The Binding Effect of a Party’s Promise in Contract Law
In the Principles of European Contract Law (PECL)
Pacta sunt servanda
A party to a contract must be able to rely on the other party keeping his part of the bargain. The binding character of contracts is therefore a basic principle in all countries. All the legal systems in the European Union vigorously uphold this principle. The obligation to comply with the terms and conditions of contracts is implied in Article 1:102 of the Principles of European Contract Law, which proclaims freedom of contract, and in other articles, such as Article 6:111 on changes in circumstances, which provides that a party is bound to fulfil his obligations even if performance becomes more onerous (see below).
The desire to become legally bound
The legal systems seem to concur in the view that an agreement only becomes a binding contract if the parties have intended to become legally bound. Even when it has been accepted, a dinner invitation is morally but not legally binding. Further, the parties must have agreed on terms which are sufficiently definite. This also seems to be a common core of all European systems of contract law and is prescribed in Article 2:101 of the Principles of European Contract Law.
However, under common law as well as German, Dutch and Nordic law, it is not what a party intends in his inmost mind that binds him. People are bound by what they say, not by what they think. For this reason, Article 2:102 of the Principles of European Contract Law provides that the intention of a party to be legally bound by contract is to be determined from the party’s statements or conduct as they were reasonably understood by the other party. The decisive point is the reasonable expectation of the recipient of a declaration of intent.
This principle of good faith is also behind the rules on the authority of agents. In accordance with German and Nordic law, Article 3:201 of the PECL provides that the principal’s authorisation of an agent to act in his name may be express or may be implied from the circumstances. A person is to be treated as having granted authority to an apparent agent if the person’s statements or conduct induce a third party reasonably and in good faith to believe that the apparent agent has been granted a power of attorney.
Form and cause
Several of the systems based on Roman law require writing as a condition for the validity of contracts and stipulate that the contract must have a cause. However, in German and Nordic law, neither a specific form nor a cause are recognised as prerequisites of a valid contract. The Commission on European Contract Law has associated itself with the more liberal position adopted by the latter systems.
The same holds true of the consideration. In English and Irish law, a promise by one party which is not supported by a consideration, i.e. a quid pro quo, is generally not binding. A promise, even if seriously meant and accepted by the promisee, will not be binding unless the promisee gives or does something (‘unilateral’ contract), or [page 4] promises to give or do something (‘bilateral’ contract), in exchange for the promise. Failure to honour a gratuitous promise is consequently non-actionable.
The Commission on European Contract Law took the view that in the business world there are promises, such as promises to pay for work or services already done, which should be enforced even in the absence of a consideration.The same applies to promises to make a gift or donation. A wealthy industrialist who announces in public that he will pay a million euros into a fund for the benefit of the wives and children of soldiers killed when serving in the peacekeeping forces in the former Yugoslavia should be held to his promise. For these reasons the Commission decided to follow the continental rule which does not require a consideration. Article 2:101 of the Principles of European Contract Law states explicitly that the contract is considered to have been concluded “if the parties intended to be legally bound and have reached a sufficient agreement, without any further requirement”. This means that the validity of a contract does not depend on its form or on a cause or consideration.
Can an offer be revoked before it has been accepted?
In German law an offer is binding when it reaches its recipient and in Nordic law when it comes to his knowledge. Unless the offer itself indicates that it is revocable it cannot then be revoked. However, most laws of the Union will allow a party to revoke his offer before it has been accepted. This is also the rule in Article 16 of the CISG, and the Commission on European Contract Law decided to follow suit; see Article 2:202 of the PECL.
But there are exceptions. Offers which indicate that they are irrevocable and offers which state a fixed time for their acceptance will lead their recipient to expect that they will not be revoked. This expectation is to be protected. And if in other cases it is reasonable for the recipient to rely on the offer being irrevocable, and if the recipient has acted on the basis of his reliance on the offer, it should not be revocable either. If, for instance, a subcontractor submits an offer to the contractor which the latter then uses in his bid for a construction contract, the subcontractor should not be permitted to revoke his offer.
Derogations from the UN law on sales contracts
Article 2:202 of the Principles of European Contract Law follows Article 16 of the United Nations Convention on Contracts for the International Sale of Goods, but with one important exception. Article 16(2)(a) of the United Nations Convention on Contracts for the International Sale of Goods or United Nations Convention on Contracts for the International Sale of Goods provides that an offer cannot be revoked if it indicates, whether by stating a fixed time for its acceptance or otherwise, that it is irrevocable. An reader of this provision might conclude that the fixing of a time limit for the acceptance of an offer would always make it irrevocable, but that is not certain. On this issue there was disagreement among the delegates who drafted Article 16 of the United Nations Convention on Contracts for the International Sale of Goodsin Vienna. The delegates from the common-law countries did not agree that the fixing of a time for acceptance should make the offer automatically irrevocable. The delegates of the civil-law countries thought it should. The outcome of the debate, although not very clear, seems to have been that the revocability or irrevocability of the offer depends upon the way in which its recipient would reasonably be expected to understand the intention of the party making the offer. This rule could give rise to legal uncertainty, and it has not been adopted by the Commission on European Contract Law. Article 2:102(3) of the PECL simply provides that the revocation of an offer is ineffective [page 5] if a fixed time was stipulated for its acceptance.