UNIT 1 (2014)Apunte Inglés
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UNIT 1: CONTRACTS AND COOPERATION. CLASSIFICATIONS OF CONTRACTS
1.1. Contracts as tools to promote economic cooperation. An outline of the legal origins
Jean Jaques Rousseau (1712-1778). Discourse on Inequality (1754) A Tale of Two Hunters: “If it was a matter of hunting a deer (cèrvol), everyone well realized that he must remain faithful to his post; but if a hare happened to pass within reach of one of them, we cannot doubt that he would have gone off in pursuit of it without scruple..” The Stag Hunt Game - If both hunters cooperate, they will have the bigger animal.
If only one cooperates to hunt the bigger animal, he’s not going to have it, and the other will only going to hunt a smaller one.
If both Nash equilibrium: the best strategy that a player may engage in taking into account the strategy followed by the other player.
- Equilibrium 1: Pay-off dominant (both cooperate) Equilibrium 2: Risk dominant (no one cooperate) What contract law does is to convey risk dominant situation to pay-off dominant situation.
Provide a tool for cooperation, move the two parts from a stage of no cooperation to a stage of cooperation. It helps to take mutual advantage of cooperation.
Other examples: Developer (D) is a highly skilled computer software programmer. He is specialized in videogames apps for iOs and Android.
Investor (I) has funds to invest in the marketing and advertising of apps or in other businesses.
If Developer and Investor cooperate they may end up marketing a successful videogame with profits of 20 u. If they do not cooperate: developer will market the videogame with fewer profits; and Investor will invest in a less profitable industry. If only one of them cooperates, he won’t be able to make any profits because the other party may try to appropriate all the possible revenues (for instance, investor copies the software illegally and markets himself without paying royalties).
- If both cooperate = successful video-game and profits.
If ones cooperate, the one who not cooperates takes 5 unite profits, and the other takes nothing.
If no one cooperates they have less profit and a less successful game.
Contract Law –the possibility of having a promised enforced- induces cooperation.
There are other factors that may be used to promote cooperation: - Kinship Altruism Reciprocity in long-term relationships, repeated iterance.
External enforcement mechanisms beyond the law: social norms, reputation, shaming, ostracism.
Contract Law as a coordination or cooperation device: Economic theory generally supports the idea that good legal institutions (clear and valuepromoting 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 profits are not immediate The investments require: o Rules that protect liberty, property and contract o Good, independent courts that enforce contracts and liberty and property, and by doing so encourage investments which are crucial for economic development.
However, causation may work both sides: - Economic growth is likely to increase demand for good legal rules and high quality courts or other institutions to enforce them.
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.
The empirical literature provides some support for the idea that a legal system of high quality encourages economic growth, but the specific causal channels remain unclear and much work is yet to be done.
Question: Is there a group or family of legal systems that may be deemed “better” or “more efficient”? Is there a group or family of legal systems that provides for more economic growth? “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 county’s law is highly correlated with economic outcomes or, in short, that common law is more efficient than civil law.
Basic summary of this literature: - Rafael La Porta, Florencio López-de-Silanes, and Andrei Shleifer, “The Economic Consequences of Legal Origins,” 46 Journal of Economic Literature 285(2008).
This literature has produced significant policy measures, essentially through World Bank-led or inspired projects and initiatives.
Public Policy Dimension: - http://www.doingbusiness.org/ - http://info.worldbank.org/governance/wgi/index.asp - http://worldjusticeproject.org/rule-of-law-index The legal origins literature 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 Substantial implications according to this literature: - Confirmation of efficiency hypothesis of the Common Law Judge-made law is more efficient than statutory law Common law courts are more effective in protecting individuals and firms from government’s bad behavior than civil law courts Results: - - 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).
Regression analyses show the effects of legal origins on important legal and economic variables both at o Micro level: financial markets, credit protection and contract enforcement, entry of firms, government ownership of banks and media labor markets, legal formalism, etc.
o Macro level: growth, development, rule of law, quality of judiciary 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: o 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 o Civil Law origin is linked to the reverse Criticisms or arguments challenging the legal origins theory: (1) Can Law and legal institutions be reliably measured? - How can you measure “constitutional acceptance of case law”, for instance? Or even “contract enforcement”? Is measuring “Law in the books” the same as measuring “Law in action”? (2) One-size-fits-all critique: - Legal systems are not monolithic: e.g., 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: - 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: the true explanatory variable is not legal origin but some other one correlated with the former - 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.
- Religion: closely linked to the cultural explanation above, but with an emphasis on religion, and religion-inspired social values and practices (Max Weber, Die protestantische Ethik und der Geist des Kapitalismus, 1906) - Politics is the key explanatory variable behind the identified diversified economic performance of countries: o Pro-government biases in given polities o Influence of social democratic grand policies deeply affecting the economy and the role of government at certain moments o Political views about the relationship between political power and Law: Courts as political actors; legal control of political power (5) History matters: - - 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 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 (6) Problems with econometric specifications (7) Correlations found do not ensure causality (8) Problems in explaining why some mixed legal systems, heavily influenced by Common Law,have not shifted to it (Quebec and Louisiana).
1.2. The “concepts of contract” - - As we have seen, a contract is a cooperative solution between two or more persons that helps them to maximize the welfare or surplus created by their cooperation.
Contractual surplus is created because they are able to 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 (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 honoured by 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 tribunal and sometimes enforce contracts. In case of illegal contracts, for example, selling drugs, you cannot go to the court even you have a contract, because the object is not legal.
Legal concept of Contract: - A contract is an agreement which is intended to give rise to a binding legal relationship or to some other legal effect.
Required elements of a contract would differ according to different legal systems. In Spanish Law (art. 1261 Civil Code): o Consent o Object o Cause/Function o (Formalities) Legal notions of contracts tend to emphasize: - Consent as the basis of contract Legal effects and legal enforceability “binding legal relationship” Pacta sunt servanda: basic principle of contract law. The binding character of a contractual agreement obviously presupposes that an agreement has actually been concluded by the parties and that the agreement reached is not affected by any ground of invalidity.
Spanish Contract Law: see articles 1091 and 1258 Civil Code - 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 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, Contracting, 2004).
- Economic approaches to contracts focus on these conditions: o Contract as a voluntary interaction: parties prefer to enter into the contract than an alternative (consent) o Contract determines future actions of parties o Contract sets future actions based on contingencies or future states of the world taking into account future conditions, adapt the present situation to the future (conditional: what if…?).
1.3. Roles of contracting Why do people enter into contracts? Contracts are entered into when they are mutually beneficial for both parties (Kaplow/Shavell, Contracting, 2004).
Ideally, the contract cannot be modified so as to raise the well-being—the expected utility— of each of the parties to it.
Examples of benefits that may be obtained by the parties and that serve as incentives to enter into a contract: - - - Differences in valuation: o Example: 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.
Advantages in production: o Example: 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.
Complementarity: o 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.
Giving and taking money on loan: o Example: a company may want to start a new project or an individual may want to buy a home. At the same time, individuals and other financial institutions that have cheaper access to capital may be interested in lending money and make a profit from loan interests. In those scenarios, a financial contract may be perceived as a mutually beneficial agreement between the parties and a tool to promote cooperation.
Risk assignment: o 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.
Different expectations: o 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 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.
1.4. Functions of Contract Law Legal systems usually have a group of norms that govern contracting between individuals, companies and other undertakings.
This group of norms, usually known as Contract Law, satisfies different functions: - To establish which agreements merit protection by the State and might be enforced by public authorities: o Formalities o Consent requirements o Validity requirements (v.g. in Spain, legal object and causa) - To reduce transaction cost o Supply of a catalogue of contracts o Default rules - To furnish interpretation rules it provides interpretation rules, it offer norms in order to understand how norms have to be used - 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.
- To establish remedies for breach (incompliment) in order to protect an aggrieved contract party when one part doesn’t do what he has said in the contract, the other part can go to the court and ask for it.
1.5. Sources of contract law (a) Spanish law: - Civil Code 1889 (http://www.mjusticia.gob.es) • Draft Bill Proposal for the Update of the Spanish Law of Obligations 2009 - Commercial Code 1885 (http://www.mjusticia.gob.es) • Draft Bill Proposal for a Commercial Code 2014 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 ComC) and sets of particular rules for each specific contract.
- Catalan Civil Code (gifts or donations) (http://civil.udg.es/normacivil/cat/ccc/Index.htm) - Special rules that govern some particular contracts: among others, urban leases, nonurban leases, agency contracts, agreements to create a company, administrative contracts, labor contracts.
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.
• Llei 7/1995, de 23 de març, de crèdit al consum.
• Llei 7/1996, de 15 de gener, d'ordenació del comerç detallista.
• Llei 7/1998, de 13 d'abril, sobre condicions generals de la contractació.
• Llei 28/1998, de 14 de juliol, de venda a terminis de béns mobles.
• Llei 42/1998, de 15 de desembre, de dret d'aprofitament per torn de béns immobles d'ús turístic i normes tributàries.
• Llei 38/1999, de 5 de novembre, d'ordenació de l'edificació.
• Llei 34/2002, d'11 de juliol, de serveis de la societat de la informació i de comerç electrònic.
• Llei 40/2002, de 14 de novembre, reguladora del contracte d'aparcament de vehicles.
• Llei 49/2003, de 26 de novembre, d'arrendaments rústics.
• Llei 59/2003, de 19 de desembre, de signatura electrònica.
• Llei 60/2003, de 23 de desembre, d'arbitratge.
• Reial decret legislatiu 8/2004, de 29 d'octubre, pel qual s'aprova el text refós de la llei sobre responsabilitat civil i assegurança en la circulació de vehicles de motor.
• Reial decret legislatiu 1/2007, de 16 de novembre, pel qual s'aprova el text refós de la llei general per a la defensa dels consumidors i usuaris i altres lleis complementàries.
• Llei 26/2007, de 23 d'octubre, de responsabilitat mediambiental.
• Llei 43/2007, de 13 de desembre, de protecció dels consumidors en la contractació de béns amb oferta de restitució del preu.
(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 (marco) for contracts of sale of goods between parties whose places of business are in different Member States.
The Convention has, as of June 2014, been ratified by 81 States, which come from all legal traditions, have very different economies, and together account for over two thirds of global commercial exchanges. It can be said to be a sort of balance between the civil law tradition and the common law one.
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 nonperformances. 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 (redactat) by an expert committee appointed in 1980. Revised in 1998 and 2002 (http://www.jus.uio.no).
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 useful to understand the main texts of modern contract law.
Each article in the PECL is accompanied by a commentary as well as with supplementary footnotes describing and surveying case-law and development in national jurisdictions.
The PECL aimed at strengthening (enfortiment) the single market and at facilitating crossborder trade (negoci) in Europe, by way of preventing or minimizing time, effort and other transactions costs.
- The Principles of International Commercial Contracts (PICC) of 2010 or UNIDROIT Principles (http://www.unidroit.org): 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 the Villa Aldobrandini in Rome. Its purpose is to study needs and methods for modernising, harmonising and co-ordinating private and in particular commercial law.
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. 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: Drafted by two groups of scholars: Study Group 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 (http://ec.europa.eu).
It has a more ambitious scope (abast) 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 such as the law of obligations, acquisition of property, trusts, unjust enrichment and others.
1.6. Classifications B2B: contracts between companies or businesses. Commercial transactions.
B2C: contracts between a business and a consumer. Consumer Law.
C2C: contracts between two individuals.
C2B: labour or employment contracts.
Traditional distinctions: (1) Onerous (those that involve a reciprocal exchange between parties) Gratuitous (one single transfer, ex. donation) (2) Bilateral (obligation for both parties) Unilateral (obligations for one of the parties, ex. donation) ...