other party knew or could not have been unaware what that intent was.” Art. 8.2 CISG ® "If the preceding paragraph is not applicable, statements made by and other conduct of a party are to be interpreted according to the understanding that a reasonable person of the same kind as the other party would have had in the same circumstances.” Art. 8.3 CISG ®“In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties”.
Art. 1281 CC ® “Si los términos de un contrato son claros y no dejan duda sobre la intención de los contratantes se estará al sentido literal de sus cláusulas. Si las palabras parecieren contrarias a la intención evidente de los contratantes, prevalecerá ésta sobre aquéllas”.
Art. 1287 CC ® “El uso o la costumbre del país se tendrán en cuenta para interpretar las ambigüedades de los contratos, supliendo en éstos la omisión de cláusulas que de ordinario suelen establecerse”.
DCFR (Draft Common Frame of Reference): II. – 8:101: General rules 1. ® “A contract is to be interpreted according to the common intention of the parties even if this differs from the literal meaning of the words.
2. ® “If one party intended the contract, or a term or expression used in it, to have a particular meaning, and at the time of the conclusion of the contract the other party was aware, or could reasonably be expected to have been aware, of the first party’s intention, the contract is to be interpreted in the way intended by the first party.
3. ® “The contract is, however, to be interpreted according to the meaning which a reasonable person would give to it: a) if an intention cannot be established under the preceding paragraphs; or b) if the question arises with a person, not being a party to the contract or a person who by law has no better rights than such a party, who has reasonably and in good faith relied on the contract’s apparent meaning”.
Parties’ intentions - Actual intentions of the parties - Establish what the intention of each party was at time of concluding contracting.
- We cannot identify intention with the intention of only one party. Besides, individual intention is a mental state which cannot be easily identified by the other party. (Además, la intención individual es un estado 48 mental que la otra parte no puede identificar fácilmente) ® we cannot identify intention solely on the basis of declarations made by this party or of declarations made by the addressee.
- If intentions correspond ® content of the contract.
- General principle: the intention as seen from the perspective of the addressee (destinatario): • The content of declarations has to be interpreted from the addressee’s perspective and how he could reasonably understand the declaration in view of the individual circumstances of the case.
• Decision by an outsider: but declarations, especially in complex transactions (por ejemplo, en contratos hechos por ingenieros) are not made to be understood by outsiders. It is important to consider then the addressee’s perspective as the relevant standpoint.
• Parties are better informed than outsiders (courts, arbitrators) about benefits and costs ® they have a comparative advantage over outsiders (informational asymmetry). Specialized arbitrators could have a comparative advantage over courts.
• Addressee is supposed to understand the declarations made by the other party in a reasonable way and in good faith ® The declaring party may expect that the addressee will be reasonable and act in good faith when interpreting his declarations.
• Circumstantial evidence as to the parties’ intentions at the time of contracting.
An intention is a state of the mind. Courts tend to identify some external elements that may be useful to determine the intentions of the parties.
The judge or the arbitration it’s an external individual that maybe ignores about that industry, so because of that it is important that lawyers of both parties identify idiosyncratic meanings.
Parties want to avoid a judge between the relationship and interests in the contract, so parties, sometimes, will prefer another possible settlement than a court or an arbitration.
DCFR II. – 8:102: Relevant matters “(1) In interpreting the contract, regard may be had, in particular, to: (a) the circumstances in which it was concluded, including the preliminary negotiations; (b) the conduct of the parties, even subsequent to the conclusion of the contract; (c) the interpretation which has already been given by the parties to terms or expressions which are the same as, or similar to, those used in the contract and the practices they have established between themselves; (d) the meaning commonly given to such terms or expressions in the branch of activity concerned and the interpretation such terms or expressions may already have received; (e) the nature and purpose of the contract; (f) usages; and (g) good faith and fair dealing”.
Art. 1282 CC ® “Para juzgar de la intención de los contratantes, deberá atenderse principalmente a los actos de éstos, coetáneos y posteriores al contrato” We also need to have into account that when parties choose a nominate contract, they are already showing their intentions.
Reasonable or efficient interpretative solutions Let’s suppose that parties could have time and money and they would have reached a solution. Then the parties would have reached one of the following solutions: - Usage in trade/custom - Normative views: efficiency § Find the most efficient solution for the parties. That solution may coincide with the one established in custom (mimicking markets, judge will have to mimic the market).
§ Judge will choose the solution that maximizes social welfare.
49 § - - “Cheapest cost avoider” ex ante, it’s the view of Richard A. Posner (a very important judge). When there is an interpretation problem, the party who is in the better position ($) needs to solve it: To assign the risk of some adverse event that would frustrate performance either to the party that can prevent the event at least cost or, if the event is not preventable at reasonable cost, to the party that is the superior risk-bearer.
Asignar el riesgo de algún evento adverso que pueda frustrar el desempeño, ya sea a la parte que puede evitar el evento al menos el costo o, si el evento no es prevenible a un costo razonable, a la parte que es el superior portador de riesgo.
To prevent either party from taking advantage of vulnerabilities created by non-simultaneity of performance”. (Richard A. Posner, “The Law and Economics of Contract Interpretation”).
Para evitar que cualquiera de las partes aproveche las vulnerabilidades creadas por la no simultaneidad del rendimiento Textualism – Formalism − Wording of the contract (redacción del contrato) and nothing else (common law: “Four corners rule”).
− Objective interpretations are criticized because they lead to excesses of formalism generated by literal meaning: it may force parties to be bound by obligations that they mistakenly drafted and that neither of them could have reasonably wanted at the time of contracting. One cannot be completely confident of being able to determine the meaning of a document from the document alone. Uno no puede estar completamente seguro de poder determinar el significado de un documento solo del documento.
− Objective interpretations are also criticized because they induce parties to overinvest in drafting the agreement (sobre invertir en la redacción del acuerdo) ® it would create an overall increase of ex ante transaction costs, regardless of the fact that only a tiny fraction of contracts are litigated ex post.
It is employed mostly in common law jurisdictions, in situations where parties are very sophisticated and has very good lawyers to draft the contract during the negotiations. But when parties haven’t recurred to lawyers, an alternative view may be preferable. Also the problem with this type of strategy is: - If the parties lack skills, they may end up entering into a contract which includes terms that from an objective perspective are negative for them.
- The fact that the only relevant aspect would be the final test would make that parties spend a lot of time on that final test.
The way of drafting contracts which come from common law jurisdictions has have influence on civil law.
Sometimes parties will make mistakes (a party expresses something with a word that do not really represents that meaning or that intention).
In most cases, the final text of the contract would be the most important piece of evidence in a court.
The wording may not be disregarded by arguing that the reasonableness of an interpretation is not in accordance with the text. But sometimes: clumsiness of parties or heterogeneous uses of language. (La redacción no puede ser descartada argumentando que la razonabilidad de una interpretación no está de acuerdo con el texto. Pero a veces: torpeza de fiestas o usos heterogéneos del lenguaje) Art.1285 CC ® “Las cláusulas de los contratos deberán interpretarse las unas por las otras, atribuyendo a las dudosas el sentido que resulte del conjunto de todas”.
Art. 1286 CC ® “Las palabras que puedan tener distintas acepciones serán entendidas en aquella que sea más conforme a la naturaleza y objeto del contrato”.
Plain meaning is not to be respected if it is clear that the intention of the parties at the time of contracting was not covered by the expressions they used.
Falsa demostratio non nacet: A wrong description of an item in a contract will not necessarily void the agreement if it can be determined from other facts.
Example: the Haakjöringsköd case (Rechtsgericht 8.6.1920, RGZ 99,147): The parties entered into a sales contract for “Haakjöringsköd”. Both parties had the understanding that this referred to whale meat.
50 However, the general usage of language and therefore its literal meaning indicated that “Haakjöringsköd” referred to shark meat.
Language discrepancies Where a contract document is in two or more language versions none of which is stated to be authoritative and where there is a discrepancy between the versions, the version in which the contract was originally drawn up is to be treated as the authoritative one.
Merger clauses or entire agreement clauses Where a contract in writing includes a term stating that the document contains all contract terms (a merger clause, cláusula de fusión), any prior statements, undertakings or agreements which are not contained in the document do not form part of the contract.
They are usually not accepted in B2C contracts.
The only relevant evidence that courts will be analysing will be the agreement between the parties included at the final draft.
Rules for breaking ties: Contra proferentem rule An ambiguous term is to be construed against the party on whose initiative it was inserted in the contract.
Used if a context is not sufficient to provide a solution, and jurisdictions include this rules that may be useful as tie breakers (para desempatar) Art. 1288 CC ® “La interpretación de las cláusulas oscuras de un contrato no deberá favorecer a la parte que hubiere ocasionado la oscuridad”.
Art. 6.2. LCGC ® “Las dudas en la interpretación de las condiciones generales oscuras se resolverán a favor del adherente”.
DCFR: II. – 8:103: Interpretation against supplier of term or dominant party “(1) Where there is doubt about the meaning of a term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred.
(2) Where there is doubt about the meaning of any other term, and that term has been established under the dominant influence of one party, an interpretation of the term against that party is to be preferred”.
Sometimes it will be difficult to ascertain whether a term was individually negotiated or not. Also when a party could use a dominant influence on the other party, specially when some benefits have been received by this other party.
The role of this rule is to provide incentives to parties to avoid the negative effects of ambiguous terms ® Incentive to be more transparent and clear.
Some legal systems provide rules that may be combined with the contra proferentem rule. In the case of Spanish Contract Law: Art. 1289 CC ® “Cuando absolutamente fuere imposible resolver las dudas por las reglas establecidas en los artículos precedentes, si aquéllas recaen sobre circunstancias accidentales del contrato, y éste fuere gratuito, se resolverán en favor de la menor transmisión de derechos e intereses. Si el contrato fuere oneroso, la duda se resolverá en favor de la mayor reciprocidad de intereses.
Si las dudas de cuya resolución se trata en este artículo recayesen sobre el objeto principal del contrato, de suerte que no pueda venirse en conocimiento de cuál fue la intención o voluntad de los contratantes, el contrato será nulo”.
Example A provision in an insurance contract entered by Mrs. L provides that the policy covers the theft of jewelry only in cases of “clandestine entry” into her home.
51 An individual M pretends to be a gas repairman and presents himself at Mrs. L’s home to check the gas line installation.
M distracts L and takes the opportunity to steal her jewelry.
The Insurance Company refuses to pay to Mrs. L alleging that the insurance policy did not cover that sort of thefts.
Mrs. L alleges that “clandestine entry” shall include “entry gained by fraud”.
Which is the reasonable interpretation in this case? 52 TEMA 6. Performance Solvens ® Person that actually performances the obligation (a debtor or a third person) Delegation: debtors may be voluntarily or legally represented by other individuals or persons.
· Exception: intuitu personae obligations (obligations to perform some type of services): obligations in which the creditor takes into consideration the personal skills and qualities of the debtor (art. 1161 CC) (si la obligación o deuda que debe satisfacer requiere sus habilidades y cualidades concretas) Capacity to alienate goods (enajenar bienes) + non-limited transferability of assets (transferibilidad no limitada de bienes) (art. 1160 CC) · If some of these requirements are not met, performance is not valid (art. 1160 CC) and restitution of assets may follow (restitución de los activos) Performance by a third person The solver may not be the same person as the debtor Where personal performance by the debtor is not required by the terms regulating the obligation (cuando no se requiere el desempeño personal del deudor), the creditor cannot refuse performance by a third person, regardless of the debtor’s assent (independientemente del asentimiento del deudor).
• Only in non intuitu personae obligations (art. 1161 CC) • Also capacity requirements should be followed (art. 1160 CC) (también se deben cumplir los requisites de capacidad) If a third person solves the obligation, it is created a new contract (between the primary debtor and his solver), and at the same time the creditor, who has already been satisfied, would cannot require the payment to the debtor.
Art. 1158 CC ® “Puede hacer el pago cualquier persona, tenga o no interés en el cumplimiento de la obligación, ya lo conozca y lo apruebe, o ya lo ignore el deudor. El que pagare por cuenta de otro podrá reclamar del deudor lo que hubiese pagado, a no haberlo hecho contra su expresa voluntad. En este caso sólo podrá repetir del deudor aquello en que le hubiera sido útil el pago”.
Effects: · Debtor knows about the third person’s intention to perform and does not oppose it: - Credit relation between Creditor and Debtor is extinguished - obligation subsists - the third person takes over the creditor’s right by subrogation.
· Debtor ignores about the third person’s intention to perform: - Credit relation between Creditor and Debtor is extinguished 53 · - the third person does not take over the creditor’s right by subrogation - but may seek reimbursement (acción de reembolso (art. 1159 CC)).
Debtor opposes performance by a third person: The third person may only seek reimbursement (acción de repetición) of amounts that have reported utility to debtor Example: Supreme Court Judgment 339/2011, May 26th: Company is created to pay third party debts with the purpose of later instating foreclosure proceedings against debtors and auction for their properties.
Accipiens ® person that receives performance (a creditor or third person) Legal capacity to administrate goods (art. 1163 CC) ® performance to an incompetent person is generally not valid (and thus can be null). It may be recommended to use deposit as an alternative to performance.
Representative of the incompetent may accept performance ex post (ratificación).
Performance to person who is not the creditor 1. Authorized persons: sometimes the creditors will appoint a person that would be directly benefited by performance (article 1162 CC).
- Representative (legal or voluntary representation).
- Non-representative authorization (adiectus solutionis causa); ex: bank account 2. Apparent creditor (art. 1164 CC: “El pago hecho de buena fe al que estuviere en posesión del crédito, liberará al deudor”): The debtor is discharged by performing to an alleged assignee if he acts in good faith à rule aimed at facilitating transactions in the market and protecting those agents that relied in the information conveyed by documents incorporating the credit. The debtor reasonably and in good faith believed that the right had been assigned to that person.
Obligation is not extinguished: the true creditor may seek reimbursement against the alleged assignee.
3. Performance to a third person (art. 1163.2 CC: “También será válido el pago hecho a un tercero en cuanto se hubiera convertido en utilidad del acreedor”) Valid performance if, for instance, the third person afterwards delivers the assets to the creditor, or debtor pays to a creditor (obligation is extinguished by set-off).
Plurality of debtors or creditors · · · Several liability Joint liability) Joint and several liability (solidarity) 54 Objective requirements Performance of an obligation shall meet the following requirements: a) Identity: debtor has a duty to perform the behavior that is the subject-matter of the obligation, unless the creditor accepts an alternative behavior as valid performance (arts. 1166 and 1167 CC). Ex: datio pro soluto.
b) Integrity: debtor has a duty to perform the obligation in full, that is, to deliver all elements of the good that was promised (including accessories) or to perform all behaviors that were the subject-matter of the obligation.
The creditor may accept a good that has been partially destroyed. In such cases, however, legal systems usually entitle the creditor to ask for a reduction of price (1460.2 CC).
c) Indivisibility: in cases of a plurality of obligations or, for instance, an obligation to deliver a plurality of goods, debtor has a duty to perform all obligations or to deliver all goods (art. 1169 CC).
The creditor may accept a partial performance, such as an incomplete delivery of goods. In such cases, however, legal systems usually entitle the creditor to ask for a reduction of price (art. 51 CISG).
The creditor has no obligation to accept that the different obligations are performed in different dates and therefore may reject a performance schedule submitted by the debtor.
Elements § Place of performance (art. 1171 CC) If the place of performance of an obligation cannot be otherwise determined from the terms regulating the obligation it is: a) in the case of an obligation to transfer a good, the place in which the good existed at the time the obligation was created.
b) in the case of any other obligation, the debtor’s place of business.
§ Time of performance If the time at which, or a period of time within which, an obligation is to be performed cannot otherwise be determined from the terms regulating the obligation it must be performed immediately (art.1113 CC).
(si no puede determinarse, la obligación debe realizarse de inmediato).
If a period of time within which the obligation is to be performed can be determined from the terms regulating the obligation, the obligation may be performed at any time within that period chosen by the debtor unless the circumstances of the case indicate that the creditor is to choose the time (article 1125 CC and 1129 CC).
(si puede determinarse, la obligación se puede realizar en cualquier momento dentro del plazo que el deudor haya escogido – o que haya escogido el creditor, si es que las circunstancias del caso lo piden así) § Early performance (art. 1127 CC) Periods of time within which the obligation is to be performed are included to benefit both creditor and debtor.
55 A creditor may reject an offer to perform before performance time is fulfilled, unless the early performance would not cause the creditor unreasonable prejudice.
A creditor’s acceptance of early performance does not affect the time fixed for the performance by the creditor of any reciprocal obligation.
§ Order of performance (imputación de pagos – art. 1172 CC).
Extinctive effect of a performance Full performance extinguishes the obligation if it is in accordance with the terms regulating the obligation.
If all obligations that arise from a contract are performed, then the contract is also fully performed.
Alternatives to performance (subrogados del consentimiento) Alternatives to full performance that extinguish the obligation but not in accordance with the terms regulating the obligation: à Debtors are discharged.
à In most of the situations, creditors experience the same level of utility and therefore it is assumed that they are initially indifferent.
Alternatives to performance (art. 1156 CC): o Deliverance of an alternative good (“dación en pago”).
o Deposit of goods (“consignación”; art. 1176-1181 CC).
o Remission (“condonación”; art. 1187-1191 CC).
o Merger (“confusión”; art. 1192-1194 CC).
o Set-off (“compensación”; art. 1195-1202 CC).
Deposit (consignación) A person who has an obligation to deliver or return property other than money and who is left in possession of the property (se le deja con la posesión de la propiedad) because of the creditor’s failure to accept or retake the property, has an ancillary obligation to take reasonable steps to protect and preserve it.
The debtor left in possession would be entitled to be reimbursed or to retain out of the proceeds of sale any costs reasonably incurred. (El deudor que quede en posesión tendrá derecho a que se le reembolse o retendrá del producto de la venta los costos razonablemente incurridos.) However, the debtor may obtain discharge from the obligation to deliver or return the goods (also money) by depositing the property on reasonable terms with a court (depósito judicial) or with a notary (depósito notarial) to be held to the order of the creditor, and notifying the creditor of this.
Different modalities of deposit depending on the property: corporeal property, real property… Ley 15/2015, de Jurisdicción Voluntaria: amends (modifica) Civil Code to include deposits with a notary.
Situations (art. 1176 CC) à cases in which performance is impossible by the debtor due to causes that cannot be attributed to him: o Creditor rejects performance without a just cause.
o Creditor is absent (non-legally declared absence).
o Creditor is incompetent (non-legally declared incompetency).
o Uncertainty about the creditor’s identity: two or more parties claim to be the holders of a credit right.
56 o Loss of the document in which the obligation is included when its delivery is required (ex: bills of exchange – letras de cambio).
Alternative good or object accepted by the creditor (Datio pro soluto) The debtor offers a different good or behavior than the one initially included in the obligation; and the creditor accepts it.
Ex.: Mr. A hired a lawyer and now has an obligation to pay an invoice for legal services; Mr. A informs the lawyer that he is having some cash liquidity problems and that he would like to pay the invoices by delivering an artwork. The lawyer accepts it à the obligation is extinguished.
The Spanish Civil Code does not regulate “datio pro soluto”, and the institution is only mentioned in some provisions (arts. 1521, 1536.2, 1636 and 1849 CC). It is thus an atypical agreement that may be concluded pursuant to freedom of contract (art. 1255 CC).
Requirements: o Alternative good or behavior (aliud pro alio) o Substitution consented by the creditor (agreement) Obligation is cancelled: afterwards creditor may not seek specific performance of the previous obligation: • Pro soluto (default solution): obligation is cancelled with transfer of alternative good.
• Pro solvendo: parties may agree that transfer of good is made on a pro solvendo basis ¯¯ Datio pro solvendo is similar to assignments of goods made to the creditor aimed at obtaining liquidity as an alternative to performance (cesión de bienes para el pago - article 1175 CC).
- Assignment does not involve a transfer of ownership (propiedad) - Creditor has a power of representation to sell the debtor’s goods and retain the price that is obtained.
- Agency costs.
- Pro solvendo effects: debtor is only discharged and the obligation is cancelled if the price obtained amounts or exceeds the obligation.
- It is usual in pre-insolvency situations (situaciones previas a la insolvencia): there are some limits in the Bankruptcy Act 22/2003.
Lack of a general regulatory framework in the Civil Court à analogical application of sales contract rules Limits · Price determination (see Supreme Court Judgment 643/2009, October 1st): intermediation services remunerated with transfer of ownership of real property. (servicios de intermediación remunerados con transferencia de propiedad de bienes inmuebles.) · Hidden defects · Home Repossession (Dación en pago) Real Decreto-ley 6/2012, de 9 de marzo, de medidas urgentes de protección de deudores hipotecarios sin recursos.
57 The Act establishes a Code of Best Practices in the field of debts secured with a mortgage on the debtor’s home.
The Code establishes three mechanisms aimed at protecting underprivileged debtors.
First, lenders - prestamistas (banks) and debtors may restructure mortgage debts by way of: i) reducing the interest rate for four years; ii) establishing interest-only payments; or iii) extending the total period for amortization.
Second, lenders may offer a rebate or reduction of the debt up to a 25% of the amount.
Third, if none of the former mechanisms may be used debtors’ homes may be repossessed by the bank and, as a consequence, the debt is cancelled (dación en pago).
Set-off (compensación) “Set-off” is the process by which a person may use a right to performance held against another person to extinguish in whole or in part an obligation owed to that person. (una persona le debe dinero [u otra cosa] a otra que, a la vez, le debe dinero a la primera) -Reciprocal obligations between two parties: A owes B €10,000 and B owes A €15,000: if set-off requirements are met, A’s obligation is cancelled and B’s debt is amended: now B owes A €5,000.
Set-off extinguishes the obligations, as far as they are coextensive.
-Set-off may apply automatically without agreement by the parties and despite their knowledge (art. 1202 CC).
Advantages of set-off: 1. Payments are simplified (reduction of transaction costs, especially between firms or professionals in long-term agreements or in repeated interactions with reciprocal outstanding balances).
2. Assurance or guarantee mechanism: one of the parties may use set-off in order to avoid the risk of paying the debted amount to the other party an remain uncertain about the prospects of being paid by the other party. Hence, set-off is not allowed when one of the parties is in insolvency proceedings (article 58 Bankruptcy Act 22/2003).
Types of set-off: a) Legal set-off b) Voluntary set-off c) Judicial set-off.
Requirements for legal set-off (art. 1196 CC): i.
Objective requirements: 58 If two parties owe each other obligations of the same kind, either party may set off that party’s right against the other party’s right, if and to the extent that, at the time of set-off: A) The obligations are of the same kind (money amounts, or goods with identical quality) B) The obligations are reciprocal: no need to arise from the same contract or legal relationship. Not necessarily synallagmatic* obligations.
*El contrato bilateral o sinalagmático es aquel contrato que genera obligaciones recíprocas para ambas partes contratantes.
C) Performance of the obligations is due or, even if it is not due, the party can oblige the other party to accept performance.
D) The obligations have been quantitatively assessed: a debtor may not set off a right which is unascertained as to its existence or value.
Subjective requirements: Reciprocal obligations between two parties who are linked by two relationships in which they both have the roles of debtor and creditor as regards to the other party.
® Exception: a security provider (fiador) may allege set-off between creditor and debtor (articles 1197 CC, and art. 1853 CC) Parties shall be rightholders (titulares de derechos) of credits (no representation).
Exclusion of set-off Set-off cannot be effected where it is excluded by agreement.
Also set-off is excluded in some cases, for instance: -against a right to the extent that that right is not capable of attachment (maintenance claims - obligaciones de alimentos, assets immune to seizure - créditos inembargables).
-against a right arising from an intentional wrongful act (acto ilícito intencional) -In insolvency situations.
Special rule on set-off and assignment of credits (article 1198 CC): “The debtor who has consented to the assignment of debt by the creditor to a third party may not use as defense against the assignee the set-off to which he would be entitled against the assignor.
"El deudor que haya prestado su consentimiento para la cesión de la deuda por parte del acreedor a un tercero no podrá utilizar como defensa contra el cesionario la compensación a la que tendría derecho frente al cedente.
Because of the assignment, A would not have to pay the money to B (so it will be paid to C).
59 If the creditor informed the debtor about the assignment and the latter did not consent to it, he may use as defense the set-off of debts that could be made before the date of the assignment, but not afterwards.
Si el acreedor le informó al deudor sobre la cesión y éste no lo aceptó, puede usar como defensa la compensación de las deudas que podrían hacerse antes de la fecha de la cesión, pero no después.
A does not agree to this assignment to C. Oposes this assignment, but C can claim the whole amount to A.
When C claims against A, A is enlitled to alledge reductions because they owe him 40u.
If the debtor is not informed about the assignment, the debtor may use as defense the set-off of debts that could be made before the date of the assignment, and afterwards until the debtor knows about the assignment”.
Si el deudor no es informado acerca de la cesión, el deudor puede utilizar como defensa la compensación de las deudas que podrían hacerse antes de la fecha de la cesión, y luego hasta que el deudor conozca la cesión".
The debtor knows nothing about the assignment of credits, the debtor would be able to set off against C to those obligations created before the assignment.
A and B enter into a contract in which B has to pay 60u to A. At T1 they conclude the contract. At T2 both parties enter into a different contract in which A has to pay 200u to B. at T3 there’s an assignment to C to receive 200u, however A ignores that this obligation has been assigned to C and has to pay C, not B. at T4 B and C enter into a new contract in which B has to pay 30u to A. At T5 A is informed. At T6 there’s a new contract and B has to pay 75u to A.
So now, C claims 200u against A. which of the amounts of the obligations can be reduced from those 200u? à those created before A knew the assignment, not when the assignment was created. So in this case, A would have to pay 110u.
Merger of debts (Confusión) An obligation is extinguished if the same person becomes debtor and creditor in the same capacity (art. 1156 and 1192-1194 CC).
Obligations require two subjects: debtor and creditor.
Examples: -Succession mortis causa between debtor and creditor -M&A between debtor and creditor.
-Assignment of debts from creditor to debtor.
Example: B, a son, has to pay an amount of money to A, who is the father. He has lend money to his son, and the son have to give back that money to him. Finally, father dies, and all the obligations are transferred to the son (B) à B has an obligation to pay this money to himself. Because the debtor and the creditor is the same person the obligation is cancelled.
Special rules on merger of debts: · Ancillary obligations – obligaciones accesorias (art. 1193 CC): if the same person becomes debtor and creditor in the same capacity by merger of debts, security providers’ obligations are extinguished. However, if the same person becomes security provider and debtor or creditor, the obligation is not extinguished.
· Obligations with a plurality of debtors/creditors 60 · Several obligations (art. 1194 CC): obligation is only extinguished in relation to the quota of the creditor or debtor who becomes the same person.
Ex.: Creditor has a right to be paid 150 € by 3 debtors, each of them with a debt of 50 €. If Creditor becomes the same person as one of the debtors, an obligation to pay 50 € is extinguished but the remaining two obligations subsist.
Joint and several/solidary obligations (art. 1143 CC): the obligation is extinguished by merger of debts if one of the creditors or one of the debtors becomes debtor or creditor in the same capacity. The rest of debtors/creditors will have a right/obligation to reimbursement.
Ex.: Creditor has a right to be paid 150 € by 3 debtors, each of them with a debt of 50 €. If Creditor becomes the same person as one of the debtors, the whole obligation to pay 150 € is extinguished. However, the debtor that has merged with the creditor will have a right against the other debtors to be reimbursed with 50€+ 50€.
61 TEMA 7. Breach of contract Difficulties in providing a notion of breach of contract that is valid across history and different legal systems: -Path dependencies are very important to explain traditional legal rules and doctrines.
-Many traditional rules and institutions differ in Civil Law and Common Law jurisdictions, even within those belonging to the same legal tradition.
-However, the case Law of different jurisdictions uncovers some common patterns about the sort of issues that Courts find relevant for a finding of breach of contract and for the application of the appropriate legal remedies.
Spanish Contract Law provides a broad notion of breach of contract, since any behavior that: · Departs from the specified behavior 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.
If those two elements are present, breach of contract will be possible Traditional general rules for breach of contract in Spain: articles 1098 and ff. Civil Code.
The general benchmark (punto de referencia) to determine breach is the contract agreed by the parties themselves, and not external notions, but good faith and fair dealing may increase the obligations and duties of a party (see art. 1258 CC).
Remember what we have discussed, the contract is not only the written agreement, because sometimes judges may identify so obligations under it.
The complete contract that the parties would have agreed, being by definition Pareto-optimal, is the best of benchmarks to analyze breach ® intentions of the parties at the time of concluding the agreement are the relevant elements to discuss the contract itself.
à The parties are both better-off by concluding the contract and executing all promises that have been accepted than being outside the contract.
Typically the analysis of breach takes place in objective terms: -Subjective factors generally do not exclude breach, although they may affect remedies -In certain contractual areas, breach of duty and fault are generally required: ® Professional contracts (doctors, lawyers, engineers, architects, auditors) ® Management contracts (contratos de gestión): breach requires violation of a duty of care or a duty of loyalty.
Benchmark: Correspondence of behavior undertaken by the debtor with due behavior under the contract, as appears to be written, and duly interpreted and constructed.
In practice, the discussion about the existence of breach typically starts with a comparison of: -the actions that were due pursuant to the contract (as written in the agreement, or as resulting from the task of interpreting and construing the complete contract, or of implying terms as a result of usage and good faith) -and the reality of performance.
At least from a general standpoint, any discrepancy that could be found between the first term of the comparison −the ideal complete contract set− and the second −the real actions and outcomes− may give rise to a finding of breach of contract.
62 Example: Supreme Court Decision May the 19th 1998 (Ar. 3381), J: José Luis Albácar López A contractor requested tiles of two different batches from a tile producer. The problem arose when the color of the two batches were not exactly the same, as it is nearly impossible to obtain the same tone in tiles that are produced in different firings.
Due to the differences in color and the impossibility of using them in the same floor, the purchaser claimed there was a breach of contract. The Court disagreed: it was the purchaser who requested two different batches of tiles, and that was exactly what it got pursuant to the contract.
The buyer was a firm in the construction business, so there was no need for the seller to specifically inform that the color of the two batches could be different, and the buyer had also failed to specify that the two batches were intended for the same flooring, when this information may have sent the correct incentives to the other party to disclose the consequences of ordering tiles from two different batches.
Since no implied terms or duties should be read, the expressed terms in the particular contract would govern the required set of actions, and therefore no discrepancy was to be found with the actual behavior of the seller.
® According to the court, the contract was perfectly performed.
Notwithstanding the fact that the contract should be the benchmark, there is a number of rules and doctrines both in Civil Law and in Common Law, that restrict certain consequences of breach to a sub-set of breaches of contract qualified by certain features.
For instance, termination of the contract (rescisión del contrato) may be reserved under different legal systems to cases of serious or material breach that deprives a contracting party of substantial utility to be expected under the contract. This is the case of article 25 CISG: Article 25 CISG ® "A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result”.
Some remedies for breach (termination) are only applied in cases of fundamental or material breach.
For instance: Art. 49.1.a) CISG ® “(1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; […]”.
To summarize: - Breach of contract has a broad definition.
- It includes a heterogeneous group of situations.
- Certain remedies or legal consequences for breach require a second stage analysis that forces to assess additional features or qualifications than the mere existence of a departure from the actions that were specified in the contract. (Ciertos recursos o consecuencias legales por incumplimiento requieren un análisis de segunda etapa que obliga a evaluar características o calificaciones adicionales a la mera existencia de una desviación de las acciones que se especificaron en el contrato.) Traditional classification 63 Consequences of delay in performance: Art. 1101 CC ® “Incurren en mora los obligados a entregar o a hacer alguna cosa desde que el acreedor les exija judicial o extrajudicialmente el cumplimiento de su obligación” “Mora” requirements: a) Obligation to transfer a good, to perform a behavior and to avoid performing a behavior.
b) Notice by the creditor to the debtor (intimación).
Statement of will (declaración de la voluntad) that has to be received by the debtor in order to have effects Exceptions (art. 1100.2 CC): i.
The contract or the legal system establish otherwise.
Ex: article 5 Act 3/2004 on Late Payments (Ley 3/2004, de 29 de diciembre, por la que se establecen medidas de lucha contra la morosidad en las operaciones comerciales); article 78 CISG.
When taking into account the circumstances in which the obligation was created, the date to perform was considered relevant.
Synallagmatic obligations: from the moment the other party performs c) Obligation is due.
d) Delay in performing is not excused by the debtor.
Legal effects of “mora”: 1. It does not eliminate the duty to perform the obligation ® the obligation is not cancelled or modify, so the same that has been promised has to be performed.
2. Debtor shall be responsible for damages caused by the delay (in case of monetary obligations: damages are compensated by paying interests [article 1108 CC]) ® the party in delay has to pay the negative consequences of delay. He has to pay all the damages that the delay has generate.
Generally, the main solution would be an award of interest.
3. Debtor shall be held liable in cases in which the good that had to be transferred is lost or destroyed even in force majeure cases (perpetuatio obligationis) (See arts. 1096.3 and 1182 CC).
Breach of contract linked to the conduct of one of the parties · Subjective factors: attribution of breach o Contractual fraud (Dolo) (including Intentional breach of contract in Spanish law) Intentional breach in various legal systems may be considered as almost inherently fundamental or material. In Spanish law, it does not require a fraudulent intent to harm the other party.
The presence of intentional breach may affect the validity of liability waivers or limitations, and may also influence the scope of liability. The fact that the breach is fraudulent implies that the clauses of exoneration of liability are not binding upon the parties (article 1102 CC).
Consequence ® damages Example: 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.
o 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.
64 General standard: Art. 1104 CC ® “La culpa o negligencia del deudor consiste en la omisión de aquella diligencia que exija la naturaleza de la obligación y corresponda a las circunstancias de las personas, del tiempo y del lugar. Cuando la obligación no exprese la diligencia que ha de prestarse en su cumplimiento, se exigirá la que correspondería a un buen padre de familia”.
Different standards of diligence: § Lex artis ad hoc § Reasonable person (bonus pater familias, bon pére de familie).
In certain contractual areas, breach of duty and fault are generally required: - Professional contracts (doctors, lawyers, engineers, architects, auditors): negligence standard (lex artis ad hoc or specialized fault) - Management contracts: breach requires violation of a duty of care or a duty of loyalty.
Strict liability (Responsabilidad Objetiva) In contract law, the promisor (prometedor) 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: - Force Majeure / “Act of God” / fuerza mayor - Impracticability/Impossibility/Frustration of purpose - Hardship/Change of circumstances/Rebus sic stantibus.
o Defenses/Exceptions In case a dispute occurs, the most efficient solution would be the superior risk bearer. How can we determine it? ® One of the parties can decrease the probability that the event that causes breach of contract occur. In some cases, it will be difficult to determinate who is the “cheapest risk avoider” Perfectly complete contracts would contain terms that explicitly allocate all risks (asignar todos los riesgos).
Explicit allocation of risk requires costly negotiating. The cost of negotiating must be balanced against the benefit from explicit allocation of risk. On balance, the cost of negotiating over remote risks may exceed the benefit. Consequently, efficient contracts have gaps concerning remote risks.
For instance, in some circumstances, physical impossibility of performance excuses non-performance: - The estate of a famous portrait painter is not liable if death prevents the artist from completing a contract to paint someone’s picture.
- A manufacturer may be excused from fulfilling its contracts to deliver goods because lightning ignited a fire that destroyed her factory. The burning of the factory is an “act of God” or force majeure.
- Breach is excused if performance became illegal before it could occur: a shipping company is excused from its contract to carry civilian cargo in time of war if the government commandeers its ships to carry military cargo.
In other cases, performance is physically possible and economically impractical: changes of circumstances might make performance extremely burdensome for one of the parties.
When one of such risks materializes, parties may need to allocate it ex post. Legal systems include several rules or doctrines that may apply to the task of allocating remote risks or unanticipated contingencies: - Force Majeure/ Act of God / Caso fortuito / Unforeseeable circumstances - Impossibility / Impracticability / Frustration of purpose - Hardship / Change of circumstances / Rebus sic stantibus 65 Contract law and economics advocate the reduction of social waste of resources and in doing that it uses a theory of efficient risk-bearing.
This idea is mainly used in the field tort law or accident law but it may also be applied to the allocation of unanticipated risks in contract law.
Starting point: Assumption 1. Transaction costs preclude a bargain to allocate a risk among the people who affect it ® incomplete contract.
Assumption 2. One person can eliminate the risk at lower cost than anyone else or any combination of people. That is, efficiency concerns demand that only one person should take precautions against the risk or contingency ® this person is the superior risk bearer or the cheapest cost avoider.
Solution Holding liable the person who can eliminate the risk at least cost ® assigning liability to the party who can bear the risk that performance becomes impossible at least cost (asignando responsabilidad a la parte que puede asumir el riesgo de que el rendimiento sea imposible al menor costo) Factors used in determining the superior risk bearer 1) People can often take steps to decrease the probability that performance becomes impossible or to reduce the losses from breach.
- An elderly and ailing painter might delay other work in order to complete a portrait as commissioned.
-The ship’s owner might alert the customer to the need for alternative supplies in the event that war causes the government to commandeer ships.
-The factory owner might install a sprinkler system to reduce the damage caused by fire.
These considerations suggest that a risk should be assigned to the party who can take precautions to reduce it at least cost.
2) In cases in which no one can take precautions to prevent or minimize risk, someone may spread it.
Example: an earthquake may prevent a seller from delivering goods on time: no one can prevent earthquakes, but people can insure against them.
Besides insurance contract, the investors in a factory subject to an earthquake hazard can spread risk by having premises in different locations: risk is cheaper to bear when spread than when concentrated.
These considerations suggest that risk should be assigned to the party who can spread it at least cost, by insurance or other means.
Force Majeure – Act of God Section 1105 of the Spanish Civil Code: “unless established otherwise in the contract, a party shall not be liable for damages arising from an unforeseeable event or from an event that was foreseen by the parties at the time of contracting but was nonetheless unavoidable”.
Transatlantic Financing Corporation v. United States 363 F.2d 312 (D.C. Cir. 1966): The Plaintiff contracted with the Defendant to ship wheat from Texas to Iran. The contract specified the destination, but not the route. The ordinary route would take the Plaintiff through the Suez Canal. However, due to armed conflict, the Suez Canal had been blocked by Egypt. The Plaintiff therefore proceeded along the route around the Cape of Good Hope. The Plaintiff then sued to recover the additional costs of taking the longer route.
Impossibility/ Frustration of Purpose Performance becomes physically or legally impossible. In some cases, a contingency that renders performance impossible also frustrates the purpose of contracting by destroying a “basic assumption on which the contract was made”.
66 Example: - the goods have been destroyed - there’s been a change on regulation that now bans the delivery of that goods.
Obligations to deliver a good: Spanish regulation for impossibility is very traditional: Artículo 1182 CC ® “Quedará extinguida la obligación que consista en entregar una cosa determinada cuando ésta se perdiere o destruyere sin culpa del deudor y antes de haberse éste constituido en mora”.
Artículo 1183 ® “Siempre que la cosa se hubiese perdido en poder del deudor, se presumirá que la pérdida ocurrió por su culpa y no por caso fortuito, salvo prueba en contrario, y sin perjuicio de lo dispuesto en el artículo 1.096”.
Artículo 1186 ® “Extinguida la obligación por la pérdida de la cosa, corresponderán al acreedor todas las acciones que el deudor tuviere contra terceros por razón de ésta”.
Obligations to perform a behavior: Artículo 1184 ® “También quedará liberado el deudor en las obligaciones de hacer cuando la prestación resultare legal o físicamente imposible”.
Example of seller and buyer: The goods that A must provide, by a contract, to B, have been destroyed. A won’t have to deliver the goods and B will still have the obligation of paying. If there’s a 3rd party (or an insurance company), B will have an action (that can be limited in practise) (art. 1186 CC) Another article of the Spanish Civil Code presumes A is always in the better position to prevent à A will always be the cheapest cost avoider. According to another article (art. 1183 CC), if the goods were destroyed on the hand of A, A was negligent, so he will have the obligation to pay expenses (resarcir los gastos).
Coronation cases (Krell v Henry [1903] 2 KB 740 and other cases) We now consider a contingency that destroys the contract's purpose. A coronation parade was planned for June 1902, in London, following Edward VII’s marriage to Queen Alexandra. Many owners of property along the parade route leased rooms for the day to people wishing to observe the ceremony. When the king’s illness caused the parade to be postponed, many people refused to pay the rent, and some of the property owners sued to enforce the contracts. Most of the courts held that the contracts were unenforceable because their purpose was destroyed by postponing the ceremony Frustration of purpose or impossibility doctrine provides a default rule to allocate losses caused by contingencies that make performance worthless. Such performance is meaningless in relation to the purpose that induced the parties to make the contract. If a contingency makes performance meaningless, a solution maybe to assign liability to the party who could bear the risk at least cost.
In the coronation cases: the property owners who rented rooms could completely eliminate their losses caused by postponement of the coronation parade by renting the rooms a second time for the rescheduled parade.
Hardship – Change of circumstances – Rebus sic stantibus In the context of long-term contracts, an unexpected change of circumstances may fundamentally alter the equilibrium of a contract resulting in an excessive burden being placed on one of the parties involved in the agreement.
The situation existing at the conclusion of the contract may subsequently have changed so completely that the parties, acting as reasonable persons, would not have made the contract, or would have made it differently, had they known what was going to happen.
Different legal concepts deal with this problem of changed circumstances: Hardship, clausula rebus sic stantibus, Wegfall der Geschäftsgrundlage, impracticability, prestazione di una delle parti è divenuta eccessivamente onerosa.
The concept of hardship in Common Law systems is usually discussed in the context of hardship clauses, which are frequently introduced into contracts in international trade.
67 Article 6.2.2 UNIDROIT Principles: “There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and (a) the events occur or become known to the disadvantaged party after the conclusion of the contract; (b) the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; (c) the events are beyond the control of the disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged party." Maple Farms Inc. v. City School District of Elmira, 76 Misc. 2d 1080, 352 N.Y.S.2d 784 (Sup. Ct.
Agreement by a milk supplier, Maple Farms, to supply milk to a public-school district for the school year beginning in September 1983.
Due to general inflationary trends in the United States, unanticipated crop failures and an agreement by the United States to sell substantial amounts of grain to the Soviet Union, the price of raw milk increased 23% within six months of the date of contract.
The supplier asked to be relieved of the contract. On the school district’s refusal, the supplier sued for declaratory judgment excusing further performance.
The court established three requirements before non-performance is justified on the ground of hardship: (a) A contingency — something unexpected must have occurred.
(b) The risk of unexpected performance must not have been allocated either by agreement or by custom.
(c) Occurrence of the contingency must have rendered performance commercially impracticable.
In the Maple Farms case the court held the supplier to the contract. The court did not agree that the contingencies were totally unexpected given a 10% increase in milk the previous year and the general inflationary trend. As to allocation or risk, the court deemed the risk of increase in price to be allocated to the supplier. The purpose of the fixed price contract was to guard against price fluctuations and the supplier had not bargained for an exculpatory clause to excuse it from performance in the event of an abnormal increase in milk prices.
Aluminum Company of America (ALCOA) v. Essex Group, Inc Aluminum Company of America (ALCOA) (plaintiff) agreed to provide Essex Group, Inc. (Essex) with its longterm needs for aluminum. The price for the aluminum was based upon a formula that would allow a portion of the price to escalate in accordance with the Wholesale Price Index (WPI). The contract provided a maximum price that Essex would pay in the event the WPI caused the price to escalate excessively. After some time, ALCOA’s costs increased substantially and the price provided in accordance with the WPI was not sufficient to cover those costs (about $70 million).
ALCOA filed suit, seeking reformation or adjustment of the contract. ALCOA argued that it was entitled to relief under the doctrines of impracticability hardship.
Court: granted relief to Alcoa and amended the formula to determine prices in detriment of Essex.
In the case of Spanish law, hardship or rebus sic stantibus doctrine is court-made construction Because of its vagueness and lack of clarity, the doctrine fell out of disfavor in the 19th century in Continental Europe, when liberal theories emphasized freedom of contract and the principle of sanctity of contract (pacta sund servanda).
It was then resurrected in the 20th century as a result of the disruptions caused by the First World War and in Spain the Civil War (1936-1939).
See Supreme Court Decisions of December 14th 1940 (RJ 1940\1135) and May the 17th 1941 (RJ 1941\632).
68 Afterwards, Supreme Court Judgment of May the 17th 1957 (Justice: Francisco Eyré Varela. RJ 1957\2164) described the main elements of the doctrine: (a) Circumstances at the time of performing the contract have extraordinarily changed in comparison with the ones concurring at the time of the contract conclusion; (b) Exorbitant disproportion, beyond all calculations, between the ex post surplus of the contracting parties that results in the collapse of the equilibrium created by the agreement; (c) Change of circumstances is the radical result of unforeseeable events; (d) Parties lack other alternative means to remedy the negative result (requirement included in Supreme Court Decision of June the 6th 1959 (RJ 1959\3026)).
Is the financial and economic crisis an event that meets these requirements? Traditionally, the Spanish Supreme Court held that: “No se infringe el art. 1184 del C. Civil al concurrir culpa del deudor al no prever la existencia de una situación de riesgo que era posible anticipar mentalmente, dado que las fluctuaciones del mercado son cíclicas como la historia económica demuestra”.
Supreme Court Decision of January the 17th 2013 marked a turning point: In this Judgment, the Spanish Supreme Court discusses the foreseeability of the current economic crisis and its consideration as a factor resulting in a change in the circumstances in application of the rebus sic stantibus doctrine. In 2008, a couple brought a lawsuit against a developer seeking termination of a real estate sales contract with ground on the impossibility to qualify for a mortgage loan and therefore to pay the price. The developer replied to the lawsuit and also filed a counter-lawsuit (reconvención). In this counter-lawsuit, the developer claimed specific performance (= order to the plaintiffs requesting payment of the remaining debt).
The plaintiffs replied to the counter-lawsuit and alleged, inter alia, that the rebus sic stantibus doctrine should apply.
Supreme Court: “Una recesión económica como la actual, de efectos profundos y prolongados, puede calificarse, si el contrato se hubiera celebrado antes de la manifestación externa de la crisis, como una alteración extraordinaria de las circunstancias, capaz de originar, siempre que concurran en cada caso concreto otros requisitos (…) una desproporción exorbitante y fuera de todo cálculo entre las prestaciones de las partes” This is mostly left to courts and arbitral tribunals: the assessment is only made on a case-by-case basis. In some cases, the current financial and economic crisis has been the ground used to apply the rebus sic stantibus doctrine and to hold a contract to be terminated or amended by the judges.
Effects of the doctrine application: -Adaptation or renegotiation of contracts: depending on the nature of the hardship, involve a price adaptation in order to distribute the losses between the parties.
-Termination Renegotiation of contracts ® Hold-up risks Hold-up refers to situations in which a party to a new or an existing contract accedes to a very disadvantageous demand due to the party’s being in a circumstance of substantial need.
Example: James Gandolfini, star of the hit television series, The Sopranos, threatened to stop filming new episodes unless his contract with HBO was renegotiated for a significantly higher amount than the $400,000 per episode that he had been receiving. HBO agreed to an increase, purportedly bringing Gandolfini’s per episode payment to over $800,000.
The hold-up problem is central to the theory of incomplete contracts. It shows how the renegotiation of contracts that may result from incomplete agreements can lead to underinvestment of specific assets.
69 Example: Company A is a supplier of components in a contractual relationship with a manufacturer, Company B.
Company A has to decide whether to invest in modifying its plant to adapt it better to the production requirements demanded by Company B.
- The investment is efficient: for instance, by investing 50 u Company A would reduce production costs in 100 u.
- The investment is relation-specific: the adapted plant is only useful for producing components for Company B.
If parties may renegotiate the contract between Company A and Company B: - Company B may hold up by threatening termination of the contract, which would result in Company A losing its investment.
- In order to avoid this loss, Company A would be willing to accept a reduction of prices paid by Company B. In fact, it would be willing to accept any price>0, because otherwise it would not have any chances to use the plant.
Anticipating this negative outcome, Company A would have no incentives to make efficient specific investments.
70 TEMA 8. Remedies for breach *TEMA MOLT IMPORTANT, SURT A L’EXAMEN Remedies It refers to solutions or actions that a party may have in cases of a particular problem.
Definition ® mechanisms that define the character and extent of relief to which an individual who has brought a legal action is entitled once the appropriate court procedure has been followed, and the claimant has established that he or she has a substantive right that has been infringed by the other party.
(los mecanismos que definen el carácter y el alcance del alivio al que una persona ha entablado una acción legal tiene derecho una vez que se ha seguido el procedimiento judicial adecuado, y el demandante ha establecido que tiene un derecho sustantivo que ha sido infringido por la otra parte) The list of remedies for breach of contract is not uniform across legal traditions and jurisdictions: each jurisdiction has its own remedies, some remedies won’t be found in another legal system (we will focus on the Spanish legal system) It is also dependent on the type of performance and contract that were breached, since there are some special remedies that are available for some sub-set of contracts.
Private remedies ® modern legal systems do not impose criminal penalties on one who refuses to perform one’s obligations. We are only analyzing those ones.
In the case of breach of contract, in the most traditional view, when the right of credit has been violated, and the right owner wants to find a solution à CC provide this party several actions to protect it: Spanish Contract Law provides a wide range of general remedies for breach of contract: 1. Specific performance (including repair and replacement in consumer contracts) The most important remedy for redressing a breach of contract case (to compel the other party to perform as it was promised in the agreement) 2. Damages The breach of contract can harm the victim, so he will have to be compensated for those loses.
- Expectation damages - Reliance damages 3. Liquidated damages or penalty clauses Also damages for loses, but regulated by the parties of the contract ex ante: they have already stablished a penalty.
4. Termination (rescission in other legal systems) The most drastic one. Parties rescind the contract (maybe unilaterally), and the contract disappears. Goal à to act as if the contract had never existed 5. Reduction of price in some contracts (sales, leases) 6. In some cases: interim remedies, such as the possibility of the non-breaching party of withholding its own performance if the contract was one with mutual obligations on both sides.
There is a lot of remedies, and Spanish CC does not really field a rule to determinate the preference of remedies. Most used ones à 1 and 2 71 Common law à damages are preferred, they are the main remedy, and specific performance is secondary (residual, when damages are inadequate) Civil law à specific performance is the main remedy A hierarchy of remedies at least with respect to specific performance and damages is traditionally presented as a major difference between the Common Law and the Civil Law systems of Contract Law.
More recent systems of Contract Law have adopted a non-hierarchical view of remedies, and present them on equal footing, often providing for rules of cumulation when there is no incompatibility between the remedies sought (estableciendo reglas de acumulación cuando no hay incompatibilidad entre los remedios buscados) The choice of the aggrieved party (with some limitations) seems to be the preferred criterion in legal literature, although this is unclear in case Law of the Spanish Supreme Court.
Specific performance: Specific performance (cumplimiento específico; cumplimiento forzoso; reparación in natura) is a remedy for breach characterized by failed performance or departure from the required action in the contract, which is then imposed upon breaching party by the adjudicator.
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, the completion of what had been performed only in part, or the correction of what had been inadequately performed.
Generally, specific performance or enforcement of monetary obligations is easier than non-monetary obligations ® enforcement costs (simple transfer of money v. ex post verification of performance).
There are several material variants of the remedy: - Forced delivery - Forced action - Injunction not to do - Repair defective performance - Replace non-conforming good Spanish regulation ® arts. 571 and ff. Civil Procedure Act (Ley 1/2000, de 7 de enero, de Enjuiciamiento Civil).
Example: Art. 46.1 CISG ® “The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement”.
In some cases, forcing an action by debtor in order to obtain specific performance will not work. In such cases, injunctions not to do coupled with penalties (multas coercitivas) may be helpful (but they do not completely eliminate moral hazard problems).
[En tales casos, las medidas cautelares que no se deben aplicar junto con las sanciones (multas coercitivas) pueden ser útiles (pero no eliminan completamente los problemas de riesgo moral)] Lumley v. Wagner [1852] EWHC (Ch) J96 Johanna Wagner was engaged by Benjamin Lumley to sing exclusively at Her Majesty’s Theatre in London from 1 April 1852 for 3 months, two nights a week. Frederick Gye, who ran Covent Garden Theatre, offered her more money to break her contract with Mr. Lumley and sing for him.
A judge granted an injunction to restrain Wagner to perform at the Covent Garden. She appealed. The Court rejected the appeal: “It was objected that the operation of the injunction in the present case was mischievous, excluding the Defendant J. Wagner from performing at any other theatre while this Court had no power to compel her to perform at Her Majesty's Theatre. It is true that I have not the means of compelling her to sing, but she has no 72 cause of complaint if I compel her to abstain from the commission of an act which she has bound herself not to do, and thus possibly cause her to fulfill her engagement”.
Perverse incentives and bargaining in the shadow: It is an opportunistic use of this remedy. Sometimes specific performance may be used strategically or opportunistically: Jacobs & Youngs v. Kent, 230 N.Y. 239 (Court of Appeals of New York, 1921) Jacobs & Youngs built a house for Kent under contract. Kent learned that some of the piping, instead of being made in Reading, was Cohoes piping, contrary to one of the conditions in the contract. However, both pipes were of the same quality. Kent asked Jacobs & Youngs via the architect to do the work all over again and to replace the Cohoes pipes.
Because the pipes had already been encased within the walls except in a few places where it had to be exposed, to replace the Cohoes Pipe with the contracted for Reading Pipe would have meant more than the substitution of other pipe.
Jacobs & Youngs would have had to demolish, at great expense, substantial parts of the completed structure.
Because of that, it left the work untouched, and asked for a certificate that the final payment was due which was refused by Kent.
Jacob & Youngs, then filed suit to collect the remaining balance. The trial court ruled in favor of Kent, which was reversed on appeal and a new trial was ordered.
Justice Cardozo ®“In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing”.
Bargaining in the shadow (Jacobs & Youngs v. Mr. Kent) à cost of replacing piping = 100.000. Kent would use replacement in an abusive way, because he hasn’t suffered any harm.
Similar Spanish case: “Hormidur” Case (Spanish Supreme Court Decision, January the 14th 2010; J.: Encarna Roca Trías): The parties to a contract to supply construction materials had agreed to the use of concrete branded as “Hormidur” in the construction of a warehouse. Instead of that specific brand, concrete marked as “Oxigrans” was used. “Oxigrans” was of the same quality as “Hormidur” and, apparently, it was produced by the same manufacturer. As in the American case, the principal noticed it and refused to pay the outstanding amount. The supplier brought a lawsuit against the principal.
According to the Spanish Supreme Court, the defendant had not supplied a different good tan the one promised in the contract (aliud pro alio) pursuant to art. 1166 CC: “1º El material (…) fue de la misma calidad que el pactado, aunque de distinta marca. Por tanto, si el primero, el acordado, era idóneo para el fin previsto, también lo era el que le sustituyó.
2º Esta identidad en la calidad no produjo la insatisfacción, medida en términos objetivos, del dueño de la obra, que no puede, por tanto, reclamar cuando lo ejecutado coincide con lo pactado, puesto que no se trata de cuestiones de marca, sino de calidades de los materiales que permiten que no se frustre el fin del contrato”.
Damages Concept® payment of a sum of money by the defaulting party (parte incumplidora) to the aggrieved party (parte afectada) in order to compensate the loss resulting from the breach of contract (indemnización de daños y perjuicios; cumplimiento por equivalente; in some cases).
The amount or type of the award of damages may vary and may result in different measures of damages or approaches to assess damages. Broadly speaking, we may conceive the coverage of loss with a retrospective approach [enfoque retrospectivo] (damages should eliminate the negative consequences from the breach measured from the welfare situation of the aggrieved party prior to the contract) or with a prospective approach [enfoque prospectivo] (damages should replace the increase in welfare that performance would have produced but that breach has deprived the aggrieved party from it).
73 This leads to the traditional distinction between expectation damages and reliance damages.
Example Hawkins v. McGee, 84 N.H. 114, 146 A. 641 (N.H. 1929).
The Plaintiff, Hawkins, had a bad scar resulting from burns he sustained from contact with an electrical wire 9 years before.
Defendant solicits Plaintiff’s father for the opportunity to perform plastic surgery on the scarred hand.
Defendant says to Plaintiff and father: - Boy will be in the hospital 3 or 4 days - I will guarantee to make the hand a 100% perfect hand Plaintiff undergoes surgery, consisting of removal of scar tissue from palm of hand and grafting skin from his chest to his hand.
Surgery was entirely unsuccessful, and Hawkins is left with a hairy hand, which requires additional surgery to restore.
Plaintiff seeks damages for 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 (situación de utilidad o bienestar en el que se encontraría si el contrato se hubiera realizado a la perfección): - It would amount to the valuation - by the creditor - of the good or service minus the contractual price à GOOD – 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 Article 9: 502 PECL ® “The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed. Such damages cover the loss which the aggrieved party has suffered and the gain of which it has been deprived.” Article 74 CISG ® “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach […]”.
Article 1106 Civil Code ® “La indemnización de daños y perjuicios comprende, no sólo el valor de la pérdida que hayan sufrido, sino también el de la ganancia que haya dejado de obtener el acreedor, salvas las disposiciones contenidas en los artículos siguientes”.
Expectation damages is the general rule in Spanish Law for breach of contract: · It is the damage measure that accompanies termination for breach 74 · It is the replacement measure of specific performance (cumplimiento por equivalente).
· It is awarded when there is a breach of representations and warranties, advertising and promotional communications or pre-contractual documents · It is awarded in cases of pre-contractual fraud that, according to the most recent case law, are equivalent to breach of contracts.
· Plaintiffs (demandantes) 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.
This requirement has some exceptions of: § Harm in re ipsa: illegitimate use of a productive good, deprivation of a productive good, and few other examples § Facilitated proof of harm (substitute transaction as current market practice, market for similar goods or services): a) Substitutive transaction approach b) Market damages approach Substitutive transaction approach to damages When goods or services admit substitute or cover transactions to avoid the negative consequences of the other party’s breach of contract, the price of these transactions is relevant, and proof of damages is eased: If the seller breaches the contract and the buyer has bought a good, generally fungible or generic, but not necessarily, to a substitutive contracting party: Expectation damages = Psub – Pc If the buyer breaches the contract and the seller celebrates a cover sale: Expectation damages = Pc – Psub Market damages approach (for fungible, generic goods with a market price): Buyer will receive expectation damages consisting of the difference between the market price when the breach of contract took place (Pm) and the contract price (Pc). Expectation damages = Pm-Pc Seller will receive the opposite difference. Expectation damages = Pc-Pm Market damages are foreseen (previstos) and applied in Spanish Law.
Limitations that can reduce its scope and amount: i) Foreseeability rule (regla de previsibilidad) ii) Duty to mitigate damages (deber de mitigar daños) iii) Comparative fault (falla comparativa ??) iv) Legal caps (límites legales) Foreseeability rule Art. 1107 CC limits damages for which the debtor in good faith shall be liable to those which are foreseen or which could have been foreseen at the time of contracting and which are a necessary consequence of his failure to perform → it induces to reveal possible extraordinary damages at the time of contracting.
Art. 1107 CC: - The damages for which the debtor in good faith shall be liable are those which are foreseen or which could have been foreseen at the time of contracting the obligation and which are a necessary consequence of his failure to perform.
- In the event of willful misconduct the debtor shall be liable for all damages which are known to have arisen from the failure to perform the obligation.
Article 74 CISG ® “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract”.
75 Notable exception is Germany, where foreseeability rule is replaced by a duty to provide notice –which may be discharged post-contract- of increased harm Common Law: Hadley v. Baxendale, [1854] EWHC J70 A shaft in Plaintiff’s (Hadley) mill broke down, which made the mill incapable of operating, and thus brought production to a halt.
A plaintiff’s agent hired the Defendant (Baxendale) to ship the broken mill shaft to an engineer in Greenwich for producing a duplicate Plaintiff’s agent instructed defendant that mill was stopped and immediate shipment was required, and inquired about time of transportation Defendant informed that if brought before noon, it would be delivered by next day Price was agreed and shaft placed in hands of defendant The shipment was negligently stopped in Greenwich for several days Mill’s operations were closed until the duplicate returned Plaintiff sues for lost profits and obtains £25 from the jury Defendant appeals Damages should be restricted to the consequences of breach that naturally derive from it, or that may reasonably be supposed to have been in the contemplation of the parties Defendants, although knew of what was shipped, and the purpose of shipment (making a new shaft) did not know, and were not informed about the fact that delay in delivering the model would stop the mill and cause loss of profit.
Exception: Intentional breach ® remoteness in causation? (¿alejamiento en la causalidad?) 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).
Article 77 CISG ® “A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated”.
III. – 3:705 DCFR: Reduction of loss “(1) The debtor is not liable for loss suffered by the creditor to the extent that the creditor could have reduced the loss by taking reasonable steps.
(2) The creditor is entitled to recover any expenses reasonably incurred in attempting to reduce the loss." Example 1: substitutive transactions.
Example 2: “Monte Oiz” Plane Crash, 19.2.1985 (Judgment of the Supreme Court, November the 15th 1994 (Ar. 8488), J: Francisco Morales Morales) Juan Manuel R.G. bought a plane ticket in travel agency for the route Madrid-Bilbao. Juan Manuel R.G. wanted to pay the ticket by credit card but he had to pay in cash since his bank (“Banco Hispano Americano, SA”) had mistakenly rescinded his credit card and in fact he had requested a new one.
The plane crashed and the purchaser of the ticket died without his widow and children having been granted the compensation of up to 20 million pesetas – 120,202.42€ - emerging from the insurance contract in public means of transport which the Bank had entered into with “La Estrella, S.A. de Seguros” in favor of its clients, holders of VISA credit cards.
The widow filed a lawsuit against the Bank, “VISA España” and “Sistema 4B” seeking compensation of damages in the amount of 20 million pesetas that she would had obtained from there insurer in case the credit card had not been rescinded.
76 Court of First Instance and Court of Appeals ordered compensation (although “VISA España” was absolved in the appealing instance). However, the SC reduces the compensation to 10 million pesetas (60,101.21€) based on the fact that the victim, in order to mitigate potential damages (inability to receive insurance compensation) could have entered into a travel insurance contract and had not done it.
(iii) Comparative fault (concurrencia de culpas) Section 254 BGB: Contributory negligence ®(1) Where fault on the part of the injured person contributes to the occurrence of the damage, liability in damages as well as the extent of compensation to be paid depend on the circumstances, in particular to what extent the damage is caused mainly by one or the other party.
Spain: Supreme Court’s case Law Court.
(iv) Legal caps Example ® Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights Art. 7. Right to compensation 1. Where reference is made to this Article, passengers shall receive compensation amounting to: (a) EUR 250 for all flights of 1500 kilometres or less; (b) EUR 400 for all intra-Community flights of more than 1500 kilometres, and for all other flights between 1500 and 3500 kilometres; (c) EUR 600 for all flights not falling under (a) or (b).
In determining the distance, the basis shall be the last destination at which the denial of boarding or cancellation will delay the passenger's arrival after the scheduled time.
Reliance damages Amount that intends to restore the injured party to the situation of utility that enjoyed before the celebration of the contract.
· It would cover: -Expenses for the injured party derived from concluding the contract (Los gastos para la parte perjudicada derivados de la celebración del contrato) -Specific investments that the injured party has made in reliance of performance of the contract by the other party (Inversiones específicas que la parte perjudicada ha realizado en dependencia de la ejecución del contrato por la otra parte) -In some cases, opportunity cost of entering/negotiating the contract.
· In Spanish legal system, reliance damages are awarded in the following cases: - Defects in consent (unless pre-contractual fraud) that render a contract void [Defectos en el consentimiento (salvo fraude precontractual) que invaliden el contrato] - Pre-contractual liability (culpa in contrahendo) [Responsabilidad precontractual] Damages for pain and suffering (daño moral) · Pain and suffering · The traditional position of the Spanish Supreme Court and Spanish Courts 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: § To avoid the problems of calculating and justifying the amount of the damage award § To compensate harm in personality rights (right to life, liberty, honor, etc.).
77 § To compensate non-patrimonial values joined to economic goods and rights (discomfort, inconvenience, disappointment, frustration).
§ To punish intolerable or egregious (atroces) behaviors of breach of contract.
[Cuando se rompe el contrato voluntariamente, pueden haber consecuencias: los tribunales pueden inflar la compensación por daños, por ejemplo. Es una especie de castigo (punitive damages)] Economic (material) and non-economic damages In economic damages, if a person suffers this damages, he suffers it in his economy.
utility = happiness D = damages (A à B) To compensate this person, we do only need to restore the original situation (B à A) 78 On the other hand, in the non-economic damages the utility of the person has decreed as a consequence of breach of contract. His way of seeing future, for example, may have changed. Not his amount of money, but his happiness has changed. How can we compensate it? How can we measure the amount of money? Figure 3 is the answer: it is economically impossible to determinate an amount of money to compensate it, so we use this formula.
Usual examples: breach of air transport contract (delayed flight, cancelled flight, overbooking) frustrates honeymoon; food poisoning in wedding banquets; delays in delivering possession of residential dwellings, funeral services, etc...
Example: ECJ Judgment of 12 March 2002, Case C-168/00, Simone Leitner v TUI Deutschland GmbH & Co. KG.
The Plaintiff (Simone Leitner) goes on holiday with her parents to a resort in Turkey where a package holiday had been bought from TUI, the Defendant, for 2 weeks -In the resort, after a week, Plaintiff suffers salmonella poisoning -For the rest of the holiday she was sick with high fever and had to be taken care of by her parents -Plaintiff’s parents send a letter of complaint to defendant, with no response -Plaintiff sues for damages in the amount of €2,000.
-First instance Court awards €1,000 for the physical pain and suffering, but reject any compensation for loss of enjoyment of the holiday.
-Appeals Court refers the case to ECJ for preliminary ruling.
Compensation for loss of enjoyment as non-economic loss ECJ finds that art. 5 of Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours includes compensation for non-economic loss resulting from breach of contract in a package holiday contract See in Spain: articles 150 and ff. TRLGDCU.
Damages for pain and suffering Damages for pain and suffering allow avoiding (without a serious justification) restrictions to the scope of damages established by Section 1107 CC. A good example: In the Decision of the Spanish Supreme Court, 1st Chamber, of 28.3.2005, Aurelio asked for a compensation of 150 million of pesetas (~900.000 €) for damages suffered when he travelled to Cincinnati (Ohio, USA) and deposited counterfeit money in a local bank. Aurelio was arrested, booked and interrogated by agents of the US Treasury Department, “causing” a breakup with his American girlfriend→ the Spanish Supreme Court awarded 360.000 € in damages for pain and suffering.
Damages for loss of chance Although Spanish Supreme Court had been traditionally restrictive in assessing the existence and scope of the lucrum cessans, since some years ago it awards damages for loss of a chance (of obtaining profits or avoiding harm).
Most frequent cases in tort law (responsabilidad extracontractual): ® Diagnosis or medical treatment failures that reduce the opportunities of avoiding further harm ® Professional liability of lawyers and attorneys that frustrates a judicial action (because they do not observe claims or appeals’ exercise periods) [Si la probabilidad de ganar un caso era del 20% y el abogado lo pierde, los tribunales negaran la posibilidad de reclamar dichos daños al abogado. En cambio, si la probabilidad era del 95%, la corte podría decidir que sí se pueden reclamar] ® Undue (indebida) lack of information that prevents (impida) decision making in medical cases. For instance: birth of children with serious malformations after the omission of information that would have allowed the parents to decide upon an abortion [nacimiento de niños con malformaciones graves después de la omisión de información que habría permitido a los padres decidir sobre un aborto] 79 Liquidated damages Liquidated damages are damages for breach that are not determined ex post breach by a Court or arbitration panel, but ex ante by the contract parties themselves.
Example: rescission clauses in professional soccer. it is usual that professional players agree when hired to pay an award of damages in case they decide to leave the team before the expiration of the contract term.
Such possibility of “privately stipulated” remedies for breach is acknowledged by most legal systems. In Spanish Contract Law they are allowed by artt. 1152 and following CC: Art. 1152 CC ®“En las obligaciones con cláusula penal, la pena sustituirá a la indemnización de daños y al abono de intereses en caso de falta de cumplimiento, si otra cosa no se hubiere pactado. Sólo podrá hacerse efectiva la pena cuando ésta fuere exigible conforme a las disposiciones del presente Código”.
Art. 1153 CC ® “El deudor no podrá eximirse de cumplir la obligación pagando la pena, sino en el caso de que expresamente le hubiese sido reservado este derecho. Tampoco el acreedor podrá exigir conjuntamente el cumplimiento de la obligación y la satisfacción de la pena, sin que esta facultad le haya sido claramente otorgada”.
Liquidated damages: - Typically they replace Court award of damages (pena sustitutiva) ® Default interpretation (art.1152 CC).
- They can be agreed as an added “penalty” for breach (Damages + penalty). (pena cumulativa o sancionadora) (art. 1153.II CC) - They can be agreed as a “withdrawal or escape clauses” ® it provides a way out of the agreement. (pena facultativa o penitencial) (art. 1153.I CC) EXAM!!! LIQUIDATED DAMAGES (Diapos 48-49-50) Common Law’s view on liquidated damages as penalties is negative: § 356 Restatement: Liquidated Damages and Penalties “(1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.
A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
(2) A term in a bond providing for an amount of money as a penalty for nonoccurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such nonoccurrence”.
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.
è 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 compensate 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).
è Arguments that may lead to reduce or at least to control the level of 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.
Spanish law on reduction of liquidated damages: 80 Article 1154 CC ® “El Juez modificará equitativamente la pena cuando la obligación principal hubiera sido en parte o irregularmente cumplida por el deudor”.
Pursuant to this provision, if breach is partial and not fraudulent the Judge is forced to reduce the conventional penalty.
The main problem concerns determination of when breach is partial or irregular. According to the traditional SC’s case-law, if the breaching party, considering his overall behavior, has performed part of his due obligations, then breach may be deemed partial and courts would have to reduce the penalty.
Some nuances (matices) a) Parties are allowed to write conventional penalties linked with individual obligations. Therefore, if the party fails to perform this individual obligation at stake but performs the rest of the obligations included in the contracts, courts shall not reduce the conventional penalty.
[Las partes pueden escribir sanciones convencionales vinculadas con obligaciones individuales. Por lo tanto, si la parte no cumple con esta obligación individual, pero cumple el resto de las obligaciones incluidas en los contratos, los tribunales no deberán reducir la multa convencional] Example: Company A and Company B establish a conventional penalty according to which Company A will have to pay 1,000 Euro per day of delay in supplying a commissioned work. Parties also establish that a delay of more than six months from deadline would entitle Company B to rescind the contract with a right to a compensation of a million Euros.
If Company A supplies the commissioned work with a delay of 3 months from the promised date, we may consider that the contract was not correctly performed, but this would not allows courts to reduce the liquidated damages awards: they would have to apply a conventional penalty of 90,000 Euro (90 days x 1,000 Euro).
b) Parties may establish a waiver according to which judges would not be permitted to reduce the amount of the conventional penalty.
Example ® Judgment of the Spanish Supreme Court, October 10th, 2010: On May the 16th 1991, pop star Marta Sánchez enters into agreement with Ediciones Zeta, S.A. (publishing company of Interviú). Contract established the following conventional penalty: "La publicación de cualquier fotografía del reportaje objeto de este contrato, que no haya sido previamente aprobada por Marta Sánchez, así como su divulgación en cualquier otro medio de comunicación distinto de Interviú generará para Ediciones Zeta S.A. la obligación de indemnizar a Marta Sánchez por el daño a su imagen e intimidad, pactando como cláusula penal inmoderable la cantidad de cincuenta millones de pesetas (50.000.000 pesetas)”.
06 - 06 - 1991: Interviú published the agreed pictures. On that same date, newspaper “Claro de Madrid” published a picture on its front page in which the celebrity was completely nude. Marta Sánchez brought a lawsuit against Ediciones Zeta S.A. and asked application of the conventional penalty.
According to the Supreme Court: - Interviú breached the contract in negligence: “Claro de Madrid” had obtained the picture from a copy of the magazine, which had been circulated by Ediciones Zeta as a promotional strategy.
- Penalty shall not be reduced since the parties agreed that it had to apply strictly c) Early-termination options or unilateral termination in indefinite contracts. According to the Supreme Court (ex: Judgment of March the 10th 2014), if a contracts established an early-termination option with a penalty, judges shall not reduce the amount of the penalty in consideration that the contract was performed during the period before the termination notice.
STS 10.3.2014 ® "en los contratos por negociación, en los que expresamente se prevea una pena convencional para el caso del desistimiento unilateral de las partes, la valoración o alcance patrimonial de la pena establecida no puede ser objeto de la facultad judicial de moderación, cuestión que pertenece al principio de autonomía de la voluntad de las partes".
81 d) Limitations (Supreme Court, Judgment n. 530/2016, September 13th): Freedom of contract does not allow parties to establish disproportionately excessive penalty clauses. In particular, amounts which are not adequately linked to the intended deterrence function of penalties are contrary to article 1255 CC. Effect: they are null or partially null.
Disproportionateness between the penalty’s amount and the scope of damages that the aggrieved party has suffered may be the result of a change of circumstances. It was unforeseeable for the parties that the penalty would grossly exceed the harm. Effect: reduction with grounds on article 1154 CC.
Case:22 - 07 - 2004: Seller Leticia and Buyer Estela enter into a private sales agreement according to which Buyer agrees to pay the price of 180.000€ of a villa in three installments: - 22 - 07 - 2004: 24.000€ - 09 - 08 - 2005: 66.000€ - 09 - 09 - 2006: 90.000€ Seller agrees to deliver possession of the villa and to include the private agreement in a public deed on 9.9.2006.
On the agreed date, Seller refuses to notarize the agreement and to accept payment, alleging that the sales price was too low. Buyer deposits the last installment and seeks specific performance in court. Court compels Seller to convey possession and notarize the agreement.
The public deed is finally authorized on July 31st 2008.
In December 2010, Buyer brought a lawsuit against Seller claiming an award of damages in application of the penalty clause they agreed in the initial sales contract: they established a penalty of 250€ per day of delay in Seller’s obligation to convey possession. As 442 days had passed between the agreed date and the date in which the public deed was authorized the requested amount of damages was 110.500€.
Termination (or rescission or cancellation, in Common Law jurisdictions): En derecho español, la rescisión y la terminación no tienen nada que ver!!!* This remedy entitles the aggrieved party to cancel the contractual relationship with the breaching party, eliminating the obligations arising from the terminated contract.
Art. 1124 CC ® “La facultad de resolver las obligaciones se entiende implícita en las recíprocas, para el caso de que uno de los obligados no cumpliere lo que le incumbe.
El perjudicado podrá escoger entre exigir el cumplimiento o la resolución de la obligación, con el resarcimiento de daños y abono de intereses en ambos casos. También podrá pedir la resolución, aun después de haber optado por el cumplimiento, cuando éste resultare imposible […]” [La parte que sufre las consecuencias negativas utiliza la terminación (Art. 1124 CC) y está limitada a los casos de reciprocidad o de relación sinalagmática] [Caso típico à Sales contract. Una parte no cumple sus obligaciones esenciales, así que la otra tiene la opción de terminar el contrato] Once the contract is terminated: · The parties should give back what was received under the contract, unless the goods are now in lawful possession of a third party (restitution) [Las partes deben devolver lo que recibieron durante el contrato. En algunos casos la restitución no podrá existir, no tendrá efectos. Por ejemplo: en un contrato de alquiler, si la persona que está viviendo desde hace 4 años en ese piso decide no pagar ese mes, y el propietario del piso quiere echarla, la primera no tendrá derecho a reclamar la restitución de lo que ha estado pagando, mensualmente, los últimos 4 años.
- Ex tunc - Ex nunc En cambio, otros factores pueden seguir produciendo efectos más allá de la terminación del contrato: por ejemplo, la promesa de confidencialidad.] § The value of the goods would replace the goods themselves (restitutionary damages).
82 · 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.
· Termination does not go alone: it is usually coupled with a damages award (=expectation damages).
It is clear that not every breach or non-performance allows the aggrieved party to terminate, but a qualified breach (incumplimiento resolutorio) is required.
III. – 3:502 DCFR: Termination for fundamental non-performance: “(1) A creditor may terminate if the debtor’s non-performance of a contractual obligation is fundamental.
(2) A non-performance of a contractual obligation is fundamental if: (a) it substantially deprives the creditor of what the creditor was entitled to expect under the contract, as applied to the whole or relevant part of the performance, unless at the time of conclusion of the contract the debtor did not foresee and could not reasonably be expected to have foreseen that result; or (b) it is intentional or reckless and gives the creditor reason to believe that the debtor’s future performance cannot be relied on”.
In an enormous amount of decisions, the Spanish Supreme Court has been struggling with the notion and contours of it. According to the Supreme Court, the breach must be: ® “persistent and repeated” ® “serious and essential” ® “real, unjustified, and based on facts” ® “frustrating the specific aim of the parties, or their legitimate expectations” ® “of a fundamental contractual duty” ® “important to the economics of the contract” ® “of essential obligations affecting the core of the contract” Sólo puede utilizarse como último recurso, debe interpretarse restrictivamente, de acuerdo con el principio de pacta sunt servanda.
Only fundamental breaches will entitle the victim to use termination: These may be summarized by the following features: · Relevance ® the breach must affect the central obligations or duties under the contract and not merely ancillary or incidental duties; [Tiene que afectar una obligación esencial del contrato, por lo cual las obligaciones secundarias no servirán para utilizar la terminación].
· Duration: the breach should not be merely sporadic or transitory, but likely to be repeated or continuing; [El quebramiento debe ser constante, repetido, continuado] · Importance ® the breach must substantially affect the interests of the non-defaulting party; [El quebramiento debe tener un impacto sustancial en los intereses de la otra parte, que tiene una expectación en el contrato] · 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 non-performance committed by the terminating party. [La parte que decide terminar con el contrato unilateralmente debe ser inocente, es decir, no puede hacerlo para no tener que cumplir con sus propias obligaciones] The essential obligations are the ones described this way in the legal system.
The contract himself can stablish the possibility of determinate which elements are so essential as to allow the termination.
Supreme Court Judgment n. 35872016, 25TH May. FESUR v. CAF (Justice: Fernando Pantaleón) Agreement for the manufacturing and supplying of 9 locomotores (very expensive contract) 83 Termination may be used a as remedy in the following situations: 1. Definitive fundamental breach or clear intention not to perform [Está claro que la otra parte no cumplirá su obligación en el contrato] 2. Parties may have agreed, with grounds on private autonomy (art. 1255 CC), that some particular nonperformances entitle one party to terminate the contract (even secondary or non-fundamental breaches).
[las partes mismas podrían haber establecido (gracias al freedom of contract) la terminación en él] 3. Some deadlines in a contract may be relevant. If this can be inferred from the text of the agreement, the common intention of parties or the usage in the industry, termination may be available in cases of delay.
[Pueden establecer una data límite después de la cual el incumplimiento de la obligación podrá dar lugar a la terminación] 4. In cases in which there are no deadlines and delays cannot be constructed as a fundamental breach, the aggrieved party may request to terminate the agreement that the situation is so excessive that good faith does not require her to continue being bound by the contract. [Habrá situaciones donde las partes no hayan establecido una data límite, y por tanto la tardanza en cumplir la obligación no puede considerarse como un elemento fundamental para la terminación: en estos casos, una parte debería tener la posibilidad de terminar el contrato si, de acuerdo a la buena fe, ha pedido a la otra parte (en un período de tiempo razonable) que cumpliera su obligación y la otra parte no le ha respondido (period of grace – nachfrist)] Ex: after an excessive delay, the aggrieved party offers the other party a reasonable period of grace (Nachfrist) to perform her obligations and the other party does nothing.
Exceptions/Defenses - According to Buyer, Seller does not perform Ob1, and thus Buyer refuses to Ob2.
- Seller brings a lawsuit against Buyer for non-performance of Ob2. Seeks specific performance + damages - Buyer replies to the lawsuit alleging that he was excused to perform Ob2, because: § Non-performance by Seller of Ob1. (Exceptio non adimpleti contractus) § Defective performance by Seller of Ob1. (Exceptio non rite adimpleti contractus) -Buyer brings a counter-lawsuit (reconvención) against Seller for non-performance of Ob1.
Seeks termination + damages Ejemplo: Tenemos un contrato de vendas: S (seller) B (buyer) Están intentando renegociar un contrato, no encuentran solución, y saben los dos que tendrán que ir a tribunales.
Supongamos que S realmente quiere cumplir sus obligaciones, pero sabe que B no quiere el contrato. S va al tribunal y pide una specific performance + daños B diría que S no ha cumplido sus propias obligaciones (exeptio non adimpleti contractus).
B tiene que mostrar lo de relevance, duration, etc (menos lo de la inocencia, porque ya sabemos que ninguna de las partes ha cumplido) Si la parte si que ha cumplido, pero lo ha hecho mal (o no como se establecía en el contrato) à exeptio non rite adimpleti contractus + counterlawsuit (demanda reconvencional) = termination (using it as a defense to avoid the requirement of innocence) 84 TEMA 9. Sales Contract Concept ® any contract under which the trader (the seller) transfers or undertakes to transfer the ownership of the goods to another person (the buyer), and the buyer pays or undertakes to pay the price thereof; it may include a contract for the supply of goods to be manufactured or produced.
[Básicamente tenemos un intercambio de un bien por dinero. En derecho español también incluye los contratos de manufacturación de bienes. Hay muchas normas para aplicar este tipo de contratos.] Legal sources in Spain: § Arts. 1445-1537 Civil Code [No todos los B2B se regulan por el CdC: muchos se regulan por el CC] § Arts. 325-345 Commercial Code § United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980) (CISG) [Aplica en casos en que el comprador y vendedor son de diferentes países, los cuales no pueden haber excluido dicho convenio de su jurisdicción. Así, por ejemplo, el CISG no podrá aplicar sobre un contrato de ventas entre una compañía de Tarragona y otra de Barcelona] § Special regulations [tipos de ventas específicos]: - Consolidated Consumer Protection Act [TRLGDCU (distant contracts; off-premises sales)] - Act 28/1998, on Hire Purchase Agreements (or Installment Plans) [Ley 28/1998 de venta a plazos de bienes muebles] - Act 7/1996 on retail trade regulations (Ley 7/1996, de ordenación del comercio minorista).
§ Catalan Civil Code: 6th Book on Obligations and Contracts [2017] [empezará a usarse en enero 2018 (no lo veremos), pero se inspira en la Convención de Viena] § Proposal for a Regulation of the European Parliament and the Council on a Common European Sales Law (CESL) [COM(2011) 635 final]. [No se llevó a cabo] Parties and obligations Considerations A. Good · Valid object [Si no es un objeto válido, será declarado ilegal, y todo el contrato será nulo] · Future goods [Puede incluir bienes que aún no existen en el momento de concluir el contrato] Contracts for the supply of goods to be manufactured or produced Traditional distinction: § Emptio spei: buyer purchases an expectation. He is bound to pay the price regardless of the fact the good finally exists.
85 [El que compra paga un precio por un bien que puede que acabe existiendo o no. Si acaba existiendo, el vendedor tiene la obligación de enviárselo, pero si no, puede quedarse el dinero.] § Emptio rei speratae: buyer purchases a good conditioned to its future existence. He is bound to pay the price only if the good exists.
[si el bien no acaba existiendo, el vendedor y comprador no tienen obligaciones, y si acaba existiendo, sí] Ex: buyer promises a price for all the fish catch that fisherman would capture during the day.
· Sale of a third party’s good: not expressly regulated in Spanish law Different cases: § Seller purchases good from third party and delivers it to buyer  valid sale § Seller fails to purchase good from third party and thus cannot deliver it to buyer  breach of contract ® expectation damages.
§ Seller delivers a good from a third party before purchasing it. Third party may bring claims against buyer (e.g.: actio reivindicatoria): - If claims are made and the buyer looses possession over the good: Seller may be liable to buyer under art. 1475 and ff. CC (saneamiento por evicción) - If buyer becomes owner of the goods (for instance, by adverse possession (usucapio) or by rules concerning “a non domino” acquisitions (art. 464 CC, 522-8 CCCat i 34 LH): Seller may be liable to third party.
Una tercera persona posee el bien.
El vendedor (S) le promete al comprador (B) la venta de ese bien en Junio de 2018, y B ya ha pagado su precio.
Es un contrato válido. Problemas: cuando la data límite llegue: 1ª situación: el contrato se cumple correctamente porque el vendedor ha entrado en otro contrato de ventas con la tercera persona poseedora del bien.
2ª situación: S no puede comprar el bien, y cuando llega la data límite no puede cumplir su obligación, y B no recibe nada a cambio del precio. Así, S habrá incumplido el contrato y B tendrá derecho a los remedios por el incumplimiento del contrato (termination + expectation damages). Si aún no ha pagado nada, sólo expectation damages 3ª situación: la tercera persona sigue siendo poseedora en el día límite del contrato, pero B tiene posesión material del bien y cree que es el poseedor, pero realmente lo es la 3ª persona, así que esta última puede tener una acción (reivindicatoria) hacía B. Si puede demostrarlo, B perderá su posesión y tendrá una acción para reclamar a S sus pérdidas (saneamiento por evicción).
- Adverse possession (usucapio) à cuando S le entrega el bien a B, B no será propietario, pero sí al cabo de 3 años (en España). Si esto ocurre, la tercera persona no podrá reclamar el bien a B.
- A non domino à B si que es el propietario automáticamente si ha actuado de buena fe y ha recibido la posesión de un vendedor aparente. Si lo creía en el momento de recibir en bien. Aquí, el vendedor será responsable frente a la tercera persona.
B. Price Price is generally a required consideration for the sales contract. Traditionally, lack of price or any referenced thereto leads to nullity of contract (see article 1445 and 1447 CC).
However, CSIG allows sales contracts to be concluded without a price: Article 55 CISG ® “Where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned”.
- Primer problema: ¿qué pasa cuando hay tanto dinero como bienes en el precio? En esos casos será relevante el % de dinero (50% de dinero o más à sales contract; 50% o menos de dinero à permuta) - Segundo problema: la regulación tradicional establece que es necesario que las partes indiquen un precio o unas bases para calcular el precio final. Si esto no se hace, el contrato será inválido (lack of 86 price). Ahora no se sigue tanto esto, y se permite a las partes no incluir el precio (por ej, una tercera parte podrá establecerlo más tarde, o puede depender de lo que suceda en el mercado) Determination of price Price may be determined by a third party: If a third party cannot or will not determine the price, a court may, unless this is inconsistent with the contract terms, appoint another person to determine it. Where a price determined by a third party is grossly unreasonable, the price normally charged in comparable circumstances at the time of the conclusion of the contract or, if no such price is available, a reasonable price is substituted.
Article 74 CESL: Unilateral determination by a party: “1. Where the price or any other contract term is to be determined by one party and that party’s determination is grossly unreasonable then the price normally charged or term normally used in comparable circumstances at the time of the conclusion of the contract or, if no such price or term is available, a reasonable price or a reasonable term is substituted.
2. The parties may not exclude the application of this Article or derogate from or vary its effects”.
[Contrast it with article 1449 CC:] ® “El señalamiento del precio no podrá nunca dejarse al arbitrio de uno de los contratantes”.
Payment of price and delivery of goods are not required elements for the validity of a sales contract.
Contract becomes legally binding because of the parties’ intentions: consensual contract; non real contract.
Art. 1450 CC ® “La venta se perfeccionará entre comprador y vendedor, y será obligatoria para ambos, si hubieren convenido en la cosa objeto del contrato, y en el precio, aunque ni la una ni el otro se hayan entregado”.
Seller’s obligations The seller of goods must: a) deliver the goods; b) deliver such documents representing or relating to the goods as may be required by the contract; c) ensure that the goods are in conformity with the contract; d) transfer the ownership of the goods.
a) Delivery of goods Place and method of delivery Article 31 CISG ® “If the seller is not bound to deliver the goods at any other particular place, his obligation to deliver consists: (a) if the contract of sale involves carriage of the goods—in handing the goods over to the first carrier for transmission to the buyer; (b) if, in cases not within the preceding subparagraph, the contract relates to specific goods, or unidentified goods to be drawn from a specific stock or to be manufactured or produced, and at the time of the conclusion of the contract the parties knew that the goods were at, or were to be manufactured or produced at, a particular place—in placing the goods at the buyer’s disposal at that place; (c) in other cases—in placing the goods at the buyer’s disposal at the place where the seller had his place of business at the time of the conclusion of the contract”.
[Las partes normalmente establecerán un lugar y método para el envío. Si esto no ocurre, hay normas por defecto que darán la solución. Convención de Viena (art. 31) da 3 soluciones.
Pero generalmente lo harán, porque puede suponer una fuente de costas (por ejemplo, el transporte para el envío), así que tendrán incentivos para decidirlo sin la necesidad de normas por defecto].
Consumers: Consumer sales contract, distance or off-premises contract, or in which the seller has undertaken to arrange carriage to the buyer, the consumer’s place of residence at the time of the conclusion 87 of the contract. [Generalmente el vendedor será responsable del transporte, y el lugar de envío será la residencia del comprador] [Contrato de venta al consumidor, contrato a distancia o fuera del establecimiento, o en el que el vendedor se ha comprometido a organizar el transporte al comprador, el lugar de residencia del consumidor en el momento de la celebración del contrato] INCOTERMS - The Incoterms rules (International Commercial Terms) are a group of pre-established commercial terms published by the International Chamber of Commerce (ICC), which are very used in international sales and other commercial transactions.
- They consist in three-letter trade terms which describe usual practices in performing a sales contract ® they clearly provide information about the tasks, costs, and risks associated with the transportation and delivery of goods. Reduction of uncertainty and transaction costs.
- They were first published by the ICC in 1936. The current version is the eighth one (Incoterms® 2010).
[términos que se usan para distribuir y adjudicar costes entre el vendedor y el comprador. Se elaboraron por la Cambra internacional de Comercio (1936 primeros), y ahora usamos los octavos (2010)] Incoterms determine the ways of delivery and divide the costs and risk: a) E-clause (EXW): no additional obligations for seller after he places the goods - in conformity with the contract - at the disposal of buyer.
b) F-clauses (FCA, FAS, FOB): seller has to take care of transport until goods are handed over to the agreed carrier, but seller shall not conclude a contract of carriage nor pay for the transport.
c) C-clauses (CFR, CIF, CPT, CIP): seller is bound to pay the main transport until the place of destination.
The seller bears the risk of loss of or damage to the goods until the goods are handed over to the main carrier. In contrast to FOB, seller must bear the costs to bring the goods to the determined port of destination and cover insurance for the transport overseas.
d) D-clauses (DAT, DAP, DDP): seller has to take care of the arrival of the goods at the place of destination at his own costs and risks. Whereas the C-clauses constitute forwarding clauses, the Dclauses constitute arrival clauses.
Time of delivery Article 33 CISG ® “The seller must deliver the goods: (a) if a date is fixed by or determinable from the contract, on that date; (b) if a period of time is fixed by or determinable from the contract, at any time within that period unless circumstances indicate that the buyer is to choose a date; or (c) in any other case, within a reasonable time after the conclusion of the contract.” b) Delivery of documents Article 34 CISG ®“If the seller is bound to hand over documents relating to the goods, he must hand them over at the time and place and in the form required by the contract. If the seller has handed over documents before that, the buyer retains any right to claim damages as provided for in this Convention”.
- This provision does not specify when the seller has that obligation nor does it further define the documents to which it refers. The contract generally provides for what documents must be handed over.
- “Documents relating to the goods” may include: documents that give their holders control over the goods, such as bills of lading, dock receipts and warehouse receipts, but they may also include insurance policies, commercial invoices, certificates (e.g., of origin, weight, contents or quality), and other similar documents.
c) Conformity What’s conformity? ® crucial standard to asses correct performance of sales contract.
88 [La parte tiene la obligación de entregar los bienes tal y como establece en el contrato] In application of CISG, domestic courts have held that the unitary notion of conformity defined in CISG displaces the concepts of “warranty” found in some jurisdictions, and that, under the CISG, delivery of goods of a different type from those required by the contract (aliud) constitutes delivery of goods that lack conformity. For instance, in the case of the Spanish Supreme Court: aliud pro alio (doctrine used to prevent shortcomings from the traditional regulation on defective goods [saneamiento por vicios ocultos (arts. 1484-1499 CC)].
Article 35 CISG ® (1) The seller must deliver goods which are of the quantity, quality and description required by the contract and which are contained or packaged in the manner required by the contract.
(2) Except where the parties have agreed otherwise, the goods do not conform with the contract unless they: a) are fit for the purposes for which goods of the same description would ordinarily be used; b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller’s skill and judgement; c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; d) are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods.
(3) The seller is not liable under subparagraphs (a) to (d) of the preceding paragraph for any lack of conformity of the goods if, at the time of the conclusion of the contract, the buyer knew or could not have been unaware of such lack of conformity.
General criteria to assess conformity of goods with the contract: a) Fitness (aptitud) with idiosyncratic purposes disclosed (relevados) by the buyer to the seller at the time of the conclusion of the contract.
Exception: buyer did not actually relied or it was unreasonable for him to rely on the seller’s skill and judgment in meeting such idiosyncratic purposes (el comprador en realidad no confió o no fue razonable para él confiar en la habilidad y el juicio del vendedor para cumplir tales propósitos idiosincrásicos) b) Fitness with usual purposes of goods of the same description.
c) Possession of the same qualities of goods supplied to buyer by seller as samples or models.
d) Same packaging or container used in such goods or packaging adequate to preserve and protect the goods.
e) Delivery of accessories, installation instructions or other reasonably expected instructions.
f) Possession of qualities and capabilities informed in any pre-contractual statement which forms part of the contract terms (e.g.: advertisings, public statements).
g) Possession of qualities and capabilities that can be reasonably expected by the buyer.
Time of conformity Article 36 ® (1) The seller is liable in accordance with the contract and this Convention for any lack of conformity which exists at the time when the risk passes to the buyer, even though the lack of conformity becomes apparent only after that time.
(2) The seller is also liable for any lack of conformity which occurs after the time indicated in the preceding paragraph and which is due to a breach of any of his obligations, including a breach of any guarantee that for a period of time the goods will remain fit for their ordinary purpose or for some particular purpose or will retain specified qualities or characteristics.
In a consumer sales contract, any lack of conformity which becomes apparent within six months of the time when risk passes to the buyer is presumed to have existed at that time unless this is incompatible with the 89 nature of the goods or with the nature of the lack of conformity. Relevant time: lack of conformity which exists at the time the goods were delivered to consumer.
Possibility to remedy non-conformity Article 37 CISG [see also article 48] ® “If the seller has delivered goods before the date for delivery, he may, up to that date, deliver any missing part or make up any deficiency in the quantity of the goods delivered, or deliver goods in replacement of any non-conforming goods delivered or remedy any lack of conformity in the goods delivered, provided that the exercise of this right does not cause the buyer unreasonable inconvenience or unreasonable expense. However, the buyer retains any right to claim damages as provided for in this Convention.” Duties to examine goods by the buyer Article 38 CISG ® “(1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances.
(2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination.
(3) If the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination.” Article 39 ® “(1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it.
(2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time limit is inconsistent with a contractual period of guarantee.” Fraudulent non-disclosure of information: information which good faith or precontractual information duties would require that party to disclose.
Article 40 ® ”The seller is not entitled to rely on the provisions of articles 38 and 39 if the lack of conformity relates to facts of which he knew or could not have been unaware and which he did not disclose to the buyer.” Transfer of ownership Article 4 CISG ® “This Convention governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract. In particular, except as otherwise expressly provided in this Convention, it is not concerned with: (a) the validity of the contract or of any of its provisions or of any usage; (b) the effect which the contract may have on the property in the goods sold”.
Obligation to transfer ownership in Spanish Law: it is not expressly stated in the regulation of the sales contract. It is an implied term grounded on good faith (article 1258 CC).
Rules on transfer of ownership are diverse across jurisdictions.
Systems of transfer of ownership: a brief overview French law ® consensual agreement 90 Property in goods passes from the seller to the buyer at the moment when they have agreed about the goods and price (solo consensu), even though the goods are not delivered nor the price paid (Civil Code article 1583).
German law ® abstract conveying agreement. Invalidity of sales contract does not necessarily affect ownership.
Spanish law (article 609 CC; also 531-3 CCCat) ® This system is based on Roman law, according to which property could be transferred if two conditions were fulfilled: the legal ground (iustus titulus) and the method of acquiring the thing (modus acquirendi): título y modo (grounds of acquisition followed by the traditio or delivery).
Default rule: conveyance of ownership occurs at the time of deliver (traditio): Examples of traditio: - Material delivery of good - Symbolic traditio: delivery of keys (traditio clavi) and delivery or documents in which a credit is included.
- Instrumental traditio: conclusion of public deed.
- Consensual agreement (traditio ficta).
Examples of traditio: - Traditio brevi manu: purchaser is already in possession of good (e.g.: lessee who buys the leased good to lessor).
Mr. A buys dwelling to Mr. B. Lease agreement between A and B is cancelled.
- Constitutum possessorium: seller remains in possession of good (e.g.: owner sells good and simultaneously enters into a lease contract).
Mr. A sells dwelling to Mr. B. Lease agreement between A and B is concluded.
Goods that are sold twice (article 1473 CC) It is possible given that conveyance of ownership in Spanish law is dependent on traditio and forms that do not involve material delivery of the good are admitted.
§ Movable goods / chattels: Property is assigned to the buyer who firstly took possession of the good acting in good faith. If different possessions exist, material possession is preferred.
§ Immovable goods / Real property: Property is assigned to the buyer who firstly registered ownership in the Land Register. If none of the buyers registered, property is assigned to the buyer who firstly took possession of the good. If not, property is assigned to the buyer with a previous title of ownership. Each case requires good faith.
Exception: acquisitions a non domino (art. 464 CC; art. 522.8 CCCat in Catalan Law; art. 85 CCom and art.
34 Ley Hipotecaria).
Buyer’s obligations (article 53 CISG) a) Payment of price for the goods b) Taking delivery of goods a) Payment of price 91 Article 54 CISG ® “The buyer’s obligation to pay the price includes taking such steps and complying with such formalities as may be required under the contract or any laws and regulations to enable payment to be made.” Place and time of payment Article 57 CISG ® (1) “If the buyer is not bound to pay the price at any other particular place, he must pay it to the seller: (a) at the seller’s place of business; or (b) if the payment is to be made against the handing over of the goods or of documents, at the place where the handing over takes place.
(2) The seller must bear any increase in the expenses incidental to payment which is caused by a change in his place of business subsequent to the conclusion of the contract.” Article 58 CISG ® (1) “If the buyer is not bound to pay the price at any other specific time, he must pay it when the seller places either the goods or documents controlling their disposition at the buyer’s disposal in accordance with the contract and this Convention. The seller may make such payment a condition for handing over the goods or documents.
(2) If the contract involves carriage of the goods, the seller may dispatch the goods on terms whereby the goods, or documents controlling their disposition, will not be handed over to the buyer except against payment of the price.
(3) The buyer is not bound to pay the price until he has had an opportunity to examine the goods, unless the procedures for delivery or payment agreed upon by the parties are inconsistent with his having such an opportunity.” Article 59 CISG ® “The buyer must pay the price on the date fixed by or determinable from the contract and this Convention without the need for any request or compliance with any formality on the part of the seller.” Taking delivery of goods Article 60 CISG ® “The buyer’s obligation to take delivery consists: (a) in doing all the acts which could reasonably be expected of him in order to enable the seller to make delivery; and (b) in taking over the goods.
Article 52 (1) If the seller delivers the goods before the date fixed, the buyer may take delivery or refuse to take delivery.
(2) If the seller delivers a quantity of goods greater than that provided for in the contract, the buyer may take delivery or refuse to take delivery of the excess quantity. If the buyer takes delivery of all or part of the excess quantity, he must pay for it at the contract rate.” 92 Remedies for breach Remedies available to Buyer for Seller’s Breach 1) Specific performance Article 46 CISG ® “(1) The buyer may require performance by the seller of his obligations unless the buyer has resorted to a remedy which is inconsistent with this requirement.
(2) If the goods do not conform with the contract, the buyer may require delivery of substitute goods only if the lack of conformity constitutes a fundamental breach of contract and a request for substitute goods is made either in conjunction with notice given under article 39 or within a reasonable time thereafter.
(3) If the goods do not conform with the contract, the buyer may require the seller to remedy the lack of conformity by repair, unless this is unreasonable having regard to all the circumstances. A request for repair must be made either in conjunction with notice given under article 39 or within a reasonable time thereafter.” 2) Granting of additional period to perform Article 47 CISG ® “(1) The buyer may fix an additional period of time of reasonable length for performance by the seller of his obligations.
(2) Unless the buyer has received notice from the seller that he will not perform within the period so fixed, the buyer may not, during that period, resort to any remedy for breach of contract. However, the buyer is not deprived thereby of any right he may have to claim damages for delay in performance.” Seller’s right to cure [see also article 37] Article 48 CISG ® “(1) Subject to article 49, the seller may, even after the date for delivery, remedy at his own expense any failure to perform his obligations, if he can do so without unreasonable delay and without causing the buyer unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer.
However, the buyer retains any right to claim damages as provided for in this Convention.
93 (2) If the seller requests the buyer to make known whether he will accept performance and the buyer does not comply with the request within a reasonable time, the seller may perform within the time indicated in his request. The buyer may not, during that period of time, resort to any remedy which is inconsistent with performance by the seller.
(3) A notice by the seller that he will perform within a specified period of time is assumed to include a request, under the preceding paragraph, that the buyer make known his decision.
(4) A request or notice by the seller under paragraph (2) or (3) of this article is not effective unless received by the buyer.” 3) Avoidance / termination Art. 49 CISG ® “(1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed.
(2) However, in cases where the seller has delivered the goods, the buyer loses the right to declare the contract avoided unless he does so: (a) in respect of late delivery, within a reasonable time after he has become aware that delivery has been made; (b) in respect of any breach other than late delivery, within a reasonable time: (i) after he knew or ought to have known of the breach; (ii) after the expiration of any additional period of time fixed by the buyer in accordance with paragraph (1) of article 47, or after the seller has declared that he will not perform his obligations within such an additional period; or (iii) after the expiration of any additional period of time indicated by the seller in accordance with paragraph (2) of article 48, or after the buyer has declared that he will not accept performance.” Effects of avoidance/termination Art. 81 CISG ® “(1) Avoidance of the contract releases both parties from their obligations under it, subject to any damages which may be due. Avoidance does not affect any provision of the contract for the settlement of disputes or any other provision of the contract governing the rights and obligations of the parties consequent upon the avoidance of the contract.
(2) A party who has performed the contract either wholly or in part may claim restitution from the other party of whatever the first party has supplied or paid under the contract. If both parties are bound to make restitution, they must do so concurrently.” Art. 82 CISG ® “(1) The buyer loses the right to declare the contract avoided or to require the seller to deliver substitute goods if it is impossible for him to make restitution of the goods substantially in the condition in which he received them.
(2) The preceding paragraph does not apply: (a) if the impossibility of making restitution of the goods or of making restitution of the goods substantially in the condition in which the buyer received them is not due to his act or omission; (b) if the goods or part of the goods have perished or deteriorated as a result of the examination provided for in article 38; or 94 (c) if the goods or part of the goods have been sold in the normal course of business or have been consumed or transformed by the buyer in the course of normal use before he discovered or ought to have discovered the lack of conformity.” Article 83 CISG ® “A buyer who has lost the right to declare the contract avoided or to require the seller to deliver substitute goods in accordance with article 82 retains all other remedies under the contract and this Convention.” Article 84 CISG ® “(1) If the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid.
(2) The buyer must account to the seller for all benefits which he has derived from the goods or part of them: (a) if he must make restitution of the goods or part of them; or (b) if it is impossible for him to make restitution of all or part of the goods or to make restitution of all or part of the goods substantially in the condition in which he received them, but he has nevertheless declared the contract avoided or required the seller to deliver substitute goods.” Reduction of price Article 50 CISG ® ”If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price.” Remedies available to Seller for Buyer’s Breach 1) Specific Performance Article 62 CISG ® “The seller may require the buyer to pay the price, take delivery or perform his other obligations, unless the seller has resorted to a remedy which is inconsistent with this requirement.” 2) Granting of additional period Article 63 CISG ® “(1) The seller may fix an additional period of time of reasonable length for performance by the buyer of his obligations.
(2) Unless the seller has received notice from the buyer that he will not perform within the period so fixed, the seller may not, during that period, resort to any remedy for breach of contract. However, the seller is not deprived thereby of any right he may have to claim damages for delay in performance.” Avoidance/termination Article 64 CISG ® “(1) The seller may declare the contract avoided: (a) if the failure by the buyer to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or 95 (b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed.
(2) However, in cases where the buyer has paid the price, the seller loses the right to declare the contract avoided unless he does so: (a) in respect of late performance by the buyer, before the seller has become aware that performance has been rendered; or (b) in respect of any breach other than late performance by the buyer, within a reasonable time: (i) after the seller knew or ought to have known of the breach; or (ii) after the expiration of any additional period of time fixed by the seller in accordance with paragraph (1) of article 63, or after the buyer has declared that he will not perform his obligations within such an additional period.” Effects of avoidance/termination (articles 81-84) Damages (following rules apply to both buyer and seller’s breaches) i) Expectation damages + foreseeability rule Article 74 CISG ® “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.” ii) Cover transaction approach to assessment of damages Article 75 CISG ® “If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74.” iii) Market price approach to assessment of damages Article 76 CISG ® “(1) If the contract is avoided and there is a current price for the goods, the party claiming damages may, if he has not made a purchase or resale under article 75, recover the difference between the price fixed by the contract and the current price at the time of avoidance as well as any further damages recoverable under article 74. If, however, the party claiming damages has avoided the contract after taking over the goods, the current price at the time of such taking over shall be applied instead of the current price at the time of avoidance.
(2) For the purposes of the preceding paragraph, the current price is the price prevailing at the place where delivery of the goods should have been made or, if there is no current price at that place, the price at such other place as serves as a reasonable substitute, making due allowance for differences in the cost of transporting the goods.” iv) Duty to mitigate losses 96 Article 77 CISG ® “A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.” Anticipatory breach (following rules apply to both buyer and seller’s breaches) i) Suspension of performance Article 71 CISG ® “(1) A party may suspend the performance of his obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his obligations as a result of: (a) a serious deficiency in his ability to perform or in his creditworthiness; or (b) his conduct in preparing to perform or in performing the contract.
(2) If the seller has already dispatched the goods before the grounds described in the preceding paragraph become evident, he may prevent the handing over of the goods to the buyer even though the buyer holds a document which entitles him to obtain them. The present paragraph relates only to the rights in the goods as between the buyer and the seller.
(3) A party suspending performance, whether before or after dispatch of the goods, must immediately give notice of the suspension to the other party and must continue with performance if the other party provides adequate assurance of his performance.” ii) Avoidance/termination Article 72 CISG ® “(1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.
(2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance.
(3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations.” Passing of risks è When goods are accidentally lost or damaged between conclusion and fulfillment of the contract, it must be decided who is going to have to bear this loss: the seller or the buyer.
è Risks not properly defined ® The CISG contains no definition of the types of risks covered by the rules on transfer of risk. Literal meaning: physical loss and deterioration: disappearance of the goods, including theft, misplacing the goods, their transfer to a wrong address or person, mixing up the goods with other goods; occurrences in transporting the goods from one party to the other; occurrences in handling and storage, such as unloading in emergencies, including the risk of natural processes leading to a decline in quality (resulting from whichever cause, like lack of care, bad packaging or from melting, thawing, shrinking, loss of weight or of strength or taste, or appearance).
è Not necessarily related with force majeure.
è Different from lacks of conformity.
General rule: art. 66 CISG ® “Loss of or damage to the goods after the risk has passed to the buyer does not discharge him from his obligation to pay the price, unless the loss or damage is due to an act or omission of the seller.” 97 a) If goods are deteriorated or physically lost after the risk has passed to the buyer, the buyer has an obligation to pay the agreed price b) Art. 66 is silent as to when the risk of loss or damage passes: the parties’ contract and articles 67-70 set out rules for determining when the risk passes [that’s, default rules: passing of risks may be amended by parties (ex.: INCONTERMS)]. The parties may deviate by agreement from the default risk allocation (Article 6). An Incoterm may have been used or the applicable standard contract terms may bring about another partitioning.
c) Exception: unless due to act or omission by seller. Examples: - Seller of a chemical substance is liable if he failed to give the carrier instructions on the temperature at which the goods were to be stored during carriage and this caused the goods to be damaged through melting and leakage.
- Seller is liable for deterioration of the goods (live sheep) during shipment when his instructions to the carrier cause the overloading of the truck, which leads to the bad physical condition of the sheep.
This exception to the buyer's obligation to pay is distinct from the seller's continuing liability under art.
36 (1) for non-conformities that exist at the time the risk of loss passes even if they do not become apparent until a later time; the exception in the "unless" clause of article 66 is also distinct from the seller's liability under article 36 (2) for non-conformities that arise subsequent to passage of risk if the seller has guaranteed the goods against these non-conformities.
Rules on passing of risks: Three basic starting points for the passing of risk in different law systems: a) Moment of conclusion of the contract (periculum est emptoris) Examples: article 1452 Spanish Civil Code (?), Swiss Zivilgesetzbuch b) Moment of transfer of ownership (res perit domino) Examples: French Civil Code and English Sale of Goods Act.
c) Moment of handing over the good Examples: CISG, German BGB and Uniform Commercial Code of the United States.
Passing of risk when the contract involves carriage of the goods Primarily, the handing over of the goods at the place determined by the contracting parties is decisive. When no particular place is determined, the handing over of the goods to the first carrier decides.
In cases of combined transport (ex. international transport and especially with container transport), the risk passes with handing over the goods to the first carrier.
Identification or specification of goods (specially in unascertained goods) is required: When a necessary identification notice is not made before the fulfillment of the prerequisites of art. 67 et seq., the risk passes at this later moment in which the identification has been made.
98 Article 67 CISG ® “(1) If the contract of sale involves carriage of the goods and the seller is not bound to hand them over at a particular place, the risk passes to the buyer when the goods are handed over to the first carrier for transmission to the buyer in accordance with the contract of sale. If the seller is bound to hand the goods over to a carrier at a particular place, the risk does not pass to the buyer until the goods are handed over to the carrier at that place.
The fact that the seller is authorized to retain documents controlling the disposition of the goods does not affect the passage of the risk.
(2) Nevertheless, the risk does not pass to the buyer until the goods are clearly identified to the contract, whether by markings on the goods, by shipping documents, by notice given to the buyer or otherwise.” Passing of risk in goods sold in transit Article 68 CISG ® “The risk in respect of goods sold in transit passes to the buyer from the time of the conclusion of the contract. However, if the circumstances so indicate, the risk is assumed by the buyer from the time the goods were handed over to the carrier who issued the documents embodying the contract of carriage.
Nevertheless, if at the time of the conclusion of the contract of sale the seller knew or ought to have known that the goods had been lost or damaged and did not disclose this to the buyer, the loss or damage is at the risk of the seller.” Passing of risk in other situations Article 69 CISG ® “(1) In cases not within articles 67 and 68, the risk passes to the buyer when he takes over the goods or, if he does not do so in due time, from the time when the goods are placed at his disposal and he commits a breach of contract by failing to take delivery.
(2) However, if the buyer is bound to take over the goods at a place other than a place of business of the seller, the risk passes when delivery is due and the buyer is aware of the fact that the goods are placed at his disposal at that place.
(3) If the contract relates to goods not then identified, the goods are considered not to be placed at the disposal of the buyer until they are clearly identified to the contract.” Consumer sales Special rule aimed at offering a harmonized protection for consumer across EU Member States.
Scope of application - It applies to B2C sales, that is, when the buyer is a consumer acting for purposes which are not related to his trade, business or profession.
- It applies to the sale of consumer goods: shall mean any tangible movable item, with the exception of: o goods sold by way of execution or otherwise by authority of law, o water and gas where they are not put up for sale in a limited volume or set quantity, o electricity; - It applies to the sale of both new and second-hand goods.
Conformity with the contract · The seller must deliver goods to the consumer which are in conformity with the contract of sale.
· Criteria to assess conformity of goods with the contract ® consumers can expect that the goods: 99 o Comply with the description given by the seller, which can be made verbally or in writing, and possess the qualities of the product which the seller has held out to you as a sample or model.
o Are fit for the purpose for which goods of the same type are normally used, or for any particular purpose for which the consumer requires them and which was made known to the seller at the time of conclusion of the contract, and accepted by the seller.
o Show a satisfactory quality and performance which a person can reasonably expect from the goods taking into account any description made by them by the seller, the producer or his representative.
· 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.
· Hierachy of remedies: o In the event of any lack of conformity, the consumer is entitled to free repair or replacement whichever is the most economical and practical, within a reasonable time and without any significant inconvenience.
o If a repair or replacement is not possible or practical, or the seller has not completed a remedy within a reasonable time or has caused significant inconvenience, the consumer is entitled to a price reduction or termination.
· 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, taking into account: o the value the goods would have if there were no lack of conformity, o the significance of the lack of conformity, and o whether the alternative remedy could be completed without significant inconvenience to the consumer.
Time limits The seller is liable where the lack of conformity becomes apparent within two years as from delivery of the goods.
During the first six months from the time of delivery: reversal of burden of proof of lack of conformity: it 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.
Statute of limitations: claims by a consumer should be made within three years from delivery.
Additional guarantees (commercial guarantees, warranties) 100 Shops or producers will often offer consumers an additional commercial guarantee (also referred to as 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.
101 TEMA 10. Gifts / Donations Concept A contract for the donation of goods is a contract under which one party, the donor, gratuitously undertakes to transfer the ownership of goods to another party, the donee, and does so: - with an intention to benefit the donee; - and the donee accepts.
· Gratuitous transfer out of generosity (libéralité).
· It takes place inter vivos.
· Disposition that both enriches the donee’s patrimony and impoverishes that of the donor.
· Acceptance by the donee.
Legal Sources A) Spanish Civil Code ® Arts. 618 to 656 CC B) Catalan Civil Code ® o Arts. 531-7 to 531-23 CCCat o Arts. 432-1 to 432-5 CCCat (Donations due or conditional on death - donacions per causa de mort).
o Arts. 231-25 to 231-29 CCCat (donacions per causa de matrimoni) Formation and validity 1. Form requirements a) Real property: A contract for the donation of an immovable good and the acceptance by donee shall be included in a public deed (escritura pública).
- Solemn contract - Donors who informally promise to make a gift are not obligated to make the transfer.
- The solemn nature of the writing and public deed refers only to the gift itself. If the donee’s obligations are not expressly mentioned, the gift remains valid. Donee would be released from the duties of charges or those would be binding if evidence of parties’ intentions is proved (see infra Supreme Court Judgment num. 111/2013, March the 6th).
Disguised gifts: gift disguised as a sale (donación encubierta) in order to reduce tax costs.
- Traditionally à courts considered that those disguised or simulated gifts were valid because they were included in a public deed.
- In the last years à the Supreme Court has held that the deed used to include the sales contract cannot be understood as a valid substitute for the donation deed. Therefore, since the donation deed is a mandatory formality for a donation to be valid, the agreement would not meet all the legal requirements and therefore would not produce legal effects ® the transaction is void as a gift because the writing does not indicate that a gift was intended.
Exceptions: 102 - Remunerative gifts. However, case-law is not uniform.
- Indirect gifts: the parties intend to enter into a sales agreement in which the price to be paid is low ® negotium mixtum cum donatione.
- Gifts that include duties or personal obligations by the donee (donació modal o donació amb càrrega) ® causa donandi may be inferred from other sources such as testamentary dispositions and wills.
b) Chattels A contract for the donation of chattels (bienes muebles) or movable goods and the acceptance by donee shall be made in writing.
Exceptions to the form requirements for chattels: - No written form in the case of verbal acceptance by donee and immediate or simultaneous delivery of the goods to the donee (No hay forma escrita en el caso de la aceptación verbal por parte del donatario y la entrega inmediata o simultánea de los bienes al donatario) - No written form in cases in which during a fundraiser or a charity program, the undertaking of the donor is declared in a public statement. In such cases, donations cannot be revoked by donors. (No hay forma escrita en los casos en que, durante una recaudación de fondos o un programa de caridad, la empresa del donante se declara en una declaración pública.) [example: La Marató de TV3] What about indirect donations or indirect gifts? Are formalities required? · · · Legal transactions other than a gift that achieve the typical result of a donation ® donee’s enrichment at the donor’s expense. Example: Payment of another’s debt when donor agrees not to seek reimbursement (art. 1158 CC).
No need to follow formalities for donations; only requirements for the transaction at stake. However, other rules may apply, such as for instance rules on revocation.
Cfr. Remission (condonación). Art. 1187 CC ® “La condonación podrá hacerse expresa o tácitamente.
Una y otra estarán sometidas a los preceptos que rigen las donaciones inoficiosas. La condonación expresa deberá, además, ajustarse a las formas de la donación”.
2. Validity When a donation contract is validly formed ® donor’s obligations: - The donor will have an obligation to transfer possession of the good.
- The donor will generally have no rights to revoke the donation.
- The donor will not be liable for hidden defects in the good (vicios ocultos) or if donee loses possession (evicción). Exceptions: a) In cases in which gifts include duties or personal obligations by the donee (donació modal o donació amb càrrega): Liability up to economic value of established duty.
b) Cases in which donor transfers possession of goods knowing that they have hidden effects or that they belong to a third party and donee acts in good faith: donor shall compensate donee for the damages. Fraus omnia corrumpit.
- Donation may be subject to conditions or terms ® gift promises.
Plurality of donees · Donations are deemed to be made in equal shares (se consideran hechas a partes iguales) 103 · Unless donor establishes otherwise, if one of the donees does not accept donation, her share is proportionally distributed to other donees (dret d’acreixement).
o In Spanish law: no distribution to other donees unless expressly established by donor (art. 637 CC).
Object · · Donated goods have to be identified. They may include a plurality of goods.
Donations may not include future generic goods.
o Example: donation of future goods made to member of religious community to his community by a vow of poverty is null (STSJCat 10.9.2007).
Revocation by the donor: irrevocability and its exceptions Contracts for the donation of goods are irrevocable after validly formed and acceptation by donee is known to donor.
Numerus clausus of exceptions: donor may only revoke donation in some legally established circumstances: 1) Birth of a child: donor has children afterwards (superveniencia). Applicable even if donor had children before the donation.
2) Donor discovers that her children that she believed dead are alive (supervivencia).
3) Breach of personal duties by donee Donation to the Archdiocese of València [Supreme Court Judgment num. 111/2013, March the 6th (RJ 2013\2585) (Justice: Francisco Javier Orduña Moreno)] Facts: - In September 1993 Mr. Valentín drafted a will in which he designated the Archdiocese of València as beneficiary of his estate.
- Some days later, Mr. Valentín and the Archdiocese entered into a private contract in which Mr. Valentín promised to donate two plots of land to the latter establishing that the lots were aimed to the building of a new temple dedicated to Saint Jerónimo Hermosilla.
- In October, Mr. Valentín formalized the donation in a public deed. According to the deed, the donation did not include any personal duties. However, for tax purposes, it was mentioned that the plots were to be used for religious constructions.
- Mr. Valentín died in 1996.
- Afterwards, the Archdiocese sold the land lots to a third party.
Revocation: - Mr. Valentín’s nephews brought a lawsuit against the Archdiocese and sought revocation for breach of duty.
- Court of First Instance: It issues a judgment in favor of the plaintiffs. Archdiocese has to transfer goods back to Mr. Valentín’s estate. Given that the lots cannot be returned, Archdiocese shall pay damages in compensation.
- Court of Appeals: judgment is upheld.
- Supreme Court: Question to be decided? Duty was imposed to the Archdiocese not in the public deed but in a private document. Is this fact valid to understand that the donation imposed a duty to build the temple or is it necessary to establish that duty in the donation’s public deed? 104 4) Ingratitude of the donee A contract for the donation of goods may be revoked if the donee: · Commits a crime or misdemeanor against the donor, her children, her spouse or her partner or against the properties of any of the aforementioned individuals.
· Engages in socially disapproved behavior against the aforementioned individuals.
In case of plurality of donees: revocation for ingratitude of one of the donees involves her share to be proportionally distributed among other donees (dret d’acreixement).
Differences in Spanish Law: Catalan rules are more flexible or open-ended: - Spanish civil code (art. 648) includes only crimes, not misdemeanors. It also includes also accusation of a crime to a third person, even if donor is found guilty afterwards (exception: crimes against donee or her family).
- Example: Are donors entitled to revoke a gift of real property they made to her daughter because she left her husband and children and started a relationship with a Moroccan man? [STS, 1a, 27.2.1995 (RJ 1995\2775)] 5) Impoverishment of the donor, notwithstanding maintenance claims A contract for the donation of goods may be revoked if the donor is not in a position to maintain herself out of her own patrimony or income.
Subjects in revocation: è Who may revoke a donation? ® Donor and her heirs, except in cases in which the ground for revocation is donor’s impoverishment.
In cases in which the ground for revocation is ingratitude, heirs are only entitled if donor could not bring the claim in advance.
è Against whom? ® Donee and her heirs, except in cases in which the ground for revocation is ingratitude: claims only against donee.
Time limits: Revocation (acció revocatòria) has to be exercised within one year from: a) Occurrence of the fact that grounds revocation.
b) Knowledge by donor of situation of ingratitude.
c) Final decision after criminal proceedings against donee.
Revocation cannot be waived in the contract.
Effects of revocation: 1) Donee shall return ownership of goods to donor.
2) Donee shall return the value of goods if before notice of revocation the good has been transferred by onerous contract to a third party. Compensation: value of good at the time of donation.
Exception: revocation for breach of donee’s duties: since these duties would be vested upon the owner, it would be the subsequent owner who would be in breach of duties.
3) Respect for limited property rights on the goods hold by third parties (according to property law rules; for instance: article 37 LH).
105 Rules on special donations a) Remunerative gifts (Donacions remuneratòries) Gifts are made as compensation for services previously rendered or to be rendered: they are made to honor some services or qualities in which exchange of considerations would not be legally required.
Remunerative gifts and other onerous donations are only revocable in cases of breach of duties by donee.
In cases of disguised gifts, courts have exceptionally understood that a public deed of sales may be valid to meet formality requirements and thus gift is not void.
b) Gift with duties or personal obligations (Donació amb càrrega o modal; donation sub modo).
Donor imposes some duties to donee.
Example: restraints on alienation (donee is not entitled to sell or to donate the good for 30 years).
If the duties are in the interest of the donor or a third party, the gift is gratuitous only if the value of the condition does not exceed the value of the gift.
Breach of duty is a ground for revocation.
c) Gifts with reversion provisions (Donacions amb clàusula de reversió) Donor decides that upon a condition or on a date goods have to be reverted by donee to donor, to her spouse or her partner or to her heirs.
Donor may also establish that upon a condition or on a date goods have to be transferred to a third person selected by donee. If not established otherwise, it is understood that reversion is to be made to donor in case the donee dies without children before the donor. Similar to trusts (substitucions fideïcomissàries).
Provisions on reversion may be cancelled unilaterally by donor.
Limitations and liens on goods that were established by donees or by subsequent acquirers, once goods have been reverted, are cancelled. Donees may be held liable for damages and for loss of value.
d) Gifts in which the donor retains control on disposition of the good (Donacions amb reserva de la facultat de disposar) Scope of control is to be governed by the contract.
If no provisions in the contract, donor only retains rights to alienate the goods in exchange for consideration (therefore, it does not include donations or wills).
If donor decides to sell the good: donee or subsequent acquirers lose ownership, the latter with the limits of good faith and the LH.
Also, control on disposition may refer to authorization to alienate, such as for instance in cases in which alienation is made conditional upon the donee’s or her family’s needs (similar to usufructs wit capacity of disposition [usdefruit amb faculat de disposició (arts. 561-21 and ff. CCCat)].
106 TEMA 11. Suretyships Introduction Generally when people enter into contracts and the obligations stablished have to be perform is possible that one of the parties be default. Creditors want assurances that they will be paid or repaid by the debtor.
Article 1911 CC ® “Del cumplimiento de las obligaciones responde el deudor con todos sus bienes presentes y futuros” Universal liability principle Protocol nº. 4 to the Convention for the Protection of Human Rights and Fundamental Freedoms, securing certain rights and freedoms other than those already included in the Convention and in the first Protocol thereto (Strasbourg, 16/09/1963): Article 1 – Prohibition of imprisonment for debt ® “No one shall be deprived of his liberty merely on the ground of inability to fulfil a contractual obligation.” According to this principle (art. 1911), debtor will be liable forever for the debts he was engaged. CC stablishes a general right of creditors to be compensated, to receive the consideration that was promised by the other parties, and so one.
We know that criminal remedies are not available, but we also know that between the time the contract is concluded and the time of performance some risks can appear, for example, insolvency (reduce the amount of the debt).
Insolvency risk: § Non seizable assets (605-607 Civil Procedure Act). Even when the creditor has the right of 1911 § Bankruptcy Law (Ley 22/2003, de 9 de julio, Concursal). Reduce its debts. Some creditors will never receive anything from the debtor.
§ Real Decreto-ley 1/2015, de 27 de febrero, de mecanismo de segunda oportunidad, reducción de carga financiera y otras medidas de orden social. People who do not have enough resources.
Because of that, sometimes the creditors, specially if they have bargaining power, will demand some type of guarantee: assurance. Types of guarantees: Security obtained through agreement comes in two major types: 1) Personal guarantees [example: suretyship (fianza)] 2) Real guarantees: mortgage of real estate (hipoteca), personal property securities, such as for instance, a pledge (penyora, prenda). Collateral is put up to secure performance.
A wants to buy a building in BCN and wants to get money from a Bank (B) in order to buy this apartment. A is a SL company, so it is a B2B contract. They enter into a loan agreement, in which A borrows money from the Bank and promises to return money + interest. It is a 15 year term. During this term, many things may happen, for example, A can become insolence, so B will demand some type of warrantee: First type of guarantee (personal): surety (for instance, a foreign company, holding company to A, because in case A fails to pay the money, this company will pay it) - Second type (real): to stablish a mortgage over the building. B will have the right to start proceedings in order to recuperate the money.
Main difference between them: personal warranty only links the parties into a contract, and the mortgage may be binding other purchasers. Ex: after 5 years without paying the bank, B can sell the building to C.
- 107 Concept There’s no regulation in the CCCat, and there’s some in de CdC, but we will focus on the CC.
Surety (fianza) ® personal guaranty which involves a promise by one party to assume responsibility to the creditor for the debt obligation of a debtor if that debtor defaults (art. 1822.1 CC). The party undertakes to answer for payment of a debt or the performance of a duty of the principal in case of the principal’s default or miscarriage of the obligation.
Creditors frequently ask the owners of small, closely held companies to guarantee their loans to the company, and parent corporations also frequently are guarantors of their subsidiaries’ debts.
Very frequently, the creditor requires first that the debtor put up collateral to secure indebtedness, and (in addition) that the debtor engage a surety to make extra certain the creditor is paid or performance is made.
Surety is the legal model for personal guaranties (arts. 1822 and ff. CC). Other personal guaranties: § Commercial suretyship [fianza mercantil (arts. 439-442 CCom)]: when debt is established in a commercial contract. To identify when the CdC is applicable, it is important to analyse the main obligations. If this obligation is commercial, the surety will also be commercial. Only those sales in which the buyer purchase those goods with the idea of reselling them in the market.
§ Guaranties in negotiable instruments [Aval cambiario (arts. 35-37 Ley cambiaria y del cheque 1985)] § First demand guarantee (Garantía a primer requerimiento): atypical personal guaranty which has been admitted by courts in Spain. The main difference with suretyships is that first demand guarantees are independent and not accessorial guaranties to the debt obligation ® not generally affected by the principal obligation’s existence or conditions.
Frequent in practise, because of the general trades of surety.
D has to pay an amount of money to the creditor. The parties have stablished surety (S) that in case D fails to pay, S will pay to the creditor. The general two ideas of this contract are: - Surety is ancillary à if this obligation disappears (is null or cancelled), the surety will disappear as a consequence. For instance, the obligation is invalid.
- Subsidiarity à Initially, when the debtor fails to perform, the creditor has to claim any type of action against the debtor. The creditor can only perform against S if it is very clear that the debtor cannot pay, after efforts against D.
- In case of a first demand guarantee, involves the following: the creditor has a paper showing that he has the right to be paid, and surety will have no possibility to eliminate liability. *FDG are not regulated on the CC.
Ex: D promises to return an amount of money. D is not paying because he has a valid ground (is withholding not to perform). This reason will be sufficient for the surety to avoid paying the creditor.
He can say that knows D is not paying C because C is not performing his obligation. This argument cannot be used in a FDG performance, even if the relationship is invalid, etc, S cannot make the claim against C.
108 Parties Which are the relevant parties into a surety contract? Debtor or principal can be a third party, and in some cases will not be a part of the agreement. The essential parties are the surety and the creditor.
− Necessary parties in a suretyship contract: guarantor/surety (fiador) and creditor.
− Debtor (or principal) will not always be a party in the contract. A suretyship may be valid and effective regardless of debtor’s knowledge or opposition to suretyship (art. 1823.2 CC) (even in those cases the debtor is opposed on the surety, it will be valid).
− Parties should have general capacity to be legally bound: a person with the general capacity to contract has the power to become a guarantor. (The surety and the creditor shall have general capacity to be bound and, if the debtor is a third party, he will also need to have capacity).
Object: Object in the contract is the surety obligation (between S and C). Is ancillary, secondary of the main obligation.
− Debt obligation must be valid (art. 1824 CC). If, for instance, is against a mandatory norm, the surety won’t be valid as a consequence.
− Future debts (art. 1825 CC) ® suretyship may involve a promise to pay future debts, the amount of which is ignored at the time of establishing the guaranty. Creditor may not claim against guarantor until the debt is not finally assessed. (In this case CC stablishes some limitations, and basically the claims against the surety can be done one the debt is constituted.) Conclusion: creditor’s declaration of will is required.
− Formalities: freedom of form. In commercial suretyships, written form (art. 440 CCom).
There are no formalities. A verbal or oral surety is possible, but in most cases the parties will enter into a written agreement (but it is not required).
In commercial surety, it is necessary a written contract or a document authorised by a notary − Consensual agreement: suretyships cannot be presumed. They should be expressed and not involve other obligations not expressly stated (art. 1827.1 CC): surety’s clear intention; it cannot be presumed. When the meeting of the minds occurs, we will have a surety agreement. The idea is that this agreement cannot be really presumed: it is necessary that the intention of both parties is really clear. If no written agreement exist, judges will declare the contract have never existed.
Types: − Onerous /gratuitous: depending on whether creditor (or debtor) promises remuneration to guarantor in exchange for surety. In some cases, surety will be onerous (if the surety receives some type of remuneration, and this remuneration can be paid by the debtor or by the creditor). In cases of trilateral 109 agreement, generally it will be the debtor the one paying to the surety. In other cases, surety will be gratuitous, and he won’t receive any payment.
Main features a) Accessorial: − A valid debt obligation is required (art. 1824.1 CC). If the obligation is deemed null, suretyship is also null as a result.
− Changes in the debt obligation affect the suretyship.
− Not in first demand guarantees: they are independent and debt obligation’s nullity does not affect guarantee.
b) Subsidiary: − Creditor can only address claims against guarantor in case the debtor defaults.
− Exception: solidary suretyship; or guarantor waives her defense of unexhausted remedies (excusión).
There are some cases on where the debtor and the surety are jointly liable to the creditor, and because of that C can decide to ask B to pay his debt or S. It is not required that C first claims against D. Consequence: in this type of contract, defense of an exhausted remedies is not available (benefici d’excusió).
Establishment When analysing sureties, we can found three types: A) Contractual sureties (The ones we are interested in) B) Legal sureties C) Judicial sureties a) Through contract between parties: § § § Between creditor, debtor and guarantor ® trilateral agreement.
Between creditor and guarantor (arts. 1158-1159 CC: performance by a third party).
Between creditor and guarantor, accepted by debtor.
Example à Where there is a private interest that requires protection from the possibility of a default, sureties are engaged We have an owner (O), landlord, and a tenant (A). They enter into a lease agreement, and A has to pay a monthly rent (main obligation of A). At the time of concluding the contract, O demands some types of guarantees, for instance, a deposit (2 months). In the Ley de Arrendamientos urbanos, this type of deposit is called a fianza (but this is not a surety, even if the law calls it fianza).
Suppose that A has to pay an extra deposit of three months. This is not the legal deposit, this is result of freedom of contract between the parties, and the landlord will have this deposit in his hands during all the contract. This is a real guarantee, which is a sort of pledge (not really a pledge), pledge collateral.
Finally, the landlord demands a personal guarantee (aval), for instance, A’s parents would have to promises the landlord in case A fails to pay the rent, the parents will do it. This aval is a surety, and this is a contractual surety between the landlord and the parents. A isn’t a necessary part of the contract.
110 b) Legal obligation to provide surety Usually where there is a public interest that requires protection from the possibility of a default (art. 1854 CC). Example: Guarantees for potential environmental liability (Ley 26/2007, de 23 de octubre, de Responsabilidad Medioambiental).
Artículo 24 CC (Constitución de una garantía financiera obligatoria) ® “1. Los operadores de las actividades incluidas en el anexo III deberán disponer de una garantía financiera que les permita hacer frente a la responsabilidad medioambiental inherente a la actividad o actividades que pretendan desarrollar.[…]” Artículo 26 CC (Modalidades) ® “La garantía financiera podrá constituirse a través de cualquiera de las siguientes modalidades, que podrán ser alternativas o complementarias entre sí, tanto en su cuantía, como en los hechos garantizados: a) Una póliza de seguro que se ajuste a la Ley 50/1980, de 8 de octubre, de Contrato de Seguro, suscrita con una entidad aseguradora autorizada para operar en España. En este caso, corresponderán al Consorcio de Compensación de Seguros las funciones a que se refiere el artículo 33.
b) La obtención de un aval, concedido por alguna entidad financiera autorizada a operar en España.
c) La constitución de una reserva técnica mediante la dotación de un fondo «ad hoc» con materialización en inversiones financieras respaldadas por el sector público. […]” c) Obligation to provide surety established by a court.
A bond filed with the court as a guarantee. For example, a party to a court action may post a judicial bond to guarantee payment ordered by a judgment while an appeal is being considered by a superior court.
Example: art. 529 LEC: a judge may require that a defendant put up a bond indemnifying the plaintiff for the costs of delays caused by the suspension of enforcement a judgment.
Artículo 529 CC (Sustanciación de la oposición a la ejecución provisional o a actuaciones ejecutivas concretas) ® “[…]3. Si se tratase de ejecución provisional de sentencia de condena no dineraria y se hubiere alegado la causa segunda del apartado 2 del artículo 528*, de oposición a la ejecución provisional, el que la hubiere solicitado, además de impugnar cuanto se haya alegado de contrario, podrá ofrecer caución suficiente para garantizar que, en caso de revocarse la sentencia, se restaurará la situación anterior o, de ser esto imposible, se resarcirán los daños y perjuicios causados.
La caución podrá constituirse en dinero efectivo, mediante aval solidario de duración indefinida y pagadero a primer requerimiento emitido por entidad de crédito o sociedad de garantía recíproca o por cualquier otro medio que, a juicio del tribunal, garantice la inmediata disponibilidad, en su caso, de la cantidad de que se trate”.
Example ® We have A and B, they entered into a contract. According to the contract, A has to pay money (pecuniary obligations), and B has to perform some other types of obligations, for instance, deliver property of a group of houses. There’s dispute between the parties, and A claims that B has not performance and B claims A has not paid the money... A wins the case, and the court orders B to deliver the properties to A. Now A has a judgment on where is clear that he’s the owner. A has the possibility of enforcing the judgment. Maybe B has appeal the judgment, and the court of appeals would modify the judgment, but in the same time A has the possibility of enforcing the judgment. B, in order to avoid the risk, has the possibility of claiming the suspension of this enforcement offering a surety that will cover all damages that the suspension of enforcement may have created to A.
111 Content Scope of surety: content agreed by the parties.
Absent consent: Art. 1827.2 CC: the guarantee has the same content as the debt obligation (fianza simple).
The amount required to be reimbursed includes the surety’s reasonable, good-faith outlays, including interest and legal fees. It thus includes the main obligation, with all of its ancillary obligations, as well as legal costs and fees incurred after creditor claims performance to guarantor.
Limit (art. 1826 CC): However, the parties may stablish some limits: by way of freedom of contract, the parties may stablish a time limitation, so the surety will only pay until an specified day on the contract and all claims made after this day would be valid. Also they can stablish an obligation higher than the main obligation.
− Guarantor shall not pay more than the debtor. In case he pays more than the debtor, amount shall be reduced (partial nullity).
− It may be agreed that guarantor will pay less than the debtor. Or surety only established for a limited period of time (temporary suretyship).
Pregunta d’examen de l’any passat (excusión). No li agrada preguntar sobre surety, però els altres professors volien.
Between guarantor and debtor (The debtor would have to pay what have been paid by the surety: he will have the right to be reimbursed.
Taking into account this right, he may not make sufficient steps to analyse the problems in the main obligations, he would not take into account defences that main debtor had against the creditor, overpay some of the debts (if debtor has already paid a part), or doesn’t listen to the debtor.) Upon the principal debtor’s default, the surety is contractually obligated to perform unless the creditor discharges the obligation. When the surety performs, it must do so in good faith.
112 Taking into account that the surety has the right to be reimbursed by the principal debtor and that his defenses are generally limited, debtors not infrequently claim the surety acted in bad faith or negligently, for instance by: - Failing to make an adequate investigation to determine if the debtor really defaulted.
- Overpaying claims - Making unreasonable refusals to let the debtor complete the promise made to the creditor.
(Once the surety has paid to the creditor, he would generally have a right of subrogation against the debtor, a possibility to claim against him, and the debtor would have the possibility of alleging some arguments in order to reduce the amounts to be paid on the surety. Also, another type of claim that the surety may have against the debtor: claim for exoneration or relieving of liability. 1st type of problem à defenses that may be arrenged by those parties. The creditor can be obligated to accept some arguments brought by the surety, and in particulary defenses that belong to the principles, and one of the main defenses has to do with excusión (defense of an exhausted remedies).
Surety may affect negatively the position of the debtor against the creditor, so the law offers some types of solution to the debtor: a) Exoneration or relieving of liability [Acción de relevación o cobertura (1843 CC)]: Guarantor, even before having performed, may ask the debtor to be relieved from the surety obligation when: - Guarantor is sued (demandado) and brought to court.
- Guarantor is in an insolvency situation.
- Debtor promised to release guarantor from the surety obligation on a date, and the date has arrived.
Debt is due.
- After 10 years, when the debt obligation has not a specific term or period to be performed.
Guarantor claims release or alternatively a security that he will be repaid or reimbursed by debtor in case the surety performs (example: retrofianza: surety of reimbursement right) (There are some cases in which the surety knows that he will end up paying, situations in which he is going to assume this cost, and because of this cost, wants to get sured that he will be covered afterwards, that he wants to sure that he will not suffer economic loses because of the surety. We have this situation: D = debtor; C = creditor; S = surety. They have stablished joined liability (D and S), and we know that surety will have to pay if D fails to pay. Once the surety knows that he will actually have to pay, he will be entitled to claim to the debtor, there’s a cancelation (discharge of the surety obligation), or an assurance that if he finally pays the creditor, he will finally be compensated by D. (right of reimbursment, so there will be a future obligation by the debtor to the surety, and they may stablish a new surety. This surety is known as retrofiança.) PROBLEM à the debtor cannot discharge the surety obligations if the creditor does not agree to that. Basically, the only possibility that the debtor has is by, for instance, promissing that a new surety will take over the position.
Only valid in those cases in which surety do really need to pay the money, for example, if creditor has opened a judgment against him.) b) Claim for reimbursement (acción de regreso): Guarantor pays on behalf of debtor and the latter has to compensate the former (art. 1838 CC): - Whole amount of debt.
113 - Legal interest from the date the debtor was informed about guarantor’s payment. It is not necessary that theses interests were established in the creditor-debtor obligation.
- Damages (if any).
This claim for reimbursement exists even in cases in which the debtor ignored that the surety existed between creditor and guarantor.
(Generally a third party will have a claim of reimbursment. Even in cases in which the payment is ignored by the debtor, this claim will be available. The surety will have the acción de regreso in any case. In other, like subrogation, this will be only available if the debtor knows and have accepted the surety to pay. That’s when surety takes on the position of the debtor, and has all he’s rights and obligations.) c) Claim for subrogation (acción de subrogación): Guarantor takes over the creditor’s position in the legal relationship with debtor (art. 1839 CC): - The guarantor stands in the creditor’s shoes and may assert against the principal/debtor whatever rights the creditor could have asserted had the duty not been discharged.
[El fiador está en el lugar del acreedor y puede hacer valer en contra del deudor / deudor los derechos que el acreedor podría haber afirmado si no se hubiera cumplido con el deber.] - The right of subrogation includes the right to take secured interests that the creditor obtained from the principal to cover the duty (such as for instance, security interests or real guarantees).
Claims for reimbursement and subrogation are incompatible. Guarantor has the option to make one of the two claims. If one of them is unsuccessful, guarantor may bring a alternative claim.
d) Defenses by the debtor to guarantor: − Guarantor paid without informing the debtor (art. 1840 CC): debtor may use all defenses and elements that could be used against the creditor at the time of performance.
When the surety turns to the principal debtor and demands reimbursement, the latter may have defenses against the surety for acting in bad faith or negligently.
The principal debtor may avail itself of any standard contract defenses as against the creditor, including, among others, impossibility, illegality, incapacity, fraud, duress, set-off, defenses based on insolvency law, statute of limitations, non-performance, or non-conformity.
− Guarantor paid in advance (art. 1841 CC): guarantor may not seek reimbursement until obligation is due.
− Guarantor paid without informing the debtor and debtor also paid to creditor, guarantor cannot seek reimbursement and is only entitled to seek restitution against creditor (pago de lo indebido, solution indebiti, arts. 1895 and ff. CC).
Relations between creditor and guarantor a) Defenses by the guarantor to the creditor: − Defenses ® guarantor may use all defenses and elements against creditor that could be used by the debtor that are related to the debt. Therefore, defenses or elements that are only personally related to the debtor cannot be used (art. 1853 CC).
Generally, the surety may exercise defenses on a contract that would have been available to the principal debtor (ex: creditor’s breach; impossibility or illegality of performance; fraud, duress, or misrepresentation by creditor; statute of limitations; refusal of creditor to accept or correct performance from either debtor or surety.) 114 − Guarantor may use set-off of amounts due to the debtor (art. 1197 CC) [El fiador puede utilizar la compensación de los montos adeudados al deudor] b) Defense of unexhausted remedies (Beneficio de excusión) The surety may refuse to satisfy the creditor as long as the creditor has not attempted without success to obtain execution of judgment against the principal debtor.
Guarantor cannot be ordered to pay to creditor before “excusión” being made (art. 1830 CC): “El fiador no puede ser compelido a pagar al acreedor sin antes hacerse excusión de todos los bienes del deudor”.
If the surety raises the defense of unexhausted remedies, the creditor’s claim against the surety is suspended until the creditor has attempted without success to obtain execution of judgment against the principal debtor.
“Excusión” can be understood as a duty of creditor of enforcement and realization: guarantor has an obligation according to which he shall identify different debtor’s properties in Spain that may be attained in order to afterwards obtain complete payment of the debtor’s obligation.
Exclusion of defense of unexhausted remedies (art. 1831 CC): · · · · Guarantor expressly waives this right.
Suretyship is established as a solidary obligation.
Debtor becomes insolvent.
Debtor cannot be brought to court in Spain.
Excusión may be waived ex ante (solidary surety or joint and several surety) or ex post.
Solidary suretyship: art. 1822.2 CC: application of rules on joint and several obligations in arts. 1137 to 1148 CC: − Internal relationship between guarantor and debtor: norms on suretyship.
− External relationship with creditor: rules on joint and several obligations.
Situations described under the Spanish Civil Code that may affect the surety relationship a) Remission (condonación) ® art. 1190 and 1847 CC: 115 - Creditor relieves debtor from obligation ® surety is cancelled.
- Creditor relieves guarantor from surety obligation ® principal obligation is not cancelled.
b) Merger (confusion) ® art. 1193 CC: - Merger between debtor and creditor ® principal obligation and surety are cancelled.
- Merger between creditor and guarantor ® principal obligation is not cancelled. Surety is cancelled but some rights or guarantees would subsist [subfiança (art. 1848 CC)].
c) Assignment of credit (cesión del crédito) ® art. 1528 CC: Surety is not cancelled.
d) Set-off (compensación) ® art. 1202 and 1847 CC: If set-off requirements are met, debtor’s obligation is cancelled  surety is cancelled.
e) Datio pro soluto (dación en pago) ® art. 1849 CC: If the creditor accepts from a debtor a different good than the one initially established in the obligation; and afterward he loses ownership (evicción) ® guarantor is not liable.
f) Extension (prórroga) ® art. 1851 CC: If creditor provides the debtor with an additional term to perform and guarantor does not consent  surety is cancelled. Open to discussion; ex: automatic extensions or brief periods are considered not to cancel the suretyship.
Cosurety (Cofianza) An arrangement where two or more surety guarantors directly participate on a bond with the same creditor and for the same debt obligation.
NOT TO CONFUSE WITH a plurality of independent sureties: each guarantor provides surety and his obligation is not affected by the existence of other surety relationships or situations that affect them.
116 Art. 1837.1 CC: unless parties agree otherwise, it is presumed that obligations from cosureties are arranged according to several liability (obligació parciària).
è Creditor is only entitled to claim individual shares to each of the cosureties unless the parties clearly established that obligations were to be arranged according to joint and several liability (solidarity).
If creditor claims more than the individual share to a cosurety he will have a right to oppose paying the whole obligation (beneficio de división).
This right cannot be applied in the situations in which the defense of unexhausted remedies is excluded (Art.
1837.2 CC) ® therefore creditor may claim payment of the whole obligation to any of the cosureties… Joint and several cosurety (Cofianza solidaria) If parties expressly establish this arrangement, creditor would be entitled to claim the whole obligation to any of the cosureties.
Claims for reimbursement and contribution (arts. 1844 and 1845 CC): · Reimbursement (art. 1844 CC): - Cosurety that pays has a right to reimbursement against the rest of cosureties. Proportional shares.
- If any of the cosureties is insolvent, his share is distributed among the remaining cosureties.
- Application of this provision requires that cosurety was judicially ordered to pay the amount or that debtor was bankrupt.
Defenses (art. 1845 CC) Subfianza (art. 1836 CC) It is a surety of a surety.
Defense of unexhausted remedies can be used by the second surety against the creditor concerning both the debtor and the surety. That is, creditor may only claim against the second surety after having claimed against the debtor and against the guarantor. (La defensa de los recursos no utilizados puede ser utilizada por la segunda garantía contra el acreedor, tanto respecto del deudor como del fiador.) - If the second surety assures performance of a cosurety, but not of all cosureties, and the cosurety is insolvent, the second surety will take his position and be liable towards the other cosureties (art. 1846 CC).
117 118 TEMA 12. Rental agreements Types of rental agreements · · Movables: Civil Code. Example: car rental, video rentals… Immovables: o Urban rentals (Ley de Arrendamientos urbanos) o Rural rentals (Ley de Arrendamientos Rústicos) Urban rental agreements Public intervention ® important policy considerations: access to housing, gentrification, urban planning, ratio between renting/purchasing properties, labor mobility… Balance of interest between owners/renters ® historical shifts (cambios históricos) Sources - Ley 29/1994, de 24 de noviembre, de Arrendamientos Urbanos (BOE núm. 282, 25.11.1994) (LAU) Amended by Ley 4/2013, de 4 de junio, de medidas de flexibilización y fomento del mercado del alquiler de viviendas (BOE núm. 134, 5.6.2013) Scope of application (articles 1-3) · · · Rental agreement on an urban dwelling for housing purposes: permanent need of housing (art. 2.1).
Rental of complete dwelling (not covering leasing or subletting of rooms) [Contrato de alquiler de una vivienda urbana con fines de vivienda: necesidad permanente de vivienda.
Alquiler de vivienda completa (no cubre arrendamiento o subarrendamiento de habitaciones)] Rental agreement on urban properties for purposes other than housing.
Examples (art. 3.2) ® temporary housing, leases for commercial, cultural, professional activities or other… Excluded rental agreements (art. 5) · · · · · Housing for doormen, employees and civil servants (funcionarios) Military housing Housings in farming exploitations (application of Ley de Arrendamientos Rústicos) University housing Touristic apartments Applicable rules (art. 4) 119 Very limited freedom of contracts in rentals intended for housing purposes (alquileres destinados a vivienda) Rental agreements for housing purposes *Landlord ® propietario * Tenant ® inquilino 1. Formalities No formalities required. However, parties may require the other party to formalize the agreement in writing. (pueden exigir a la otra que formalice el acuerdo).
2. Term (art. 9) o o o Freely established by the parties Default term: 1 year Minimum extension /Legal extension: 3 years If the term agreed by the parties is less than three years or if parties have not established a term, the agreement is extended up to 3 years, unless tenant informs landlord of his intention not no remain in the place with at least one month prior to the term’s end.
Exceptions to minimum 3-year term: a) If after the first year, landlord informs tenant, with at least two-month prior notice that he intends to use the property for his own housing needs or those of his children or former spouse.
Breach: if the property is not used as informed within three months after termination, tenant has two options. He may: i.
Specific performance: force the landlord into a new rental agreement for a three-year term and claim damages for expenses incurred in the meantime.
Damages: claim and award of damages equal to the rents of months within the three year term in which he could not use the property.
b) The landlord sells the property to a third party which is not affected by the rental agreement (the agreement was not registered in the Land Registry) Extension after the three-year term (article 10): - If none of the parties opposes with at least one month before the term, the agreement would be automatically extended for one additional year (tácita reconducción).
- The same provisions in the agreement would apply to this automatic extension.
- Afterwards, automatic one-year extensions would follow after each extension.
Early termination after unilateral decision by the tenant (article 11): - After the first six months, tenant would be entitled to unilaterally terminate the agreement, with at least a 30-day prior notice.
- Consequences: those established in the agreement. Parties may establish a penalty clause for such early termination, but this penalty may not exceed an amount equal to a monthly rent for the years 120 pending until completing the agreed term [pero esta multa no puede exceder un monto equivalente a una renta mensual por los años pendientes hasta completar el plazo acordado] 3. Rent (arts. 17-20) · · Freedom of contract: agreement by the parties Some default rules in cases parties have not established otherwise: o Form ® monthly payment in cash o Payment term ® within the first seven days in each month (payment of future rents of more than one month may never be required in advance) o Place ® rented property o Alternatives to money payments ® parties may agree that temporally the tenant would perform his payment obligation by assuming some renovation works.
o Landlord has an obligation to issue receipts of rent paid by the tenant (obligación de emitir comprobantes de renta pagados), unless the medium used by parties provides sufficient evidence of reality and amount of payment (for ex., money transfers).
o Rent update (art. 18): it is only allowed after each term year. Default rule ® Consumer Price Index (CPI-IPC) o From 3-years onwards (art. 19): in rental agreements with a term longer than 3 years, landlords are entitled to increase the monthly rent if they have undertaken renovation works that have improved the property [derecho a aumentar el alquiler mensual si han realizado trabajos de renovación que han mejorado la propiedad] § Increase: amount invested in the works x (money legal interest + 3%) § Limit: 20% of current rent 4. Deposit (Fianza) (article 36): *Diferente que la fianza (surety) en suretyships: aquí se trata del depósito de dinero en alquilar un bien.
· · · · · · Mandatory ® tenants have a duty to make this legal deposit and landlords have an obligation to require the deposit.
Amount ® one month rent for rentals intended for housing purposes (two months for other rentals) [alquiler de un mes para alquileres destinados a vivienda (dos meses para otros alquileres].
Possibility of establishing an update for this deposit ® after three years (if nothing is established in the contract, default: CPI).
How should it be done? ® Deposit has to be delivered in cash at the time of concluding the contract Pursuant (de conformidad) to freedom of contract, parties may establish additional guarantees (sureties, pledges, insurance…).
Deposits have to be placed by the landlord into a fund organized by the regional government in each Autonomous Community. In Catalonia: Institut Català del Sòl: (INCASOL): Decret 147/1997, de 10 de juny, pel qual es regula el Registre de fiances dels contractes de lloguer de finques urbanes i el dipòsit de fiances.
121 5. Expenses (art. 20-21) A. Tenant: - Expenses for utilities which can be individualized to the property (for ex., electricity, gas, water, internet).
- Expenses connected to the general maintenance of property and Building, taxes, community of owners, insurances.... (parties may establish that the tenant will pay them. *Formality: necessarily written provision in which the annual cost is described).
- Ordinary expenses: minor works (for ex., dripping faucet).
B. Landlord: - Extraordinary expenses incurred in guaranteeing that the property is apt for housing purposes.
*Exceptions: o Damages to the property were caused by the tenant.
o Loss of property was caused by a factor external to the parties (Force majeure).
6. Works (arts. 22-24) · · · · · · · If works (both those that are necessary and those that would improve the property) cannot be postponed until the term of the agreement, tenant is under a duty to tolerate them. If works last longer than 20 days, he has a right to get a reduction in the rent.
Duty to send written notice to tenant, at least with three months in advance.
Tenant has one month to decide to terminate the contract, except in cases the works do not create substantial interference with the property.
A discount in rent follows. Damages (if any).
Tenant may never undertake works that may endanger the property’s structure (stability). If he does, landlord may ask him to restore the property to the previous situation. [El inquilino nunca debe realizar trabajos que puedan poner en peligro la estructura de la propiedad (estabilidad). Si lo hace, el propietario puede pedirle que restaure la propiedad a la situación anterior] Any other works intended by the tenant shall be authorized by the landlord. If tenant undertakes works without obtaining the landlord’s permit, the latter would be entitled to terminate the contract, to seek restoration of the property or to order the tenant not to eliminate the works without paying any price or cost.
Special and exceptional rules for works intended to adapt the housing for people with a disability Contract suspension, termination and expiration 1. Suspension (art. 26) When a public administration orders the landlord to undertake works aimed at safeguarding that the dwelling may be used for housing purposes, the tenant will have a right to suspend the rental agreement or to rescind it (with no right to damages compensation) [Cuando una administración pública ordena al propietario que realice trabajos destinados a salvaguardar que la vivienda pueda ser utilizada con fines de vivienda, el inquilino tendrá derecho a suspender el contrato de alquiler o rescindirlo (sin derecho a indemnización por daños y perjuicios)] 122 2. Termination for breach (art. 27) Besides the general ground for contract termination (art. 1224 CC – fundamental breach), the Rental Agreement Act establishes some cases of breach that would entitle one party to terminate the contract: 3. Other situations of contract’s expiration (art. 28) - Loss of property not caused by the landlord - Public authority declares that the property is ruinous Special situations a) Sale of property by the landlord Expiration (article 14)? - In cases the rental agreement was registered in the Land Registry, it will not be terminated because of the sale ® the purchaser would be subrogated in the agreement as new landlord.
- In cases the rental agreement was not registered and the purchaser can be deemed a good faith acquirer (pursuant to article 34 LH), the contract will be terminated. The tenant will have a right to stay in the property up to three months after he is informed about the purchaser’s intention.
o Obligation to pay the rent during these three months o Tenant is entitled to claim damages to the seller for breach of contract.
Preemption rights by tenant (article 25) - Right of first refusal (derecho de tanteo): within 30 days of notice to tenant of landlord’s intention to sell the property - Right of preempting previous transaction (derecho de retracto): if tenant was not informed, the notice was incomplete, or the transaction was made under conditions different that those described in the notice. Term: 30 days from notice sent by purchaser (copy of public deed) - These rights can be excluded by parties in the agreement.
- They are not available when the property is sold jointly with the rest of dwellings or premises owned by the landlord in the same building; or when a single purchaser acquirers properties in the same building from different owners simultaneously [No están disponibles cuando la propiedad se vende conjuntamente con el resto de las viviendas o locales propiedad del propietario en el mismo edificio; o cuando un solo comprador adquiere propiedades en el mismo edificio de diferentes propietarios simultáneamente].
123 b) Judicial attribution of dwelling use (article 15): In cases of divorce, separation or marriage nullity, a judge may decide to assign use of the rented property to a spouse which was not a party in the rental agreement.
- The (ex)spouse will become a party in the contract if right of use is established indefinitely or for a term longer than the rental term [si el derecho de uso se establece indefinidamente o por un período más largo que el plazo del alquiler] - The (ex)spouse shall send a notice to the landlord stating his will to keep using the property within two months from the judicial decision.
c) Tenant’s death: - Rental agreements is terminated if within three months from the event, the landlord does not receive a notice informing him about this and the use of subrogation by one of the parties with right thereto pursuant to article 16 (spouse, partner, children, parents, siblings and other disabled relatives who had been living in the property in the two years before the tenant’s death).
Right of subrogation can be excluded in rental agreements with a term longer than 3 years.
124 TEMA 13. Contracts for services / Construction contracts Contract for services/ Construction Contracts Traditional distinction (locatio): è Arrendamiento de bienes è Arrendamiento de servicios è Arrendamiento de obra Contracts for services Provisions ® arts.1583-1587 CC. Historically, these provisions applied to domestic and manual dependent work, but not to qualified professional services (which were often understood to be within the scope of application of mandate contracts [contratos de mandato]). Today, the phenomenon is the opposite: dependent work is regulated under labour law and contracts for services under these general provisions.
Since these provisions are very fragmentary, other sources are relevant: - Freedom of contract - Specific regulations governing some contracts for services - Usages and customs in specifics industries - Analogy with other contracts (mandate) Definition ® contract from which an obligation to perform services in its broader sense arises in exchange of consideration. [contrato a partir del cual surge la obligación de prestar servicios en su sentido más amplio a cambio de consideración] Art. 1544 CC ® “En el arrendamiento de servicios, una de las partes se obliga a prestar a la otra un servicio por un precio cierto.” Examples: services rendered by professionals (lawyers, accounts, physicians…), artists and performers (actors, musicians…), sponsoring services, public relations services, among many others.
Some problems of distinction: labour contracts (art. 1 Estatuto de los Trabajadores), work for hire, mandate.
General features: - Obligation to perform an activity in the interest of the principal, without generally guaranteeing a specific result. (realizar la actividad en interés del principal) Obligation to perform the activity diligently. Duty of care. (realizar la actividad de manera diligente).
The service provider must perform the service: § with the care and skill which a reasonable service provider would exercise under the circumstances; and § in conformity with any statutory or other binding legal rules which are applicable to the service.
If the service provider professes a higher standard of care and skill the provider must exercise that care and skill (lex artis).
Lex artis may be found in standards defined by a professional board (deontological norms of conduct set by professional associations, such as a Bar Association [Colegio de Abogados]): If the service provider is, or purports to be, a member of a group of professional service providers for which standards have been set by a 125 relevant authority or by that group itself, the service provider must exercise the care and skill expressed in those standards.
In determining the care and skill the client is entitled to expect, regard is to be had, among other things, to: a) the nature, the magnitude, the frequency and the foreseeability of the risks involved in the performance of the service for the client; b) if damage has occurred, the costs of any precautions which would have prevented that damage or similar damage from occurring; c) whether the service provider is a business; d) whether a price is payable and, if one is payable, its amount; and e) the time reasonably available for the performance of the service.
Proof of a breach of services contracts usually will require evidence of negligence (lack of diligence) in the supply of said services. Proving that the result that was aimed by the client was not obtained will be insufficient to establish liability. [Demostrar que el resultado que fue dirigido por el cliente no se obtuvo será insuficiente para establecer la responsabilidad] These contracts are characterized by the client’s trust in the professional's expertise and the freedom of the professional in relation to how to achieve the intended result (the professional works, in principle, under his own direction and without being subject to the criterion of the client).
Guaranteeing a specific result Sometimes, however, a service provider may guarantee a specific result è Obligations of means (obligación de medios) /obligations of results (obligación de resultados) The supplier of a service must achieve the specific result stated or envisaged by the client at the time of the conclusion of the contract, provided that in the case of a result envisaged but not stated: a) the result envisaged was one which the client could reasonably be expected to have envisaged; and b) the client had no reason to believe that there was a substantial risk that the result would not be achieved by the service.
Grey examples: voluntary medical treatments, such as plastic surgery, dentists, sterilizations...
Unilateral termination of contracts with professionals: Contracts for services with professionals can be usually terminated unilaterally by the client, even in cases in which a particular term had been agreed with the parties during which the professional would be providing his services to the principal. In such cases, the client should compensate the professional reliance damages.
Professionals may also unilaterally terminate a contract for services if a just cause concurs (ex: professional’s lack of trust in his client).
Construction contracts Art. 1544 CC ® in the construction contract, the contractor (contratista) promises the principal (comitente) to execute a work in exchange for a price.
- The contractor not only undertakes to develop a diligent activity, but to obtain a useful result for the principal.
- Therefore, it is said that the work is made at the contractor’s risk (it assumes any costs before completing the work if the materials or the work itself is lost: see arts. 1589 and 1590 CC).
126 The central model is that of the real estate project (Proyecto inmobiliario), which is the paradigmatic reference in the CC regime and includes: - Construction of new buildings.
- Renovation, reforms, maintenance or demolition of buildings.
Other construction or work contracts: software contracts, technological implementation agreements, work for hire contracts, production contracts… The construction contract has a broader scope (alcance más amplio) than real estate projects. This may create problems of distinction, especially with sales contracts and services agreements.
Distinction criteria: - Fungible or non-fungible goods - Technical and economic independence.
- Remuneration by work or by time.
- Generic or specific considerations.
- Term of the contract.
They are valid indications, but the important element is the contract’s overall impression [impression general del contrato] Individuals involved: Parties to the agreement: § Principal or client (comitente.
§ Contractor (contratista) Other individuals who are not a party to the construction contract: the soil’s owner [propietario del suelo] (in case he is different from the principal); subcontractors; architect; developer; technical advisors… Frequent use of employees and independents agents and contractors (art. 1596 CC). Especially, of subcontractors (in whole or partially). Contractors are held liable for any damage caused by subcontractors in the scope of their employment (art. 1596 CC).
Art. 1596 ® “El contratista es responsable del trabajo ejecutado por las personas que ocupare en la obra.” Formalities ® no requirements Certainty of price Artículo 1544 ® “En el arrendamiento de obras o servicios, una de las partes se obliga a ejecutar una obra o a prestar a la otra un servicio por precio cierto.” The requirement of certainty of price has been understood by case-law (jurisprudencia) in a broad way. The construction contract would be deemed valid if the price can be determined ex post by resorting to: - Usage or custom [uso o personalización] Professional fees [tarifas profesionales] - New agreement by the parties [nuevo acuerdo entre las partes] - Assessment of the work by experts or third parties [evaluación del trabajo por expertos o terceras partes] - Assessment of the work by the judge [evaluación del trabajo por un juez] 127 In practice, when the price or its calculation formula have not been established in the contract, the cost-plus system of assessing the price (precio por administración) would be generally used: the real cost of executing the work is paid, plus the industrial profit expected by the contractor (usually an extra amount equal to a percentage of the costs, between 15% and 17%, depending on the industry).
Different systems for price determination: a) Flat-fee (ajuste o precio alzado): o Lump sum (suma global) for the entire work as a whole or for each piece or part thereof.
o It is indifferent that the price is broken down by items and that anticipated payments are made in advance.
o Principle of invariability of price, although with some nuances (art 1593 CC ® “The architect or contractor [...] cannot demand a higher price even if the costs of wages or materials have increased, but can do so when there have been changes in the project that have expanded the work, as long as the principal had authorized it”).
b) Cost-plus (por administración): o The price is fixed at the end according to the effective cost of labor and materials, as well as the industrial profit.
o Does not prevent anticipated payments.
c) Price per part or per unit (por unidad o medida): o The price is established per unit or per part, whether homogeneous or not.
o This system is not presumed simply because the principal is obliged to make payments in advance or to pay against presentation of temporary work certifications [o a pagar contra la presentación de certificaciones de trabajo temporal] o If the work is done by parts, and it is not agreed otherwise, the contractor may require that the work is received by the principal in different parts and that payments are to be made proportionally (art.
1592, which is an exception to the rule of indivisibility of payment set forth in article 1169 CC).
128 Price revision ® given the complexity of some work contracts, it is accepted that price revision clauses are agreed, in any of the systems for price determination available for construction contracts.
Modifications of the work ® modification of any aspect in the order, even for technical reasons, requires the authorization (express or tacit) of the principal.
Price increase ® in cases in which modifications of the work involve a higher final price, such increase must be borne by the principal, unless it is due to: § A correction of constructive defects.
§ Remedying a loss due to a force majeure event [como un terremoto, por ej.] § Remedying foreseeable technical impediments at the time of concluding the contract [Remediar los impedimentos técnicos previsibles en el momento de la celebración del contrato.] § Remedying non-technical impediments that the contractor is responsible for.
Anticipated payments Principle of prior provision ® the principal is not obliged, in principle, to pay before the completion and delivery of the work.
- Principle of payment in proportion to what has already been done in the works by parts or by units.
The above principles are not mandatory and therefore can be overridden by the parties. In practice, it is usual to establish anticipated payments in advance or partial payments, especially after the certifications of work issued by the technical directors of the work [especialmente después de las certificaciones de trabajo emitidas por los directores técnicos del trabajo]: - Final or definitive certifications (although they may be partial) - Provisional certifications (parties may agree that they are sufficient to make payments obligations due).
- Contractor’s obligations: i.
Executing the works according to the commissioned project by the principal and according to the professional diligence (lex artis).
Warning the client of any risks of the project’s feasibility or the adequacy of the supplied materials.
Failure to inform the other party is deemed to be a breach of contract and would result in his liability even in cases of force majeure losses.
Supplying materials with the agreed quality standards and, in the absence of any agreement about this issue, supplying materials with reasonable quality in consideration of the work’s nature.
Executing the work within the agreed period; or otherwise, art. 1128 CC would apply (term established by a court).
Storage or custody of any accessories.
Delivery of the work: the contractor must make the finished work available to the client. This involves the passing of risks onto the client, as well as the possibility of claiming collection of the price (excluding any payments made in advance) [Esto implica la transferencia de riesgos al cliente, así como la posibilidad de reclamar el cobro del precio (excluyendo cualquier pago realizado por adelantado)] Delivery and reception In complex works, it is frequent that the delivery and reception of the work is more intricate: § Verification ® examination of the work to verify its conformity with the project or the agreement.
§ Approval ® acknowledgment that the work has been correctly executed.
129 § Reception ® provisional or final, total or partial. Objections may be made for minor defects.
Effects of reception: reception of a work involves conformity with the contractor’s performance: the client acknowledges that the work has been executed in accordance with the agreement and, therefore: o Any claims arising from apparent defects and other appreciable non-performances are cancelled.
o Any claims arising from hidden defects, from breach of contract or for ruin are not extinguished.
o It involves an ex post authorization of any changes or enlargements in the works made by the contractor.
o Computation of guarantee terms begins [Empieza el cómputo de los términos de garantía] Principal’s obligations: i.
Cooperating with the contractor for the effective execution of the work.
Paying the price.
Unilateral withdrawal (retiro unilateral) by the principal (art. 1594 CC): The principal may withdraw from the contract at will (a voluntad). In such case, the principal must pay an award of damages to the contractor, covering all his expenses, work and utility. Withdrawal does not become effective until the principal does not compensate the contractor, but the contractor may decide to paralyze the works upon knowing about the withdrawal. Integral compensation of the contractor's interest: § Damage to the contractor must be proven (expenses incurred and work done).
Profit ® the agreed one and, if not proven, the usual one in the industry (~15%).
+ Mitigation of hold-up risks (mitigación de los riesgos de retención) Civil liability for construction defects Source ® Spanish Construction Act: Ley 38/1999, de 5 de noviembre, de Ordenación de la Edificación Issue at stake: A developer transfers the property of the apartments to purchasers, by either sale contracts or construction contracts. Once the new owners have the possession of the apartments, property damages to the building appear as a result of construction defects (ex: elevated humidity levels, leaks in the building due to defects in the waterproofing of isolation elements, or cracks in the walls of the building due to structural problems) ® Are the owners of the building entitled to bring a lawsuit against the agents involved in the building process (ex: developer, architect, builder)? The first buyer, who bought the apartment to the developer, sells the apartment some years later to a third party. After the sale is concluded and ownership transferred to the purchaser, property damages to the building appear due to construction defects. In this scenario, is the developer liable for the damages arising from construction defects? Main building agents intervening in the building process a) Developer (promotor) Concept ® The developer is “any person or private or public legal entity who, individually or collectively decides, impulses, programmes and finances, with own resources or someone else’s, the construction works for herself or in order to transfer them afterwards” (art. 9.1 Construction Act).
130 - Developer: decides all the important aspects of the construction process hires the builder and the architects who will execute the construction works.
Afterwards, the developer sells the apartments to the consumers.
Broad definition ® it includes not only professionals (usually firms specialized in the real estate market) but also developers that aimed at building a house for themselves (autopromotores).
Non-profit organizations are also included in the developer definition provided by the Construction Act.
This is the case of housing cooperatives, non-profit organizations that develop the construction works in other to transfer the property of the apartments to its members [las organizaciones sin fines de lucro que desarrollan las obras de construcción en otro para transferir la propiedad de los apartamentos a sus miembros].
b) Builder (constructor) The builder is “the agent that enter into a contract with the developer and commits to execute with her own or someone else’s human and material resources, the works or part of them, according to the project and the contract specifications” (art. 11.1 Construction Act).
c) Project architect (proyectista) The project architect is the “agent who, commissioned by the developer and subject to the technical and town-planning regulation, draws up the project” (article 10.1 Construction Act) which has to be delivered “with the necessary permits” [article 10.2.b) Construction Act].
d) Architects: Construction manager and execution manager The construction manager (director de la obra) and the execution manager (director de ejecución de la obra) command the construction process. The distinction between both professionals stems from the specific functions each of them performs within the works.
- The construction manager “directs the development of the works in the technical, aesthetic, townplanning and environmental aspects, according to the project, the building permit and other necessary authorizations…” (art. 12.1 Construction Act).
- The execution manager is “the agent who assumes technical management and qualitative and quantitative control of the work’s execution” (art.13.1 Construction Act).
Protection of purchasers: different potentially applicable liability regimes Three different liability regimes that potentially apply to the protection of purchasers: Arts. 1101 and ff. and 1124 of the CC ® buyer’s remedies against the seller for breach of sales contract.
§ Art. 1591 of the Civil Code ® owner’s remedies against the developer and other construction agents for damages due to construction defects.
Applicable to constructions with building permit applied for before the entry into force of the Act, that is, before 6th May 2000 § Arts. 17 and 18 of the Construction Act ® owner’s remedies against the developer and other construction agents for property damages in the building due to construction defects.
§ Liability regime in Construction Act: arts.17 and 18 131 Art. 17.1 Construction Act states that ® “Notwithstanding the contractual liabilities, the person or legal entity that take part in the construction process will be liable to the owners and acquirers of the buildings in whole, or part of it in case of division, for the (…) property damages occasioned in the building within the indicated periods, starting from the date of reception of the works without objections or starting from the date in which those objections are repaired (…)”.
Scope of compensation for damage in Construction Act: property damages affecting the building Property damages ® The plaintiff (demandante) will only be able to claim, according to the liability regime of the Construction Act, property damages caused to a building by the defects mentioned in art. 17.1. That is, the cost of fixing the defect and other property damages caused to the building.
[El demandante solo podrá reclamar, de acuerdo con el régimen de responsabilidad de la Ley de Construcción, los daños a la propiedad causados a un edificio por los defectos mencionados en el art. 17.1. Es decir, el costo de reparar el defecto y otros daños a la propiedad causados al edificio].
Therefore, the Act excludes from its scope: A. Property damages different to those caused to the building, such as: o Damages for loss of personal properties located inside the building (art.19.9.c) or the contiguous or adjoining immovable property [Daños por pérdida de propiedades personales ubicadas dentro del edificio (19.9.c) o la propiedad inmueble contigua] o Indirect expenses arisen of the defects: cost originated by the need of moving from the apartment affected by the defects to a new one, such as replacement cost of dwelling (rents paid by the plaintiff to the landlord during the fixing works).
o Lost profits: lost earning in commercial activities.
B. Personal injuries and pain and suffering suffered by building occupants or third parties [Lesiones personales y dolor y sufrimiento sufrido por los ocupantes del edificio o terceros].
Kind of defects § § § Art. 17.1 Construction Act distinguishes three liability regimes or sets of remedies with different limitation guarantees taking into consideration different kinds of defects. The three types are: o Structural defects o Habitability defects o Execution defects Defects need to be discovered within the respective periods of guarantee.
Dies a quo ® date of reception of the building without objections, or the date in which the objected issues were rectified.
a) Structural defects: 10 years This kind of the defects are the less likely to appear in the building, because they also are the more serious ones.
Two requirements are necessary: - Property damages in the building should arise from defects in cementation, supports, beams, floor structure, contention walls and other structural elements; and - These defects directly affect the mechanic resistance and stability of the building. In other words, they might probably cause the collapse of the building.
132 The Construction Act compels the developer to buy an insurance policy aim to cover the renovation works in the building due to structural defects during the ten-year period of guarantee.
b) Habitability Defects: 3 years The second kind of defects comprises those deficiencies affecting constructive elements or facilities that cause a breach of the requisites of habitability mentioned in art. 3.1 c) Construction Act (“Hygiene, health and environment protection, in such a way that acceptable conditions of salubrity and the airtightness in the building and around it, an adequate treatment of all kind of residues is guaranteed; Protection against noise, when noise does not threaten people’s health; Energy saving and thermal insulation, in order to achieve a rational use of the energy necessary to use the building adequately; …”) c) Execution Defects: 1 year Liability of the builder “for damages caused by defects of execution which affect external furnishing elements” during one year.
According to the Construction Act: - Builder will be the only agent held liable for property damages due to defects in the execution of the works which affect finishings, (art. 17.1.2nd Construction Act).
- However, the developer will be held jointly and severally liable with the builder for property damages in the building caused by execution (art. 17.3 in fine).
Statute of limitation for indemnification recovery ® 2 years [Estatuto de limitación para la recuperación de indemnización] Liability regime General rule ® Personal liability rule The Act establishes the personal liability rule for each agent of the construction process. In other words, liability is personally and individually assessed for the breaches of their specific duties (art. 17.2 Construction Act).
Arts. 10 to 15 of the Construction Act provide with a list of obligations for each of the construction agents that take part in the construction process.
Exceptions to the general rule: joint and several liability Art. 17.3 Construction Act excludes this rule in favor of joint and several liability in the following cases: § When it is impossible to individualize causation in property damages –liability from unknown events.
§ When it is impossible it is impossible to establish individual contribution to negligent breach of duties.
§ The developer “is held jointly and severally liable with the other agents for property damages in the building caused by construction defects suffered by eventual acquirers” (art. 17.3 in fine). The Construction Act holds the developer strictly liable without resorting to any standard of diligence.
Art. 17.3 Construction Act in fine (en la parte final) characterizes the developer as an unconditional guarantor in front of acquirers for the good conditions of the building.
The joint defendant who has paid in excess of her share of the damages can seek contribution from other defendants or sue them for indemnification of her costs, according to art. 17.3 and 7 Construction Act. [La parte demandada que pagó más de su parte de los daños y perjuicios puede solicitar la contribución de otros acusados o demandarlos por indemnización de sus costos, de conformidad con el art. 17.3 y 7 de la Ley de construcción] 133 ...