Understanding Anglo-American contract models (part 1)
31 August 2020
Anglo-American contract models are frequently used as a template for various transactions without questioning their suitability in light of the applicable law. This results in the usage of irrelevant common-law concepts. More importantly, it significantly delays negotiations and thus closing of the deal. It is, therefore, that Dutch companies engaged in international trade or finance transactions may benefit substantially from a basic understanding of the legal systems of their counterparties.
This goal can be best achieved by training business managers by members of the legal profession who have acquired extensive knowledge of the differences between American Common Law and (Dutch) Civil law, but this is not always feasible these days Therefore, this blog post series aims to create awareness of the main differences between American Common Law and (Dutch) civil law in terms of contracts.
Over the next weeks we will be publishing blog posts on the following topics: why long and detailed contracts?, interpretation of the wording of the contract, law and equity, referring to consideration, using warranty, condition, indemnity and guarantee clauses, using represent and warrants clauses, using the verb ‘warrants’ and the noun ‘warranty’, best endeavours and reasonable endeavours provisions, penalty clauses and liquidated damages clauses, whether time is of the essence, direct loss and indirect loss and force majeure.
Today we kick off with a post about underlying reasons for long and detailed contracts in which we briefly explain that sometimes a short contract drafted in a comprehensible manner may be most appropriate.
Why long and detailed contracts?
In daily international commercial contracting practice, Anglo-American contract law models are often used without thinking about their suitability for a particular transaction. Consequently, significant hours are spent in reviewing legal documents. This investment in time and money can be reduced if parties gain a better understanding of the underlying reasons for the basic differences between common law and civil law systems.
To start, countries following a common law system have adopted a very broad notion of the freedom of contracting, and are not familiar with extensive statutory provisions for commercial contracts (although few provisions are implied to protect private consumers). Moreover, in the realm of commercial contracting, almost everything is permitted that is not expressly prohibited by law. As a result, contracting parties need to clearly define all the terms of the contract. This results in long and detailed contracts.
Drafting lengthy contracts is unnecessary when a contract is governed by (Dutch) civil law because contracting parties can rely on codified default rules. In other words, a civil law system is more prescriptive and, in most cases, does not require a long and detailed contract. For example, section 296, paragraph 1 of the Dutch Civil Code stipulates that a person who is obliged to do something (e.g. delivery of generic goods) may be ordered to do so by the court upon the demand of the person to whom the obligation is owed. Although this statutory principle is subject to case-law relating to how it is to be interpreted, it is not necessary to insert a provision in the contract allowing contracting parties to claim for specific performance if the other party fails to perform its contractual obligations. That said, civil law systems allow commercial parties to deviate from non-mandatory statutory principles in their contract.
Questions about drafting, reviewing and negotiating international commercial contracts? All you need to do is send an e-mail with your question to Paula Kemp, p.kemp@banning or call me at +31 657576290. Wherever you live (or are currently vacationing!) we are looking forward to helping you out!
The next blog in our Understanding Anglo-American contract models series discusses the principles underlying the interpretation of the text of a contract. This topic is of paramount importance for determining the enforceability the obligations of contracting parties.
Paula Kemp received her master’s degree from the University of Groningen, the Netherlands in 2011. The same year, she started to work as a lawyer (licensed). In 2015, Paula moved to Singapore to expand the international practice and she jumped at the opportunity to start a PhD in her field of interest. After three years working in Singapore, Paula moved back to the Netherlands and continues to work as a lawyer with a focus on international commercial contracting. Paula received her PhD from Leiden University on 23 January 2020.