Go to Database Directory || Go to Bibliography
Search the entire CISG Database (case data + other data)

Saggi, Conferenze e Seminari 22. Reproduced with permission of Centro di studi e ricerche di diritto comparator e straniero, diretto da M.J. Bonell

An American Perspective on the Unidroit Principles

James Gordley
Roma (May 1996)

  1. Contract Formation
    1.1    Consideration
    1.2    Promissory Reliance
    1.3    Preliminary Negotiations
    1.4    Discrepancies Between Offer and Acceptance
  2. The Effect of a Writing
  3. The Statute of Frauds
  4. The Parol Evidence Rule
  5. Contracts to Use Best Efforts and Contracts that Guarantee a Result
  6. Conclusion

One purpose of the Unidroit Principles is "to serve as a model for national and international legislators."[1] I will describe several ways in which they could be a good model for legislators and courts in the United States.

1. 1. Contract Formation

The principles do not contain anything like the American doctrines of consideration and promissory reliance. They provide instead: "A contract is concluded, modified or terminated by mere agreement of the parties, without any further requirement."[2] I approve the results that American courts have reached applying the doctrines of consideration and reliance. Yet, paradoxically, these results could be reached more simply by applying the Principles.

The Principles apply to commercial contracts. Therefore, we need only consider how the doctrines of consideration and promissory reliance apply to them and not how they apply to promises of gifts.

The principal function of the doctrine of consideration in commercial settings has been to police the fairness of contracts. According to this doctrine, contracts in which the promisor receives nothing in return for his promise are unenforceable. Frequently such contracts are unfair. When they are not unfair, as we will see, American courts have used the doctrine of promissory reliance to enforce them despite the absence of consideration. The more straightforward approach would be to enforce any agreement unless [page 1] it is unfair. That is the approach of the Unidroit Principles. There are no special requirements for contract formation but, under Article 3.10(1) of the Principles, "a party may avoid the contract" if it "unjustifiably gave the other party an excessive advantage."

1.1. Consideration

It once would have seemed strange to say that the function of the doctrine of consideration in a commercial setting is to prevent unfairness. The meaning of the doctrine, according to Anglo-American jurists of the 19th and early 20th centuries, was that as long as the parties had made a bargain, the law would enforce their contract whether or not it was fair. That was how they interpreted the ancient maxim, "the common law will not consider the adequacy of consideration." As I have shown elsewhere, this maxim had typically been invoked in cases that had little to do with the enforcement of hard bargains.[3] Nevertheless, according to 19th century jurists such as Joseph Story, the maxim meant that "whether [a party's] bargains are wise and discreet or profitable or unprofitable or otherwise, are considerations not for courts of justice but for the party himself to deliberate upon."[4] Sir Frederick Pollock explained consideration by quoting Thomas Hobbes to the effect that the just price was any price which a party chose to give.[5]

The courts used the doctrine, however, to strike down transactions that were unfair because a party received nothing in return for what he gave. The courts said there was no bargain, and hence, no consideration. Increasingly, we have recognized not only that the courts use this doctrine to prevent unfairness but that it is a crude tool. [page 2] Because it is a crude tool, American law has already been moving toward the Unidroit approach of asking directly whether a contract is unfair.[6]

An example is the treatment of output and requirements contracts. One party agrees to sell all he makes or to buy all he needs of a particularly commodity from the other at a fixed price. If there are no limits to how much one party could force the other to buy from him or sell to him, the arrangement is seriously unfair. Courts used the doctrine of consideration to invalidate such contracts on the ground that a party who binds himself to sell or buy as much as he pleases does not really bind himself, and so gives up nothing in return for the other party's promise.[7] The doctrine was a crude tool for preventing unfairness, however, since a draftsman could make an unfair output or requirements contract binding by specifying that a certain minimum amount must be sold or bought. Consequently, the Uniform Commercial Code replaced the common law with a more sophisticated solution: the output or requirements in question must be those that "occur in good faith" and "no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded."[8]

Another example is the treatment of modifications of the contract after it is made. Sometimes these modifications can be seriously unfair. For example, knowing he can exploit the other party's need to have construction work finished on time, a builder might refuse to proceed unless he is promised more money for the same [page 4] work he has already contracted to perform. Traditionally, courts said there was no consideration because the party who was already bound to complete the work had given up nothing extra in return for the promise of increased compensation.[9] Again, the use of this doctrine was a crude tool for preventing unfairness. A draftsman could make an unfair modification binding by adding some insignificant burden to the work that had previously been undertaken. Moreover, if circumstances have changed sufficiently, it might be fair to ask for increased compensation for the same work.[10] Consequently, the Uniform Commercial Code provides that a modification of a contract to sell goods is binding without consideration unless it is made in "bad faith."[11] The Second Restatement of Contracts provides that a modification is binding without consideration if it is "fair and equitable in view of circumstances not anticipated by the parties when the contract was made."[12]

Another example is the treatment of options, irrevocable offers, and other arrangements in which one party is bound if the other chooses. They may unfairly allow one party to speculate at the other's expense.[13] Traditionally, American courts said there was no consideration for an option or a promise to hold an option open because the party who was not bound had given up nothing for the other's promise. Again, the tool was a crude one. A draftsman could make an unfair option or offer binding by requiring that the other party [page 4] pay a small sum for it. Moreover, such arrangements may not be unfair.[14] One party may have to spend time and money deciding whether to contract, and he may be unwilling to do so unless the other party first commits himself. And the chances for the party who is uncommitted to speculate at the committed party's expense may be small. Recognizing that these arrangements were sometimes fair and useful, American courts traditionally enforced them even when the "consideration" was a trifling amount thrown in to make them binding. But then, the problem was how to deny enforcement when they were unfair. The Second Restatement of Contracts urges the courts to take fairness directly into account. They should uphold the option given for a trifling sum if it "proposes an exchange on fair terms within a reasonable time."[15] The Uniform Commercial Code provides that a promise not to revoke an offer to sell goods is binding for up to three months.[16] An Official Comment notes that an unfair option could still be struck down if it is "unconscionable."[17]

In these cases and others like them, courts initially did not acknowledge that they were using the doctrine of consideration to prevent unfairness. In the late 19th and early 20th centuries, to be concerned about fairness seemed paternalistic. Today, as these examples illustrate, American jurists recognize that if the doctrine is to prevent unfairness effectively, courts cannot apply it without taking direct account of whether a contract is fair.

At that point, however, the doctrine of consideration seems to lose its identity. My colleague Melvin Eisenberg has concluded that [page 5] we would do well to abandon the requirement of consideration in commercial contracts and merely ask if a contract is unfair. He points out that today, it is generally acknowledged that courts can refuse to enforce a harsh bargain on the grounds that it is "unconscionable." Therefore, we no longer need the doctrine of consideration to invalidate unfair requirements and output contracts, modifications of terms, options, and the like.[18] We ought to say, as the Unidroit Principles do, that all commercial contracts are enforceable unless they give one party an excessive advantage.

1.2. Promissory Reliance

If American courts did abandon the requirement of consideration, they would also find that they no longer need the doctrine of promissory reliance in commercial contracts. According to this doctrine, a promise without consideration is enforceable if the promisee changed his position in reliance upon it and so suffered some disadvantage.[19] The doctrine was originally supposed to apply to gratuitous promises.[20] Nevertheless, as Jay Feinman and Stanley Henderson have shown, the doctrine has been used far more frequently to enforce promises in a commercial setting.[21] Moreover, as Daniel Farber, John Matheson, Edward Yorio and Steven Thel have shown, most often courts allow the promisee to recover without proving he relied on the promise.[22] [page 6]

The reason, I have argued, is that the courts are using promissory reliance to enforce promises that lack consideration but which are not unfair because performing the promise is virtually costless.[23] Sometimes the promise was made to the other contracting party to a contract but it lacked consideration because it was made after the contract had already been concluded. Examples are the promise of one who sold or held a security interest in property to insure it for a brief period or at the promisee's expense,[24] or the promise of a railway to file papers with a government agency so that the promisee could receive a rebate.[25] In other cases, consideration was lacking because the promise was made to a third party involved in a transaction rather than to the party who was paying the promisor. Examples are the promise of a senior creditor to give notice of the debtor's default to a junior creditor,[26] or the promise of a general contractor to write checks payable to his subcontractor's supplier rather than to the subcontractor.[27] In these cases, the court did not ask for proof that the promisee changed his position in reliance. Indeed, in many of them, it is hard to see what the promisee could have done differently if the promisor had refused to make a promise. It seems reasonable to conclude that courts give relief, not on account of reliance, but because promises such as these place no great burden on the promisor and so raise no concerns about fairness. The courts invoke the doctrine of reliance simply to escape the effect of the doctrine of [page 7] consideration, a step which would not be necessary if there were no doctrine of consideration to escape. The simplest way to reach the same results would be the approach of the Unidroit Principles: to enforce commercial agreements without regard to consideration or reliance as long as they do not give one party an unjustifiable advantage.

1.3. Preliminary Negotiations

In the United States, as in Europe, a party is sometimes held liable for his conduct during negotiations even though no final agreement was reached. Despite extensive discussion, the basis for liability is far from clear.

The Unidroit Principles contain a general provision that "a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party."[28] The Principles then clarify this area of law by identifying three instances in which a party will be held liable even if a final agreement has not been reached. In these three instances, courts in the United States and Europe actually have imposed liability, and, moreover, in each instance, the reason for doing so is clear. By identifying these instances, the Principles locate patches of firm ground in what threatens to be an intellectual swamp. The Principles could can assist American courts, not in reforming, but in clarifying American law.

First, according to the text of the Principles, a party is liable as long as both parties intended to conclude a contract even if they left other matters open for later agreement.[29] In addition, a party's expression of his intention "shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances."[30] Taken together, these [page 8] rules cover the many cases in which American courts,[31] and, for that matter, continental courts,[32] have imposed liability once the parties have made preliminary commitments. Sometimes the commitment is to the basic terms of the final contract. Sometimes the commitment is to attempt in good faith to reach agreement on the basic terms. Sometimes, the commitment is to abide by certain rules during negotiations: for example, to consider all bids or to award a contract to the lowest bidder. But, in all cases of this sort, a reasonable person in the plaintiff's position would have understood the defendant to have made a commitment.

Second, the Principles provide that "[i]t is bad faith for a party to enter into or continue negotiations when intending not to reach an agreement with the other party."[33] Again, in such a situation, continental courts have typically imposed liability.[34] In American law, such a party would be liable for fraud for misrepresenting his intentions.[35]

Third, the Principles provide that "[w]here information is given as confidential by one party in the course of negotiations, the otherparty is under a duty not to disclose that information or use it improperly for his own purposes."[36]

Again, American [37] and continental courts [38] have allowed an action in such cases. [page 9]

These three situations are not only common instances of liability for conduct during negotiations but instances in which the basis of such liability is transparently clear. In the first situation, a party is liable for failing to honor a commitment; in the second, for misrepresenting his intentions; in the third, for improperly appropriating information for his own purposes. Liability seems to rest on the ordinary principles of contract, tort, and unjust enrichment, respectively. The Principles dispel confusion by specifically mentioning these situations.

The contribution to clarity would have been still greater had the Principles confined liability to these three situations. They do not. They speak of a general duty to negotiate in good faith.[39] Indeed, according to Comment 3 to Article 2.15, "a party may no longer be free to break off negotiations abruptly and without justification."

Nevertheless, the Principles also say that "[a] party is free to negotiate and is not liable for failure to reach an agreement."[40] Therefore, a party who wishes the court to go beyond the three situations specifically mentioned in the Principles cannot merely point to the other party's refusal to reach agreement. Presumably, he must point to some special reason why the refusal is a breach of good faith. One wonders how often he will succeed. If the party who broke off negotiations made no commitment express or implied, misrepresented nothing, and did not enrich himself at the other party's expense, it is hard to see a reason why he should be held liable. If he is held liable, then as E. Allan Farnsworth has cogently argued, it is hard to see a principled way to limit liability. People would be afraid to negotiate [page 10] for fear they would be held liable simply for doing so.[41] Indeed, as Farnsworth points out, while continental courts have spoken of a duty to negotiate in good faith, they have rarely imposed liability except in the three situations just described.[42] In my view, even the rare cases in which they seem to have done so really involve one of these situations if one looks closely.[43] So does the illustration in Comment 3 to Article 2.15 of the Principles: A is liable if he "assures" B of the grant of a franchise if B has changed his position significantly "always with A's assurance that B will be granted the franchise." It certainly sounds like a commitment.[44]

1.4. Discrepancies Between Offer and Acceptance

It frequently happens that each party signs his own printed form, and the terms on these forms conflict. The traditional common law [page 11] approach was to insist that the offer and acceptance exactly match. If they did not, each conflicting form was not an acceptance of the previous one but a counter-offer. Each counter-offer was rejected in turn by the next conflicting form. A contract was not made until the last party to receive a form did some act which was deemed to be a tacit acceptance of the "counter-offer" of the other party: for example, he shipped or accepted the goods. The last party to send a document -- to fire the "last shot" -- therefore obtained a contract on his own terms.

Both the Uniform Commercial Code and the Unidroit Principles reject that approach. Both provide that the parties may form a contract even if terms in the "acceptance" differ from those in the "offer."[45] Both provide that deviant terms in the acceptance become part of the contract if they do not materially alter it and the other party does not object.[46]

Nevertheless, the Uniform Commercial Code and the Principles disagree about what happens if the terms materially differ. Here again, in my view, the advantage is with the Unidroit Principles. According to the Principles, "a contract is concluded on the basis of the agreed terms and of any standard terms which are common in substance." Americans call this a "knock-out rule." Opposing terms cancel each other, leaving the judge to supply terms that are reasonable. The Uniform Commercial Code is much more confusing. The first paragraph of Section 2-207 suggests that terms that materially alter the contract are proposals for additions to the contract. In that case, according to the second paragraph, they do not become part of the contract. Therefore, it would seem, the contract has been accepted on [page 12] the terms of the original "offer." The battle of the forms is now won by the party who fires the "first shot."

That result seems to be as arbitrary as to give the victory to the party who fires the "last shot." So courts have often tried to avoid it. They have tried to bring a case within the third paragraph of Section 2-207. That paragraph does contain a knock-out rule. But its relationship to the other paragraphs is mysterious. It says that "conduct by both parties which recognizes the existence of a contract" will form a contract "although the writing of the parties do not otherwise establish a contract." It adds: "In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplemental terms incorporated under any other provisions of this Act."

Thus this third paragraph seems to exist in the hyperspace of science fiction writers. There is no way with current technology to get there from ordinary space. According to the first and second paragraphs of Section 2-207, unless one of the parties objects, terms in an "acceptance" that vary those of an "offer" belong to the contract if the variation is non-material and do not belong if the variation is material. It is hard to see how any cases are left to fall within the knock-out rule of the third paragraph.

To apply a knock-out rule, some have seized on what seems to be an instance of careless drafting. The first and second paragraphs speak of "terms additional to or different from" the initial proposal, but paragraph two speaks only of "additional" terms. Ingenious courts have claimed that the knock-out rule of paragraph three therefore applies to terms that are "different" rather than "additional."[47] Since [page 13] there is no way to determine when a term is "different" rather than "additional," this interpretation allows courts to apply the knock-out rule whenever they are so inclined.

It would be better if the Uniform Commercial Code simply contained a knock-out rule like the Unidroit Principles. The "first shot" rule of paragraph two is no more sensible than the traditional "last shot" rule. The knock-out rule recognizes that parties should not be bound by terms to which they have not consented, and that they have not consented to terms simply because they were mailed a printed form that conflicts with their own printed form. American courts should be able to apply the knock-out rule without having to hide behind a meaningless distinction between terms that are "different" and those that are "additional."

2. The Effect of a Writing

In American law, two special doctrines concern the effect of a writing memorializing the contract: the statute of frauds, and the parol evidence rule. The Unidroit Principles contain no analogs to them. Again, I think the advantage is with the Unidroit Principles.

3. The Statute of Frauds

The statute of frauds was enacted in England in 1677. It provided that no action may be brought on certain contracts unless they are in writing. Among these transactions are contracts for the sale of interests in land, contracts for the sale of goods for more than a certain price, contracts not to be performed within one year of the time they are made, and promises to answer for the debt of another.[48] Such provisions are typical of the versions of the English statute in force in [page 14] most American states.[49] As to these transactions, the statute of frauds requires memorandum in writing, which need not be a formal contract, which is signed by the party against whom the promise is being enforced, though it need not be signed by the party enforcing it.

In contrast, according to the Unidroit Principles, a contract must be in writing only if one of the parties insists.[50] A party can therefore always protect himself by making a well evidenced demand for a written contract. But the question whether the contract should be in writing is answered by the parties themselves with regard to their own circumstances since they decide whether to make such a demand. The statute of frauds, in contrast, tries to list the types of contracts that should be in writing. Again, I prefer the Unidroit approach. The American experience shows the inherent difficulty of making such a list. When the courts have tried to make the list clear, they have succeeded only at the cost of making it artificial. When they have tried to make it fair, they have succeed only at the cost of making it unclear and subject to exceptions that defeat the purpose of preventing fraud.

Courts bought clarity at the price of artificiality when they interpreted the provision that contracts not to be performed within one year must be in writing. How is a party to know when he contracts whether the performance will actually take more than a year? For the sake of clarity, courts held that a contract must be in writing if, by its terms, it cannot be performed within a year. Examples are contracts that specify a thirteen months as the time period for a lease, an employment contract or a loan. In contrast, a contract that does not specify a time period of greater than a year need not be in writing even [page 15] though it is unlikely or even physically impossible for the contract to be completed within a year.[51] And so we arrived at the artificial result that a contract for thirteen months of labor must be in writing but not one for lifetime employment or for the construction of a multi-million dollar building.

Similarly, contracts to sell interests in land must be in writing. For the sake of clarity, courts interpreted this provision to apply to any interests in land. Again, the results are artificial. The statute makes no distinction between large transactions and small, and so the sale of swamp or desert for an insignificant price must be in writing. Moreover, an enormous variety of rights are regarded as interests in land in common law. The distinction between those rights that do and do not count as interests in land is extremely technical. Nevertheless, the courts have, in general, looked to the common law of property to determine when the statute applies.[52] So the statute applies to easements, such as the right to cross someone else's land, and to leases,[53] although many states have made an exception for very short-term leases.[54] But a lifetime pass to an amusement park would not count as an interest in land and so need not be in writing.

In contrast, the courts sacrificed clarity to prevent unfairness when they interpreted the provision that promises to answer for the debt of another must be in writing. They have held that it does not apply to when a person who has acquired property promises to pay a debt secured by a mortgage or security interest on that property in order to preserve the property from the debtor's creditors. Moreover, they have held that it does not apply when the promisor has a financial interest in the debtor's affairs and promises to answer for his debt in [page 16] order to give him a breathing space. The scope of these exceptions is not clear. They are usually said to fall within a "main purpose rule" that exempts promises from the statute when the "main purpose" of the promisor is to pursue his own financial interests.[55] Not only is this rationale unclear but it does not apply in all cases. The promise must be in writing if the promisor receives a premium in return for making it even though then his "main purpose" seems to be his own financial interest.[56]

In the case of sales of goods worth more than a certain amount, the requirement of a writing is now contained in the Uniform Commercial Code which sets the amount at $500.[57] Since no one would bother to sue with only $500 at stake, the practical result is that any contract worth a lawsuit must be in writing. One can see why the drafters of the Code did not choose a larger figure. If they had chosen $10,000 or $50,000 the results in practice would have been quite arbitrary. A contract for $8,000 is roughly as important as one for $12,000, and its real importance to the parties will turn on the size of their businesses. By choosing as they did, however, the drafters of the Code in effect conceded the point that has become obvious in interpreting other sections of the statute of frauds. There is no non-arbitrary way to specify the contracts that ought to be in writing.

In many circumstances, however, a blanket rule like this will be unfair because the parties might not think a writing is necessary. To prevent unfairness, the drafters recognized a number of exceptions. But the exceptions undermine the capacity of the rule to prevent fraud.

Thus the Code provides that a merchant is liable on a contract he has not signed himself provided he receives a written confirmation and [page 17] does not object in writing within ten days.[58] It preserves another exception recognized by the American, though not the English, case law. The statute will not void an oral contract for specially manufactured goods not suitable for sale to others when the seller has made a substantial beginning in manufacturing them or has committed himself to procure them.[59] If party wished to commit fraud, however, it would be comparatively easy for him to claim that he sent a written confirmation or to begin manufacture of goods or to make a commitment to procure them.

To prevent people from using an exception to commit the very fraud the rule is supposed to prevent, one would have to create exceptions to the exceptions. It is difficult to do so coherently. But in any case, the result may then be to recreate the injustice the original exception was supposed to avoid. Before the Code was enacted, most American courts had held that by way of exception, a writing was not necessary if the buyer had actually received part of the goods or paid part of the purchase price. The drafters of the Code recognized that this exception facilitated fraud since the delivery or payment proves that there was a contract but not the quantity or the price. Consequently, they limited the exception by allowing the contract to be enforced only with respect to the goods which have been delivered or for which payment has been made.[60] They thereby reintroduced one of the very injustices which the original exception prevented, for it [page 18] might be clear from the very fact of delivery, that a contract had been concluded for much more than the amount delivered and that, because of sudden swing in the market price, the buyer had every incentive to breach it.

There is only one non-arbitrary criterion for when a contract should be in writing: when it is serves the parties' needs to evidence that transaction. The Unidroit Principles leave that question to the parties themselves. The American experience shows that the task of codifying the circumstances in which a writing serves their needs is frustrating and never ending.

4. The Parol Evidence Rule

Not to be confused with the statute of frauds is the parol evidence rule. The statute of frauds requires certain types of contracts to be expressed in writing if they are to be enforceable. The parol evidence rule provides that if a contract is put in writing, evidence of prior or contemporary agreements, whether written or oral, an sometimes be excluded.

For the parol evidence rule to apply, the parties must have adopted a written contract as a final expression of all or part of their agreement. If it was to express all of the terms of their agreement, the contract is "completely integrated." In that case, according to the parol evidence rule, no evidence can be admitted of any terms of the agreement that are not contained in the writing but are within its scope.[61] If the written contract was adopted as a final expression of [page 19] part of the parties' agreement, it is "partially integrated." Evidence is admissible to prove that the parties agreed on additional consistent terms. No evidence is admissible to prove that the parties agreed on an inconsistent term.

The Unidroit Principles, in contrast, specify only one case in which a written agreement "cannot be contradicted or supplemented by evidence of prior statements or agreements": when there is a merger clause, that is, a "clause indicating that the writing completely embodies the terms on which the parties have agreed."[62] Here, as before, the approach is enable a party to protect himself by insisting on such a clause but not to protect him otherwise.

As before, the American experience shows the advantage of the Unidroit approach. American courts have encountered a dilemma trying to determine whether a writing is partially or completely integrated when the writing itself does not speak to that issue.

According to one approach, developed by Samuel Williston and enshrined in the First Restatement, the court should ask whether the writing would "naturally" have omitted the prior agreement in question. If so, evidence as to the prior agreement is admissible.[63] Thus the court decides whether to admit evidence of the prior agreement by looking at the later written agreement, without considering whether the prior agreement was actually made. The trouble is that to determine what terms the parties meant to include in the later written agreement, it is often important to know whether they [page 20] actually made the prior agreement. The Williston approach requires the court to guess the meaning of the later written agreement while excluding evidence relevant to its meaning. The reason is supposedly to prevent fraud. But, on the basis of this guess, the parole evidence rule can exclude even the most cogent evidence--oral or written--of the prior agreement.[64]

Opposed to this approach is another, associated with Arthur Corbin.[65] To determine whether a written contract was intended to be fully or partially integrated, a court must consider all the relevant evidence, including evidence that a prior agreement was made. Evidence of the prior agreement may therefore be heard to decide if the writing was intended to be fully or partially integrated, even though, if it was so intended, the court will then refuse to allow this evidence to be used to contradict or supplement the writing.

At present, the more liberal Corbin approach seems to be triumphing, although not everywhere.[66] The Uniform Commercial Code excludes extrinsic evidence only if "the court finds the writing to have been intended as a complete and exclusive statement of the terms of the agreement."[67] That provision has been thought to reflect Corbin's view that the written contract should prevail only to the extent the parties so intend.[68] The Restatement Second 210(3) and Comment b provides that in determining, as a "preliminary question," [page 21] whether an agreement is completely or partially integrated, the court must consider "any relevant evidence" and "wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties. "[69]

The trouble with this approach is that it leaves very little reason for preserving the parol evidence rule as a distinct rule of law. It does little to prevent fraud. A party can invent a course of negotiation and have the evidence admitted to help the court determine whether a writing is completely or partially integrated. Moreover, one does not need a special rule, cast in terms of "completely integrated" and "partially integrated" agreements, to tell us that the parties are free, if they wish, to make a later agreement that supercedes a prior agreement. If the parol evidence rule simply gives effect to the intention of the parties, then all the rule asks us to do is to consider whether the parties meant their agreement on Tuesday to supersede one made on Monday. One might as well scrap the rule and just let the parties present evidence as to what their agreements mean.[70]

Moreover, in the interests of fairness, courts have carved out so many exception to the parole evidence rule that one wonders if it would prevent fraud even by the strict approach of Williston and the First Restatement. Evidence of trade usage,[71] and of the parties' course of dealing [72] or course of performance [73] is admissible, according to some courts, as long as it does not contradict the written contract,[74] [page 22] and according to others, even then.[75] Moreover, the rule does not exclude evidence of false statements that would ground a tort action for misrepresentation.[76] Consequently, in all states, evidence of intentional misstatements is admissible, and in those states in which negligent and innocent misstatements will ground such an action, evidence of them may be admitted as well.[77] Generally speaking, any misstatement of a presently existing fact made at the time the contact was entered into can therefore be admitted. If a party intends not to perform at the time he contracts, this intention has been held to be a presently existing fact, the misrepresentation of which constitutes "promissory fraud."[78] Some courts have found "promissory fraud" when an oral promise was fraudulently made to induce the other party to sign a written contract that contradicts the oral promise.[79] A party who proves fraud may have the agreement rescinded, although he will not be able to have it enforced.[80] [page 23]

Thus, as in the case of the statute of frauds, the American experience suggests the difficulties of providing more protection for the parties than they have sought for themselves.

5. Contracts to Use Best Efforts and Contracts that Guarantee a Result

The Principles also clarify the circumstances in which a party can escape liability if he fails to perform. They accept a distinction between two basic types of contracts that was drawn initially by the French jurist Demogue. In one type, a party has a "duty of best efforts": he is not liable if he makes "such efforts as would be made by a reasonable person of the same kind in the same circumstances."[81] In the other type of contract, a party is obligated "to achieve a specific result." In that case, he "is bound to achieve that result,"[82] but he escapes, nevertheless, if he proves force majeure, that is, if he proves "that non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."[83]

In my view, the Principles have found the clearest way of describing results that nearly every legal system reaches in practice.

Roman law distinguished between initial and subsequent impossibility. The Principles expressly reject this distinction. They state: "The mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract."[84] They thereby remove a perpetual source of confusion. [page 24]

In Roman law, if a performance was initially impossible, a party was excused if the performance was, as later jurists put it, objectively impossible, impossible for anyone.[85] If a performance subsequently became impossible, a party was liable only if he was at fault. Sometimes fault meant lack of ordinary care. Other times fault meant what medieval lawyers called culpa levissima: the failure to use exactissima diligentia, the most scrupulous diligence. In that event, to be excused, a party had to prove what the Romans called vis maior and what later jurists called force majeure: an accident that the most scrupulous care could not have prevented.[86]

Over the centuries, jurists have tried unsuccessfully to make sense of this distinction. Yet it must have had little practical significance. It really doesn't matter much whether, to escape liability, I have to prove that, initially, performance was impossible for anyone or that, subsequently, it became impossible for almost anyone to perform. It is simpler, as the Unidroit Principles do, to speak merely of impediments beyond one's control.

The failure of the Romans to do so has obscured the underlying similarity of the excuses for non-performance recognized by modern legal systems. It is often said that in French law, liability in contract depends on fault whereas in common law it does not. The reason seems to be that the French jurists borrowed and generalized the Roman rule about subsequent impossibility, while the common lawyers borrowed and generalized the Roman rule about initial impossibility. The results are much the same.

In France, Article 1137 of the Civil Code rested liability on fault. The drafters claimed they were rejecting the Roman distinction [page 25] among degrees of fault.[87] And yet Articles 1147-48 said that a party who does not perform can escape liability only by proving cas fortuit or force majeure, the French terms that correspond to the Roman vis major. Nineteenth century French jurists sloughed over the contradiction.[88] Then, Demogue suggested the formulation used today by most French jurists and by the Unidroit Principles: there are obligations de moyens and obligations de résultat. In the first case, one is liable for failure to use ordinary care, in the second case, for failing to reach a result unless one can prove force majeure.[89]

Common lawyers took the opposite course. They denied that liability depends on fault but borrowed and generalized the Roman rule that excuses a performance that is objectively impossible. In 1863, in Taylor v. Caldwell, Judge Blackburn applied that rule when a music hall burned down after the defendant had contracted to provide it for a performance.[90] Max Rheinstein noted that Blackburn must have been following civil law,[91] and, indeed, both before and after the decision, common lawyers such as Powell, William Story, Leake, Pollock and Williston stated the rule as a civil lawyer would: performance was excused by events that made it absolutely or objectively impossible but not merely impossible for the promisor.[92] [page 26]

The German Civil Code retained the Roman rule about initial impossibility. Due to the influence of the 19th century conceptualists, however, the Code scrapped the notion of culpa levissima in the case of subsequent impossibility. In principle, a party is liable only for lack of ordinary care.[93] And yet, as German scholars themselves have observed, the results in practice are similar to those reached in other legal systems.[94] According to the Code, if a party makes a Werkvertrag, a contract in which he promises to achieve a particular result, he has the burden of proving that he was not at fault if he fails to perform.[95] Courts and commentators have not allowed him to surmount this burden simply by proving that he used ordinary care. Even if he was without fault, he still cannot escape liability if he failed to perform because he lacked the financial resources to do so,[96] or materials were delivered to him late,[97] or his suppliers failed him.[98] The event that prevents performance must be one that the parties would not foresee or take into account at the time the contract was formed.[99] [page 27]

The Unidroit Principles, then, provide a clearer formulation of a distinction that is not only fundamental to American law but to other legal systems as well.

6. Conclusion

As I observed in a earlier article, one should not think that codifying or restating the law will automatically make it clearer. A code or a restatement, I argued, can be only as clear as the thought behind it.[100] It is a tribute to the thought behind the Unidroit Principles that they make these contributions to clarity. [page 28]


FOOTNOTES

1. The Unidroit Principles of International Commercial Contracts Preamble [hereinafter cited as Principles].

2. Principles Art. 3.2. Comment 1 to Art. 3.2 expressly rejects a requirement of consideration.

3. James Gordley, The Philosophical Origins of Modern Contract Doctrine (1991), 147-48, 151-54.

4. Joseph Story, Equity Jurisprudence as Administered in England and America 1 (14th ed., 1918), 337

5. Sir Frederick Pollock, Principles of Contract (1885), 172.

6. See Melvin Eisenberg, "The Principles of Consideration," Cornell Law Review 67 (1982), 640; Melvin Eisenberg, "The Responsive Model of Contract Law," Stanford Law Review 36 (1984), 1107, 1112-17.

7. E.g., Wickham & Burton Coal Co. v. Farmers' Lumber Co., 179 N.W. 417 (Iowa, 1920).

8. Uniform Commercial Code 2-306(1) (1990) [hereinafter cited as U.C.C.].

9. E.g., Lingenfelder v. Wainwright Brewery Co., 15 S.W. 844 (Mo. 1891) (no consideration for a promise to pay more to an architect who threatened to stop work); Alaska Packers' Ass'n v. Domenico, 117 F. 99 (9th Cir. 1902) (no consideration for a promise to pay more to sailors who threaten to stop work during a voyage).

10. As noted in Restatement (Second) of Contracts 73 cmt. c (1979); Eisenberg, "Principles" 644-47.

11. U.C.C. 2-209(1) cmt. 2 (1990).

12. Restatement (Second) of Contracts 89(a) (1979).

13. As noted Restatement (Second) of Contracts 41 cmt. f (1979).

14. Eisenberg, "Principles" 649-55; James Gordley, "Enforcing Promises," California Law Review 83 (1995), 547 at 599.

15. Restatement (Second) of Contracts sec. 87(1) (1979) (also requiring the option to be in writing and signed).

16. U.C.C. 2-205 (1990).

17. U.C.C. 2-205 cmt. 4.

18. Eisenberg,"Principles" 641-47.

19. Restatement (Second) of Contracts 90 (1979).

20. Gordley, "Enforcing Promises" 563-69.

21. Jay M. Feinman, "Promissory Estoppel and Judicial Method," Harvard Law Review 97 (1984), 678 at 691 n. 59; Stanley D. Henderson, "Promissory Estoppel and Traditional Contract Doctrine," Yale Law Journal 78 (1969), 343 at 343-44, 352.

22. Daniel A. Farber & John H. Matheson, "Beyond Promissory Estoppel: Contract Law and the `Invisible Handshake,'" University of Chicago Law Review 52 (1985), 903 at 904, 909-10; Edward Yorio & Steve Thel, "The Promissory Basis of Section 90," 101 Yale Law Journal 101 (1991), 111 at 152-60.

23. Gordley, "Enforcing Promises" 582-90.

24. E.g., Dalrymple v. Ed Schults Chevrolet, Inc., 380 N.Y.S.2d 189 (App. Div. 1976), aff'd, 363 N.E.2d 587 (N.Y. 1977); East Providence Credit Union v. Geremia, 239 A.2d 725 (R.I. 1968); Siegel v. Spear & Co., 138 N.E. 414 (N.Y. 1923).

25. Carr v. Maine Cent. R.R. Co., 102 A. 532 (N.H. 1917).

26. Miles Homes Division of Insilco Corp. v. First State Bank, 782 S.W.2d 798 (Mo. Ct. App. 1990).

27. United Elec. Corp. v. All Service Elec., Inc. 256 N.W. 2d 92 (Minn. 1977).

28. Principles Art. 2.15. Similarly, Art. 1.7(1) provides that "[e]ach party must act in accordance with good faith and fair dealing" and Comment 1 to that article explains that they must do so during "the negotiation process."

29. Principles Art. 2.14.

30. Principles Art. 4.2(2).

31. E.g., Hoffman v. Red Owl Stores, 133 N.W.2d 267 (Wis. 1965). See E.Allan Farnsworth, "Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations," Columbia Law Review 87 (1987), 217 at 236-39.

32. See Hein Kötz, Europäisches Vertragsrecht 1 (1996), 53-55.

33. Principles Art. 2.15(3).

34. Kötz, Europäisches Vertragsrecht 52.

35. E.g., Markov v. ABC Transfer & Storage Co., 457 P.2d 535 (Wash. 1969). See Farnsworth, "Precontractual Liability" 233-36.

36. Principles Art. 2.16.

37. E.g., Matarese v. Moore-McCormack Lines, 158 F.2d 631 (2d Cir. 1946). See Farnsworth, "Precontractual Liability" 229-33.

38. See, e.g., Cass. com. 3 Oct. 1978, D. 1980.55; Ole Lando, "Danish Report," in Edward W. Hondius (ed.), Precontractual Liability Reports to the XIIIth Congress, International Academy of Comparative Law (1990), 120-21.

39. See note 28.

40. Principles Art. 2.15(1).

41. Farnsworth, "Precontractual Liability", 242-43.

42. Farnsworth, "Precontractual Liability", 239-40.

43. The two cases that go the farthest seem to be a seminal Dutch decision, HR 18 June 1982 (Plas/Valburg), NJ 1983 no. 723, and French case, Cass. comm., 20 March 1972 Bull. civ. IV, no. 93, J.C.P. 1973.17543.

In the Dutch case, a contractor submitted the lowest bid to construct a municipal swimming pool. The mayor and aldermen accepted his plans. But when his bid was submitted to the municipal council, for what was expected to be routine approval, at the initiative of one councilman, the project was given at a lower price to another contractor who had not previously submitted a bid. The Dutch court held the municipality liable on the grounds that when negotiations reach a certain point, neither party can withdraw without compensating the other for any losses he incurred, and when they reach a still further point, neither can withdraw without compensating the other for the loss of his bargain. But the decision itself can be explained on much narrower grounds. The city seems to have committed itself to follow certain rules during negotiations, rules which it then violated. And information contained in the plaintiff's bid may well have been passed on to the rival bidder who used it to prepare his own.

In the French case, the defendant was the sole distributor in France for an American company that made machines for the manufacture of cement pipes. It abruptly broke off negotiations to sell such a machine to plaintiff and sold one to plaintiff's competitor, promising when it did so not to sell a machine to anyone else in eastern France for two years. While the court held defendant liable for breaking off negotiations without a legitimate reason, it seems likely that the defendant misrepresented its intentions to contract.

44. Principles Art. 2.15 cmt. 3, illustration 4.

45. U.C.C. 2-207(1); Principles Art. 2.12.

46. U.C.C. 2-207(2); Principles Art. 2.12. A party can object afterwards or in advance, by indicating he will be bound only to the terms he proposed. U.C.C. 2-207(1) & (2); Principles Arts. 2.12; 2.22.

47. E.g., Gardner Zemke Co. v. Dunham Bush, Inc., 850 P.2d 319 (N.M. 1993); Diatom, Inc. v. Pennwalt Corp., 741 F.2d 1569 (10th Cir. 1984); Southern Idaho Pipe & Steel Co. v. Cal-Cut Pipe & Supply Co., Inc., 567 P.2d 1246 (Idaho 1977), cert. denied 434 U.S. 1056 (1978).

48. The statute also covered promises by executors and administrators to answer for damages out of their own funds and contracts upon consideration of marriage. Similar provisions are found in many state statutes.

49. See Restatement (Second) of Contracts 110 & statutory note to Chapter 5; U.C.C. 2-201.

50. Principles Art. 1.2 (Nothing in these Principles requires a contract to be concluded in or evidenced by writing"); Art. 2.13, if "one party insists that the contract is not concluded until there is agreement in a specific form, no contract is concluded before agreement is reached in that form").

51. Restatement (Second) of Contracts 130 cmt. a & Illustrations 2 & 5.

52. Restatement (Second) of Contracts 127.

53. Restatement (Second) of Contracts 127 cmt. b.

54. Restatement (Second) of Contracts 125(4).

55. Restatement (Second) of Contracts 116 (1979).

56. Restatement (Second) of Contracts 116.

57. U.C.C.  2-201.

58. U.C.C. 2-201(2)

59. U.C.C. 2-201(3)(a). The Code also provides that a party can also be held without a writing if he admits the existence of a contract in his pleadings or testimony in court. U.C.C. 2-201(3)(b). The current tendency is to interpret this provision to allow a plaintiff to bring suit on an oral contract in hopes that he can elicit an admission from the defendant rather than dismissing the plaintiff's action in summary proceedings. While this interpretation avoids injustice, it severely limits the advantage of invoking the statute of frauds.

60. U.C.C. 2-201(3)(c).

61. Courts are divided as to whether, when the agreement is silent, extrinsic evidence can be admitted to vary the term that would be read into the agreement as a matter of law. Compare Hayden v. Hoadley, 94 Vt. 345, 111 A. 343 (1920)(when no time of performance specified, performance must be made in a reasonable time, and oral evidence of a different agreement is inadmissible) with Marcus & Co. v. K.L.G. Banking Co., 122 N.J.L. 202, 3 A.2d 627 (1939)(an agreement that specifies no time for performance does not purport to be complete and therefore oral evidence of an agreement as to the time is admissible). For the view that the evidence is admissible, see Helen Hadjiyannakis, "The Parol Evidence Rule and Implied Terms: The Sounds of Silence," 54 Fordham Law Review 54 (1985), 35 at 68-77.

62. Principles Art. 2.17.

63. Samuel Williston, The Law of Contracts 4 (1920), 638, at 1039-42; Restatement (First) of Contracts 240(1)(b). For an example, see Mitchill v. Lath, 247 NY. 377, 160 N.E. 646 (1928)(evidence of agreement to remove an ice house excluded because it would "naturally" have been included in final contract).

64. This aspect of the rule is criticized by John E. Murray, Jr., "The Parol Evidence Rule: A Clarification," Duquesne University Law Review 4 (1965/66), 377 at 342-43.

65. Arthur L. Corbin, Corbin on Contracts 3 (St. Paul, Minn., 1963), 588 at 529; Arthur Corbin, "The Parol Evidence Rule," Yale Law Journal 53 (1944), 603.

66. A recent case taking the older approach is Mellon Bank Corp. v. First Union Real Estate Equity and Mortgage Investments, 750 F.Supp. 711 (W.D.Pa. 1990), aff'd, 951 F.2d 1399 (3d Cir. 1991).

67. U.C.C. 2-202(b).

68. Interform Co. v. Mitchell, 575 F.2d 1270, 1277 (9th Cir. 1978). See George I. Wallach, "The Declining Sanctity of Written Contracts--Impact of the Uniform Commercial Code on the Parol Evidence Rule, Missouri Law Review 44 (1979), 651.

69. Restatement (Second) of Contracts 210(3) & cmt. b (1977). But for doubts whether the victory is complete, see Murray, "The Parol Evidence Rule" 1350-72.

70. John E. Murray, Jr., "The Parol Evidence Process and Standardized Agreements Under the Restatement (Second) of Contracts," University of Pennsylvania Law Review 123 (1975), 1342 at 1348.

71. Restatement (Second) of Contracts 222 (1979); U.C.C. 1-205(2).

72. Restatement (Second) of Contracts 223 (1977); U.C.C. 2-208.

73. Restatement (Second) of Contracts 202(4)(1977); U.C.C. 2-208.

74. Southern Concrete Services, Inc. v. Mableton Contractors, Inc., 407 F. Supp. 581 (N.D.Ga. 1975), aff'd per curiam, 569 F.2d 1154 (5th Cir. 1978); Division of Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc. 2d 720, 304 N.Y.S.2d 191 (Sup. Ct. 1969), aff'd mem., 34 A.D.2d 618, 311 N.Y.S.2d 961 (1970).

75. Chase Manhattan Bank v. First Marion Bank, 437 F.2d 1040 (5th Cir. 1971)(despite written provision that subordination agreement lasts only 18 months, evidence admitted of trade usage or course of dealing to show it lasts until repayment of lead lender); Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971)(despite fixed quantity term in contract, evidence admitted of trade usage to show term could be adjusted because of market conditions).

76. Lusk Corp. v. Burgess, 85 Ariz. 90, 332 P.2d 493 (1958).

77. E.g., Wilburn v. Stewart, 110 N.M. 268, 794 P.2d 1197 (1990).

78. Lipsit v. Leonard, 64 N.J. 276, 315 A.2d 25 (1974); Sabo v. Delman, 3 N.Y.2d 155, 164 N.Y.2d 714, 143 N.E.2d 906 (1957). See Justin Sweet, "Promissory Fraud and the Parol Evidence Rule," California Law Review 49 (1961), 877.

79. E.g., Sherrodd, Inc. v. Morrison-Knudsen Co., 249 Mont. 282, 815 P.2d 1135 (1991); Dellcar & Co. v. Hicks, 685 F. Supp. 679 (D.C.N.D.Ill. 1988). For the contrary view that such evidence is not admissible, see General Motors Acceptance Corp. v. Marlar, 761 F.2d 1517 (11th Cir. 1985); United States v. Williard E. Fraser Co., 308 F. Supp. 557 (D. Mont. 1970); Bank of America v. Prendergrass, 4 Cal.2d 258, 48 P.2d 659 (1935).

80. Lipsit v. Leonard, 64 N.J. 276, 315 A.2d 25 (1975); Sabo v. Delman, 3 N.Y.2d 155, 164 N.Y.S.2d 714, 143 NE.2d 906 (1957).

81. Principles Art. 5.4(2).

82. Principles Art. 5.4(1).

83. Principles Art. 7.1.7(1).

84. Principles Art. 3.3.

85. See Dig. 45.1.137; Reinhard Zimmermann, The Law of Obligations Roman Foundations of the Civilian Tradition (1990), 687.

86. See Dig. 44.7.1.4; Dig. 13.6.18.pr; Zimmermann, Law of Obligations 192-97.

87. Bigot-Préameneu, "Exposé des motifs," in P. Antoine Fenet, Recueil complet des travaux préparatoires du Code civil 13 (1927), 230.

88. See Charles Aubry & Charles Rau, Cours de droit civil français d'après la méthode de Zachariae 4 (4th ed., 1869-1871) 308; Léon Larombière, Théorie et pratique des obligations ou commentaire des titres III & IV, livre III, du Code Napoléon art. 1101 à 1386 1 (1857), 541-42; François Laurent, Principes de droit civil français 16 (3d ed., l869-1878), 256.

89. René Demogue, Traité des obligations en général 5 (1921-33), 1237.

90. 3 Best & S. 826, 122 Eng. Rep. 309 (1863).

91. Max Rheinstein, Die Struktur des vertraglichen Schuldverhältnisses im anglo-amerikanischen Recht (1932), 175.

92. John Joseph Powell, Essay upon the Law of Contracts and Agreements (l790), 161; William Wentworth Story, A Treatise on the Law of Contracts Not Under Seal (3rd ed., l851), 463; Stephen Leake, The Elements of the Law of Contracts (London 1867); Pollock, Principles of Contract 356; Williston, Law of Contracts 1932.

93. BGB 276.

94. Manfred Löwisch in Staudinger, Kommentar zum Bürgerlichen Gesetzbuch (13th ed., 1994), no. 11 to 282. See Peter Schlechtriem, "Rechtvereinheitlichung in Europa und Schuldrechtreform in Deutschland, Zeitschrift für Europäisches Privatrecht 1 (1993), 217 at 228-29.

95. BGB 282.

96. Volker Emmerich in Münchener Kommentar zum Bürgerlichen Gesetzbuch (3d ed., 1995), no. 3 to 285; Löwisch in Staudinger, Kommentar no. 12 to 285; Frank Peters in J. von Staudinger, Kommentar no. 13 to 635.

97. Robert Battes in Walter Erman, Handkommentar zum Bürgerlichen Gesetzbuch (9th ed., 1993), no. 2 to 285.

98. Emmerich in Münchener Kommentar no. 3 to 285.

99. Emmerich in Münchener Kommentar no. 3 to 285; Peters in von Staudinger, Kommentar no. 10 to 635; Herbert Wiedemann, in Soergel, Kommentar zum Bürgerlichen Gesetzbuch (12th ed., 1990), no. 6 to 285.

100. James Gordley, "European Codes and American Restatements: Some Difficulties," Columbia Law Review 81 (1981), 140 at 156.


©Pace Law School Institute of International Commercial Law - Last updated December 14, 2009
Go to Database Directory || Go to Bibliography
Comments/Contributions