Understanding Anglo-American contract models (part 2)
09 September 2020
In our most recent blog post, we discussed the underlying reasons for long and detailed contract models which are based on Anglo-American law (contracting parties usually do not realise that their models are based on Anglo-American law!). We also explained that a short contract drafted in a comprehensible manner is more appropriate in certain situations.
However, before deviating from the text of your contract models, it is vital to take note of the legal boundaries of the interpretation of the wording of a contractual provision. This is of significant importance when determining the enforceability of an obligation (e.g. the delivery of goods) and the consequences of a breach of contract during negotiations, and when drafting and reviewing a contract. In the long run, a better understanding of the legal interpretation of the wording of a contract may reduce your litigation costs.
Interpretation of the wording of the contract
In addition to the reasons mentioned in our previous post (inbound link), Anglo-American contract models are also long and detailed due to the so-called parol evidence rule. Briefly put, the common law parol evidence rule bars the court from taking into account external and contextual factors (exceptions may apply). By contrast, most civil law jurisdictions allow courts to take into account subjective considerations (i.e. oral and written representations) for the interpretation of a contractual clause regarding, for example, the quality and price of the goods. A full understanding of the distinction between the discussed approaches is relevant when, for example, parties are negotiating a cross-border sales contract with an indefinite purchase price for the goods to be delivered.
In the situation mentioned above, the common law view is that an enforceable contract is concluded if the purchase price can be determined via a stipulated mechanism or by the course of dealing between the parties. Where both indicators are absent, the buyer owes a reasonable price, which is a question of fact dependent on the circumstances of each particular case. The market price and experts are possible sources to determine a reasonable price. It is, however, essential to keep in mind that the imposition of a narrow interpretation of the parol evidence rule restricts the court to the language of the contract to be determined from the viewpoint of a reasonable observer (abstract viewpoint).
The Dutch civil law approach is also that the buyer owes a reasonable price when the purchase price, or a mechanism to determine the price, is not included in the contract. In determining the price owed by the buyer, the prices usually stipulated by the seller at the time the contract is entered into are taken into account. Where this indicator is missing or does not suffice to establish the price (e.g. unique goods), the court may also seek recourse to general business usage and the requirements of reasonableness and fairness to determine the price owed by the buyer. Hence, a Dutch court may look beyond the four corners of a contract and the abstract benchmark of ‘usually stipulated prices by the seller’ to establish a reasonable price.
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 third blog in our Understanding Anglo-American contract models series discusses the distinction between law and equity principles and the relevance of understanding these principles when drafting a contract for cross-border transactions.
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.