Contract (Formation)

From Max-EuP 2012

by Martin Illmer

1. Term and systematic aspects

Contract formation describes the foundational step establishing a contract between two or more persons. Under all European and international legal regimes, the formation of a contract is the manifestation of a consensus by means of offer and acceptance.

Under the German Bürgerliches Gesetzbuch (BGB), the rules on formation of contracts are part of the doctrine of juridical act within the code's general part. Offer and acceptance are Willenserklärungen (declarations of intention), so that the general rules on Willenserklärungen apply to them. The Polish Kodeks cywilny (Polish Civil Code), the Portuguese Código civil, the Dutch Burgerlijk Wetboek (BW) and the Swiss Obligationenrecht (OR) (Swiss Code of Obligations) pursue a similar systematic approach (however, the rules are partly located in the general part of the law of obligations).

The older codifications, still dominated by the systematic patterns of natural law, such as the French Code civil (1804), the Belgian Code civil, the first Italian Codice civile (1865), the Spanish Código civil' '(1889) and the Austrian Allgemeines Bürgerliches Gesetzbuch (ABGB) of 1811, did not recognize a doctrine of legal act (which is a product of 19th-century German legal scholarship) and did not even contain any rules on the formation of contracts. Italian, Spanish and Austrian law later incorporated the concept of offer and acceptance into their codifications. In contrast, the French and Belgian Codes civils still do not contain rules concerning the formation of contracts (Art 1108 French Code civil addresses merely the prerequisites for the validity of a contract). The model of offer and acceptance was, however, developed through case law.

In the English common law, the rules on formation of contracts form part of the law of contract that is still mainly governed by case law. While contractual obligations were initially based on the concept of promise, the 19th century paved the way for the concept of contract and with its model of offer and acceptance.

The private law of the European acquis communautaire does not provide for a general regime for the formation of contracts. However, the requirement of formation of contracts is mentioned in Art 2(1) of the Distance Selling Directive (Dir 97/7) and reference is made to offer and acceptance in Art 1(3) and (4) of the Doorstep Selling Directive (Dir 85/577). The case law of the European Court of Justice (ECJ) presupposes the formation of contracts through offer and acceptance without further describing those concepts (ECJ Case C-96/00 – Gabriel [2002] ECR I-6367, para 48 f). The rules on formation of contracts in the Principles of European Contract Law (PECL), in the Aquis Principles and the Draft Common Frame of Reference (DCFR), had to be developed on the basis of the national laws of the Member States which regularly reached similar results despite the different systematic approaches.

2. Offer

An offer is explicitly defined in Art 2:201(1) PECL, Art II.-4:201(1) DCFR and Art 2.1.2 UNIDROIT Principles of International Commercial Contracts (PICC) as a proposal intended to result in a contract upon acceptance and containing sufficiently definite terms to form a contract. Most national laws do not define the term but presuppose it with similar content.

a) Intention to be legally bound and invitatio ad offerendum

Proposals to a larger group of persons or even the public in general pose the problem of whether they constitute offers (regularly ad incertas personas), or whether they amount only to an invitatio ad offerendum. The relevant criterion is the intention of the proposing person to be legally bound. This intention is ascertained objectively by determining whether the proposing party wants to enable the addressee(s) to conclude a binding contract by declaring his or their acceptance, or whether that party would rather want the addressee(s) to make offers which he may then choose to accept or decline.

While the answer will always depend on the individual circumstances of the case, the different national regimes have developed certain presumptions for the most typical situations. The marketing of products in advertisements, catalogues or displays in shop windows is regularly regarded as a mere invitatio ad offerendum under German, Italian and English law as well as under Art 14(2) CISG, whereas the display of goods in shop windows or elsewhere is regarded as an offer ad incertas personas under French and Swiss law (under Swiss law at least where prices are stated). Likewise, Art 2:201(3) PECL and Art II.-4:201(3) DCFR presume an offer in the case of marketing in advertisements, catalogues or display of goods, limited however to the number of items in stock.

Often there is a presumption of a mere invitatio ad offerendum if the proposing party wants to select his contractual partner according to the criterion of solvency, or if he wants to distribute his goods widely.

b) Specificity and dissent

To constitute an offer, the proposal of the offeror has to contain sufficiently definite and specific terms to form a contract (cf explicitly Art 2:201(1) PECL, Art II.-4:201(1) DCFR, Art 2.1.2 UNIDROIT PICC, Art 14 CISG and most national regimes). To meet that standard, it is, however, sufficient that the essentialia negotii of the respective contract type are either specified by the proposal itself or capable of being ascertained under the proposal. The requirement of specificity relates in particular to the subject matter of the contract and to the counter-performance. It is satisfied even in the case of a reservation of future specification or in the case of the right of one party to subsequently determine specific contract terms unilaterally (contractual terms, subsequent determination). Some legal regimes even provide for default rules applying in relation to unspecified essentialia (eg for the contract price: s 8 Sale of Goods Act 1979, Art 7:4 BW, Art 1474 Codice civile, Art 212 OR, Art 55 CISG). If the essentialia are not even capable of being ascertained, there is usually no consent between the parties, so that the formation of the contract fails. In contrast, accidentalia negotii that are unspecified or not regulated at all do not hinder the formation of contracts. Rather, trade practices, usage, implied terms, or statutory default rules determine the content of the contract in this respect. The requirement of specificity corresponds with the rules on dissent. According to the rules on dissent, a contract is concluded under most national regimes even if the parties have not agreed on every individual aspect as long as the points of disagreement concern immaterial aspects of the contract envisaged, unless one party has made the conclusion of the contract conditional upon an agreement on one of these aspects (cf German law via § 154 BGB, Dutch law via Art 6:225 BW, French, English, Austrian and Spanish law as well as Art 2:103 PECL, Art II.-4:103 DCFR).

c) Effectiveness, revocability and expiration of the offer

An offer made in the presence of the offeree (many legal systems apply the rule also to contract formation over the phone; cf § 147 s 2 BGB, Art 4(2) OR, § 862 s 2 ABGB) is effective once made, and it can only be accepted forthwith. Otherwise, it expires.

An offer made in the absence of the offeree only becomes effective once it reaches the offeree. Nearly all legal systems provide for the revocability of an offer until it has reached the offeree (cf § 130(1)2 BGB, Art 3:37(5) BW, Art 9(1) OR (even until the offeree takes notice of the offer), Art 2.1.3(2) UNIDROIT PICC, Art 15(2) CISG, Art 1:303(5), (6) PECL, Art II.-106(1), (5) DCFR. Usually, this applies also to the revocability of an acceptance). One of the core differences in European national systems on the formation of contracts is whether an offer that has become effective by reaching the offeree may still be revoked. While the offeror may indicate in the offer whether it shall be revocable or not (in English law irrevocability is only available for consideration), the differences relate to the statutory default rules. According to § 145 BGB an offer is irrevocable. The same rule applies in Swiss, Austrian and Portuguese law. In contrast, an offer is revocable under French, Italian, Spanish and English law as well as under Art 2:202 PECL, Art II.-4:202 DCFR, Art 2.1.4 UNIDROIT PICC and Art 16 CISG. Nevertheless, the revocation must reach the offeree before he dispatches his acceptance. While English law provides for revocability without requiring the revoking party to pay damages, French law imposes delictual liability in case of an abusive revocation (particularly revocation before expiry of a time limit set for acceptance by the offeror). The PECL, DCFR and UNIDROIT PICC go even further in providing for irrevocability if the offeror has fixed a time limit for acceptance, if the offeree was entitled to rely on the irrevocability of an offer, or if he has already acted upon such reliance (according to Art 2:202(4) DCFR these exceptions to revocability do not apply if the offeror had a right to withdraw under Books II or IV of the DCFR).

An offer also expires if the offeree rejects it (cf § 146 BGB, Art 2:203 PECL, Art II.-4:203 DCFR) or if the time limit fixed for acceptance expires (see 3. c) below). Whether the death of the offeror or offeree results in the expiry of the offer has to be determined in the light of the circumstances and the type of contract in question. While some legal systems contain a presumption that the offer does not expire upon the death of the offeror (see § 130(2), 153 BGB, Art 6:222 BW, § 862 ABGB), others presume the opposite (see Art 1329(2) Codice civile and English law once the offeree has become aware of the offeror’s death).

3. Acceptance

Acceptance is the unconditional assent to an offer. While an offer usually takes the form of an express statement, acceptance often takes other forms.

a) Acceptance by express statement

The main question arising in case of an acceptance by express statement is when the acceptance becomes effective, with the result that there is a binding contract. Is acceptance effective upon dispatch or upon reaching the offeror? The problem is less virulent with regard to contracts concluded by modern means of communication, such as fax and e-mail, since the time (if any) that passes between dispatch and receipt is very short.

Under Art 2:105(1) PECL, Art II.-4:205(1) DCFR and many national legal systems, acceptance becomes effective once it reaches the offeror (§ 862a ABGB, Art 224 Portuguese Código civil; § 130(1)1 BGB, Art 3:37(3) BW; likewise Art 2.1.6(2) UNIDROIT PICC and Art 18(2), 23 CISG). English law also takes the general position that the acceptance has to reach the offeror to become effective, but it provides for a very important and far-reaching exception in the form of the 'postal rule' (Adams v Lindsell (1818) 1 B & Ald 681 (KB); Henthorn v Fraser [1892] 2 Ch 27 (CA)). If acceptance is communicated by mail, it becomes effective with the dispatch of the letter. The contract is concluded even if the letter is lost on the way or reaches the offeror late. When using e-mail or fax, the postal rule applies only if the offeree could not be aware of the transmission failure. In any event, the postal rule does not apply if the use of the respective means of communication was unreasonable or if the offeror expressly stated that acceptance has to reach him to become effective. Hence, the postal rule is only a default mechanism. The current state of the law in France is not clear. Case law looks at the circumstances of the individual case. To meet a time limit for acceptance, mailing the acceptance in time will usually suffice. When a revocation of the acceptance reaches the offeror prior to the acceptance, the revocation is nevertheless valid, as under English law.

The interplay of the revocability of the offer and the effective date of the acceptance is apparent: if the offer is irrevocable, there is no need for protecting the offeree further by an early date when the acceptance becomes effective. Conversely, if the offer is revocable, it appears justified to put the offeree in a position where he can prevent a revocation by dispatching his acceptance. The PECL, DCFR and CISG promote an intermediate solution: although the acceptance does not become effective before it reaches the offeror, a revocation of the offer must reach the offeree before he has dispatched his acceptance.

b) Acceptance by conduct

A number of codifications, eg the BGB, ABGB, OR, Portuguese Código civil, Codice civile, Kodeks cywilny, as well as English and French case law recognize acceptance by conduct. The definition of acceptance in Art 2:204 PECL and Art II-4:204 DCFR envisages this explicitly: ‘[a]ny form of statement or conduct’ (likewise Art 2.1.6(1)1 UNIDROIT PICC). The time of acceptance varies. Usually, the acceptance is effective once the offeror becomes aware of the respective conduct. If, however, it is provided in the offer, or if it is accepted trade practice or usage between the parties, commencement of the respective conduct amounts to acceptance (Art 2:205(3) PECL, Art II.-4:205(3) DCFR, Art 18(3) CISG; see also § 151 BGB, § 864(1) ABGB, Art 1327 Codice civile, Art 234 Portuguese Código civil and Art 10(2) OR).

c) Time limit for acceptance and late acceptance

It is possible to fix a time limit for acceptance in the offer (cf § 148 BGB, Art 2:206(1) PECL, Art II.-4:206 DCFR). An acceptance after the expiration of the time limit is ineffective. If the offeror does not fix a time limit, the time for acceptance is fixed by statutory default rules. An offer made in the presence of the offeree can only be accepted immediately (cf Art 2.7 s 2 UNIDROIT PICC, Art 18(2)3 CISG, § 147(1) BGB). The express acceptance of an offer which was made in the absence of the offeree is effective only if it reaches the offeror within a reasonable time, taking into account the time required to assess the offer, to decide whether to accept it and to communicate acceptance to the offeror (§ 147(2) in conjunction with § 130(1)1 BGB, Art 6:221(1) in conjunction with Art 3:37(3) BW, Art 862 ABGB, Art 5 OR, Art 1326(2) Codice civile, Art 2.7 s 1 UNIDROIT PICC, Art 18(3)2 CISG, Art 2.206(2) PECL and Art II.-206(2) DCFR). The same rule applies under the English common law: under the postal rule it is sufficient to post the acceptance letter within a reasonable time. The same rule applies under French law. In case of acceptance by conduct, the offeror has to become aware of the respective conduct within a reasonable time. If acceptance by conduct requires only a commencement of the respective conduct (see 3. b) above), it suffices that such commencement takes place within a reasonable time (Art 2:206(3) PECL, Art II.-4:206(3) DCFR, Art 18(3) CISG; also implicit in most national laws).

Under some legal systems, late acceptance is effective if the offeror treats it as effective (Art 6:223(1) BW, Art 229(2) Portuguese Código civil, Art 1326(3) Codice civile, Art 2.207(1) PECL, Art II.-4.207 DCFR, Art 21(1) CISG). Various other systems (eg Germany, Austria, Switzerland, France and Belgium) do not provide for such an exception. Nevertheless, they reach a similar result by applying the rules on modified acceptance (see 3. d) below); the main difference between the two approaches is the time of the conclusion of the contract.

An acceptance that merely reaches the offeror with a delay, but was dispatched so as to reach the offeror in time, is effective if the offeror was aware or could have been aware of the reason for the delay and if he does not inform the offeree without undue delay that the acceptance was late (§ 149 BGB, Art 862a s 2 ABGB, Art 5(3) OR, Art 6:223(2) BW, Art 229(1) Portuguese Código civil, Art 67 Kodeks cywilny, Art 2:207(2) PECL, Art II.-4:207(2) DCFR, Art 21(2) CISG). Under English and French law, the problem does not usually arise since acceptance takes effect upon being dispatched.

d) Modified acceptance

A response that modifies the offer is regarded as a rejection of the offer and as a new offer for a contract with the modified content (Art 2:208(1) PECL, Art II.-4:208(1) DCFR, § 150(2) BGB, Art 6:225(1) BW, Art 233 Portuguese Código civil, Art 68 Kodeks cywilny, Art 19(1) CISG; likewise French and English case law) unless the modifications are immaterial and the accepting party has expressed assent to the offer despite the modifications (Art 2:208(2) PECL; Art II.-4:208(2) DCFR; Art 2.22(2) UNIDROIT PICC; Art 19(2) CISG; Art 6:225(2) BW, partly also German case law). In the latter case, the modifications become part of the contract. However, even in the case of immaterial modifications, the response is not regarded as an acceptance if the offer explicitly excludes such modifications, if the offeror objects to the modifications without undue delay, or if the offeree makes his acceptance conditional upon an assent of the offeror to the modifications and this assent does not reach the offeree within a reasonable time (cf Art 2:208(3) PECL, Art II.-4:208(3) DCFR). According to Art 6:225(2) BW, Art 2.1.11(2) UNIDROIT PICC and Art 19(2) CISG, the offeror has to object to the modifications without undue delay in any event.

e) Silence and commercial letters of confirmation

As a general rule, silence or inactivity does not in and of itself amount to acceptance (cf Art 2:204(2) PECL, Art II.-4:204(2) DCFR and Art 2.1.6(1)2 UNIDROIT PICC). Only Swiss law provides in Art 6 OR that the offeree has to reject an offer explicitly if an acceptance would be implied in the case of silence or inactivity due to the nature of the contract or the circumstances of the case.

Contrary to the general rule, however, silence may amount to acceptance in business-to-business transactions. This may follow either from express statutory provisions (see § 362 German Handelsgesetzbuch), or from trade practices or usage (rare instances of this alternative can be found in German, French, Italian and English case law).

A widely recognized instance of silence as acceptance in business transactions are commercial letters of confirmation (in Germany part of customary trade law; expressly regulated in Art 2:210 PECL, Art II.-4:210 DCFR and Art 2.12 UNIDROIT PICC). If businesses have concluded a contract (the PECL, DCFR and UNIDROIT PICC are limited to this situation), or have at least done so in the view of the confirming party (German, Danish and Finnish law also apply the rule to this situation), a letter sent to the other party specifying the content of the contract gives rise to such contract unless the recipient objects to the letter without undue delay. The contract is, however, not concluded if its content has been intentionally wrongly reproduced in the letter of confirmation (the PECL and DCFR are silent in this regard), or if it materially deviates from what was in fact previously agreed upon. Hence, letters of confirmation are treated like a modified acceptance under the PECL and DCFR while German law treats both cases differently.

f) Conflicting standard contract terms

Conflicting standard contract terms in offers and acceptances present a special problem in the formation of contracts which occurs in all legal systems. Is the contract validly concluded and, if so, under which terms? Although this will in the end depend on the circumstances of the individual case, two different solutions have been developed.

According to the last shot rule, the problem is solved by reference to the general regime of contract formation. An acceptance referring to the standard contract terms of the accepting party is regarded as rejecting the offer and making a new offer. The party that had made the first offer may accept that new offer, even impliedly by commencing performance under the envisaged contract. If, however, the party that made the first offer refers in its reply again to its own standard contract terms, this amounts to a rejection of the second offer and to yet another offer being made. Hence, the contract is either not concluded at all or it is concluded with those standard contract terms referred to in whatever offer has finally remained uncontested by the other party. The last shot rule applies in English and Scottish law. Dutch law, in contrast, provides for a first shot rule (Art 6:225(3) BW), so that it is regularly the standard contract terms of the offeror that apply.

According to the knock-out rule, the contract is, even in case of conflicting standard contract terms, concluded by acceptance if the parties have reached consensus apart from the conflicting standard terms. The standard contract terms of each party are only part of the contract to the extent that they are not in conflict. The conflicting parts are replaced by dispositive statutory provisions. The knock-out rule applies under the PECL, the DCFR, the UNIDROIT PICC as well as under German, Austrian and French law. It is also the prevailing view under the CISG (which lacks an explicit provision on the matter). Article 2:209(2) PECL and Art II.-4:209(2) DCFR provide for a slight modification: the contract is not concluded if one of the parties either expressly indicates in advance and in relation to the specific contract (not merely by way of its own standard contract terms) that it does not want to be bound by the contract in case of conflicting standard contract terms (German and Austrian law are similar in that respect), or if it informs the other party immediately after it has taken notice of the conflicting standard terms that it does not want to be bound.

4. Formation of contract beyond offer and acceptance

The question whether to base the contract on the traditional model of formation by offer and acceptance arises particularly in the case of the use of public services which allow direct unchecked access, eg in a parking lot or a bus. It appears somewhat odd to refer to a concurrence of wills in such cases where the parties have never communicated, but where instead one party simply makes use of a service generally offered by the other party. Like most national regimes, Art 2:211 PECL, Art II.-4:211 DCFR and Art 2.1.1 UNIDROIT PICC recognize the formation of a contract in ways other than by offer and acceptance in order to apply the traditional rules on formation by offer and acceptance with appropriate modifications. In most of these cases, one may, however, construe an implied offer and acceptance by the conduct of the parties. The distinction between implied offer and acceptance, on the one hand, and contract formation by other means than offer and acceptance, on the other, is a thin one. In any event, the rules on formation beyond offer and acceptance are merely of a residual character for situations that may not be explained by the traditional model.

Literature

Rudolf B Schlesinger (ed), Formation of Contracts: Study of the Common Core of Legal Systems, 2 vols (1968); Arthur T von Mehren, ‘The Formation of Contracts’ in IECL VII/1 (1991) ch 9, paras 19 ff, 50 ff, 112 ff; Tony Weir (tr), Hein Kötz, European Contract Law, vol I (1997) § 2; Helmut Köhler, ‘Das Verfahren des Vertragsschlusses’ in Jürgen Basedow (ed), Europäische Vertragsrechtsvereinheitlichung und deutsches Recht (2000) 33 ff; Peter Oestmann, ‘§§ 145–156. Vertragsschluss’ in Mathias Schmoeckel, Joachim Rückert and Reinhard Zimmermann (eds), Historisch-kritischer Kommentar zum BGB, vol I (2003); Karl Riesenhuber, Europäisches Vertragsrecht (2nd edn, 2006) § 13; Filippo Ranieri, Europäisches Obligationenrecht (3rd edn, 2009) chs 2–4; Nils Jansen and Reinhard Zimmermann, ‘Contract Formation and Mistake in European Contract Law—A Genetic Comparison of Transnational Model Rules’ (2011) 31 Oxford J Legal Stud, issue 3; Rodolfo Sacco, ‘Formation of Contracts’ in Arthur S Hartkamp and others (eds), Towards a European Civil Code (4th edn, 2011) 483; Edwin Peel, Treitel on the Law of Contract (13th edn, 2011) ch 2.

Retrieved from Contract (Formation) – Max-EuP 2012 on 15 August 2022.

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