The Contents of the Contract
Once the contract[1] is validly concluded, the second stage of its life begins: the parties have to perform in conformity with what they promised. Fortunately, this does not pose a problem in the great majority of cases; the parties doing what they should do will automatically lead to the extinction of their respective obligations. However, the law also needs to provide rules for those cases in which problems do arise. It can be that the parties are in disagreement about what they actually agreed upon
1- Interpretation
The law shares with literature and theology the characteristic that it is an interpretative discipline: legislative statutes, governmental decisions, treaties, and written contracts may be unclear and therefore have to be interpreted. In contract law, this interpretation often takes place implicitly, even without the parties realizing it.
2- Reasonable Person
All European jurisdictions adopt a compromise between attaching importance to intention and declaration. As a general principle, interpretation is aimed at ascertaining the meaning that the text would convey to a reasonable person having the same knowledge that would have been available to the parties at the time of the contract. The contract is thus interpreted in the way in which a reasonable person would understand it. Civil law and common law reach this result from two different perspectives. In civil law countries, the subjective intention of the parties is the starting point: in case of a dispute, the meaning that a reasonable man in the position of the party would give to this intention is decisive. In English law, it is rather the objective meaning of the words of the contract that is given preference, although this is also mitigated by what is reasonable. This is reflected in Art. 5:101 PECL: 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 it is established that one party intended the contract to have a particular meaning, and at the time of the conclusion of the contract the other party could not have been unaware of the first party’s intention, the contract is to be interpreted in the way intended by the first party. 3. If an intention cannot be established according to (1) or (2), the contract is to be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.
3. Unfairness of Contract Terms
3.1- Fairness and Reasonableness
An eternal question of contract law is whether only «fair» contracts should be enforced. Until well into the nineteenth century, an important strand of thought was that without some equivalence among the performance and counter-performance, a contract of sale would not be valid.
3.2-Procedural Unfairness
Contract law is impregnated with devices that aim to avoid so-called procedural unfairness. Such unfairness exists if a party is not able to form its will in a manner that is sufficiently free. If Amy holds Clint at gunpoint while telling him to sign a document, every jurisdiction would allow Clint to invalidate the contract for threat (cf. Art. 4:108 PECL). And if a 4-year-old were to buy a Roman artifact from the online store of an Amsterdam antique dealer, his parents could invalidate the contract for incapacity (see 7 Sect. 3.3).
3.3- Threat and Incapacity
Threat and incapacity lead to an avoidable contract because the law presumes that the will of a party could not be formed in the right way. Other applications of such procedural fairness are fraud and mistake. In the case of the latter, a party contracts under an incorrect assumption: it can be under the impression that it buys a secondhand car in excellent shape, although it is, in reality, a death trap. While it is clear that this affects the proper formation of the party’s intention to buy, it is less clear what this should lead to. The law has to find a balance between the duty of the buyer to investigate for himself what shape the car is in and the duty of the seller to inform the prospective buyer about possible defects. Each jurisdiction balances these interests in a different way.
3.4-General Conditions
It was already noted (in 7 Sect. 2) that many professional parties make use of general conditions. This poses a problem for the fairness of consumer contracts in particular. In practice, consumers that are confronted with these standard contracts cannot influence their contents (assuming they are able to understand them at all) and have to decide either to accept the general conditions or not to enter into the contract at all. Here, too, it is possible for the law to intervene on the basis of deficiencies in the formation of the contract, holding that—as Lord Bingham stated in the English decision of Director General of Fair Trading v. First National Bank (2001) in a case about consumer credit—the contract terms «should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. (…) Fair dealing requires that a supplier should not (…) take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, and weak bargaining position (…)». However, practice shows that safeguarding procedural fairness may not be enough, particularly in the case of standard form contracts. Preceded by statutes in many individual Member States, the European legislature therefore issued Directive 93/13 on unfair terms in consumer contracts, allowing courts to hold a standard clause in a contract invalid «if, contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations under the contract». This test of substantive fairness invites the court to consider the actual contents of the contract, even if its formation did meet the necessary standard. While testing the substantive fairness of general conditions is now daily practice in the national courts of the European Union, this is different from the part of the agreement that the parties explicitly discussed. If Rafael is unequivocally clear about his intention to sell his Ferrari to Roger for only a tenth of its actual value but subsequently realizes that he has entered into a disadvantageous agreement, he cannot go back on his promise arguing that this contract is manifestly unjust.
The notion of good faith (fairness and reasonableness) referred to in Directive 93/13 is well known in civil law countries, to such an extent that it is often seen as a principle that permeates the entire law of contract or is even, as was once remarked, the «queen of rules». The English judge Lord Bingham excels in describing the principle: «In many civil law systems, and perhaps in most legal systems outside the common law world, the law of obligations recognizes and enforces an overriding principle that in making and carrying out contracts parties should act in good faith. This does not simply mean that they should not deceive each other, a principle that any legal system must recognize; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as «playing fair», «coming clean» or «putting one’s cards face upwards on the table». It is in essence a principle of fair and open dealing (…)». This fair and open dealing implies that parties have to take into account each other’s legitimate interests, not only in interpreting the contract (which should take place in a reasonable way: see 7 Sect. 4.1) but also in supplementing the party agreement with duties to give information to, and cooperate with, the other party. In countries like Germany (§ 242 BGB) and the Netherlands (Art. 6:248 s. 2 BW), the principle is even used to limit the exercise of contractual rights, namely, where it would be grossly unfair to invoke a contractual provision.
3.5 Prohibited Contracts
Despite the prevalence of the principle of freedom of contract, parties are not free to enter into any contract whatever its contents. Every legal system places limits on the freedom of contracting parties by declaring contracts void if they are contrary to law, public order, or morality. If Marjolein were to sell nuclear arms to a terrorist group or if Jens were to agree to act as a hired assassin in return for a sum of money wired to his Swiss bank account, not many would doubt that these contracts interfere with the public interest and should not be enforced. The same is true for agreements among companies to divide the market among themselves and to refrain from competition. Other cases, however, give rise to more doubt. One problematic category of cases is where it is not necessarily apparent to the other party that the contract is concluded to engage in illegal activity.
If I were to buy a knife in a nearby supermarket with the aim of killing my neighbor, it is not likely that I will tell the seller about this motive. But if the other party should reasonably know about my intentions, one can argue that this contract should be void as well. Another type of case is where sensible persons would doubt the extent to which the contract violates public order or morality. This is, in particular, problematic if one would like to base one’s decision on a notion of shared European values, such as Art. 15:101 PECL suggests. This provision states «A contract is of no effect to the extent that it is contrary to principles recognized as fundamental in the laws of the Member States of the European Union». If Xaviera borrows money to set up a brothel, it is not likely that all European countries share one view on the validity of this contract. But even within one country, views can differ on what should be recognized as fundamental. Does it violate human dignity if Manuel, who is 25 years old and 114 cm tall, is employed in a discotheque by allowing himself to be thrown short distances onto an airbed by clients (so-called dwarf-tossing)?
[1] – Introduction to Law , Jaap Hage &Antonia Waltermann & Bram Akkermans , Second Edition – The Law of Contract
