From contract to umbrella agreement

Cambridge Law Journal

Volumn 67, Issue 1, 2008, Pages 37-50

  Mouzas, Stefanos ^a   Furmston, Michael ^b  

^a LANCASTER UNIVERSITY MANAGEMENT SCHOOL   (United Kingdom)

^b UNIVERSITY OF BRISTOL   (United Kingdom)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 68149151172     PISSN: 00081973     EISSN: 14692139     Source Type: Journal    
DOI: 10.1017/S0008197308000081     Document Type: Article

References (84)

1. S. Macaulay, “Non-Contractual Relationships in Business: A Preliminary Study” (1963) 28 American Sociological Review 55
2. H. Collins, Regulating Contracts (Oxford 1999).
3. For a discussion and review, see D. Campbell, “Reflexivity and Welfarism in the Modern Law of Contract” (2000) 20 O.J.L.S. 477
4. J. Gava and J. Greene, “Do We Need a Hybrid Law of Contract? Why Hugh Collins is Wrong and Why it Matters?” [2004] C.L.J. 605.
5. The fact that contracts often fail to capture the reality of a business deal is vividly illustrated by S. Macaulay, “The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity and the Urge for Transparent Simple Rules” (2003) 66 M.L.R. 44.
6. J. Beatson, “The Role of Statute in the Development of Common Law Doctrine” (2001) 117 L.Q.R. 247.
7. See also R.Zimmermann, “Statuta Sunt Stricte Interpretanda? Statutes and Common Law: A Continental Perspective” [1997] C.L.J. 315.
8. R. Zimmermann and S. Whittaker, (eds.), Good Faith in European Contract Law (Cambridge 2000).
9. See also J. Beatson and D. Friedmann, (eds.) Good Faith and Fault in Contract Law (Oxford 2002)
10. G. McMeel, “Prior Negotiations and Subsequent Conduct - The Next Step Forward for Contractual Interpretation?” (2003) 119 L.Q.R. 272.
11. See R. Zimmermann, “Savigny's Legacy: Legal History, Comparative Law and the Emergence of European Legal Science”(1996) 112 L.Q.R. 576.
12. See also B.Markesinis(ed.), The Gradual Convergence: Foreign Ideas, Foreign Influences and English Law on the Eve of the 21s' Century (Oxford 1994).
13. D. Campbell, H. Collins and J. Wightman (eds.), Implicit Dimensions of Contract: Discrete, Relational and Network Contracts (Oxford 2003).
14. See also McMeel, n.4 above.
15. This shift is vividly demonstrated in the speech of Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 W.L.R. 896.
16. For a general discussion, see C. Staughton, “How do the Courts Interpret Commercial Contracts?” [1999] C.L.J. 303
17. K. Lewison, The Interpretation of Contracts (London 2004)
18. A.W. Katz, “The Economics of Form and Substance in Contract Interpretation” (2004)104 Colum. L. Rev. 496.
19. See also Lord Nicholls “MyKingdomfor a Horse” (2005) 121 L.Q.R. 577.
20. The two cases cited by Lord Nicholls, The Karen Oltmann [1976] 2 Lloyd's Rep. 708
21. The Pacific Colocotronis [1981] 2 Lloyd's Rep. 40
22. are reviewed in a further note by Alan Berg “Thrashing through the Undergrowth (2006) 122 L.Q.R. 354.
23. M. Loughlin, “Constitutional Theory: A 25th Anniversary Essay” (2005) 25 O.J.L.S. 183.
24. Also compare D. Strauss, “What is Constitutional Theory?” (1999) 87 Cal L Rev 581.
25. McCulloch v. Maryland (1819) 4 Wheaton 316, 407.
26. R.E. Barnett “A Consent Theory of Contract” (1986) 86 Colum. L. Rev. 269.
27. Compare R.E. Barnett, “Constitutional Legitimacy” (2003) 103 Colum. L. Rev. 11.
28. Relational contract theory attempted to explain patterns of business agreements: see I. R. Macneil, “A Primer ofContract Planning” (1975) 48 Southern California L. Rev. 627
29. C. J. Goetz and R. E. Scott “Principles of Relational Contracts” (1981) 67 Virginia L. Rev. 1089
30. I. R. Macneil, in D. Campbell (ed.), Relational Theory of Contract: Selected Works of Ian Macneil (London 2001). It appears, however, that relational contract theory has to some extent caused a misunderstanding of the changing nature of contracts. The particulars of a “relational” contract derive from the specific function of the contractual arrangement and not from the fact that a contract is relational
31. see M. A. Eisenberg, “Relational Contracts” in Beatson and Friedmann (eds.), Good Faith and Fault in Contract Law, 297–304
32. E. McKendrick. “The Regulation of Long-Term Contracts in English Law”, Good Faith and Fault in Contract Law, 305–333.
33. The term “umbrella agreement” is widely used in business. Civil law traditions refer to such an agreement as a “framework contract” or “framework agreement”. For example, German lawyers use the term Rahmenvertrag or Rahmenvereinbarung: see W. Kruger, MUnchener Kommentar zum BUrgerlichen Gesetzbuch (Munich 2003), Band 2a, 1103–1104.
34. Nevertheless, a number of business agreements might include immediate contractual decisions leaving some of the terms open. In these cases, it seems to be more appropriate to view these contractual arrangements as “open terms” agreement:, see M. P. Gergen, “The Use of Open Terms in Contract” (1992) 92 Colum. L. Rev. 977.
35. The underlying assumption is related to the notion of contract as “Selection framework” (“Selektionsumfeld” als Vertragsgegenstand): see H. C. von der Crone, Rahmenvertmge. Vertragsrecht-Systemtheorie - Okonomie (Zurich 1993). The notion of “future selection processes” does not imply that umbrella agreements are necessarily long-term business agreements; the onus is on contracting parties to define the duration of their relationship.
36. This functional differentiation is critical for understanding the nature of umbrella agreements. Scholarly work has rather obscured the difference between contractual decisions and the framework in which contractual decisions are made, compare e.g. I. R. Macneil, “Barriers to the Idea of Relational Contract”, in F. Nicklisch (ed.), The Complex Long-Term Contract (Heidelberg 1987)
37. R. H. Weber, Rahmenvertraige als Mittel zur rechtlichen Ordnung langfristiger Beziehungeh’ (1987) 106 Zeitschrift fur Recht 401.
38. For comments, see W. Kruger, Munchener Kommentar Zum Biirgerlichen Gesetzbuch, Band 2a, 1103–1104.
39. A. Farnsworth, “Precontractual Liability and Preliminary Agreements: Fair Dealings and Failed Negotiations” (1987) 87 Colum. L. Rev. 217.
40. The expression “pre-contract” can be traced back to Thoel, Handelsrecht (Gottingen 1854), at p. 62. Nowadays, pre-contractual agreements serve a practical purpose. In circumstances, for example, where an activity has to be completed before a contract is concluded or where parties cannot enter into a contract because the consent of a third party is required, and that cannot be obtained at the time of the pre-contractual agreement.
41. The view of contract law is that the process of contract formation has “hard edges”, see P.S. Atiyah, An Introduction to the Law of Contract (Oxford 1995).
42. Beatson and Friedmann edited a comprehensive anthology of cases and articles regarding pre- contractual liabilities, see n.4 above.
43. M. Furmston, T. Norisada and J. Poole, Contract Formation and Letters of Intent (Chichester 1998), ch. 10.
44. For a comparative analysis see R. B. Lake and U. Draetta, Letters of Intent and Other Pre-Contractual Agreements: A Comparative Analysis and Forms (New Hampshire 1989).
45. F. J. Sacker, Munchener Kommentar zum Biirgerlichen Gesetzbuch (Munich 2001), Band 1, 1470–1474
46. J. von Staudinger, Kommentar zum Biirgelichen Gesetzbuch mit Einfiihrungssgesetzen und Nebengesetzen (Berlin 2003), Buch 1, ed. R. Bork, at p. 567.
47. Farnsworth regards agreements with “open terms” and “agreements to negotiate” as preliminary agreements, in other words as lying between negotiation and agreement. See A. Farnsworth, “Precontractual Liability and Preliminary Agreements: Fair Dealings and Failed Negotiations” (1987) 87 Colum. L. Rev. 217.
48. Open terms are “contractual provisions that expressly grant a party substantial, but not completely unfettered discretion in performance”; for example, a promise to use best efforts, see M. P. Gergen, “The Use of Open Terms in Contract” (1992) 92 Colum. L. Rev. 977.
49. This alternative route is often found in business relationships that demonstrate a high degree of symbiotic interdependence, see E. Schanze, “Symbiotic Arrangements” in The Palgrave Dictionary of Economics and Law (1998) 3.554.
50. The use of open terms simply reduces the parties' incentive to haggle over risks that will have offsetting impact; thus they reduce the “cost of contracting”: The Palgrave Dictionary of Economics and Law, at p. 999 and p. 1081.
51. R. Christou, Boilerplate Clauses: Practical Issues (London 2002).
52. see L. Raiser, Das Recht der Allgemeinen Geschaftsbedingungen (Hamburg 1935). Despite Raiser's enormous influence among academic scholars, legislative powers in Europe needed more than forty years to react with an actual drafting of statutes.
53. See e.g. Unfair Contract Terms Act 1977 and AGB-Gesetz 1976.
54. See also J. Adams and R. Brownsword, “The Unfair Contract Terms Act: A Decade of Discretion” (1988) L.Q.R. 94
55. S. Bright, “Winning the Battle Against Unfair Contract Terms” (2000) 20 Legal Studies 331.
56. see E. McKendrick (ed.), Force Majeure and Frustration of Contract (London 1995).
57. Treitel differentiates between “conditions precedent” as the order of performance and “conditions” related to the conformity of performance, see G. H. Treitel, “‘Conditions' and ‘Conditions Precedent”’ (1990) 106 L.Q.R. 185.
58. For the importance of re-negotiation see I. Ayres, “Valuing Modern Contract Scholarship” (2003) 112 Yale L.J. 881.
59. J. Effron, “Alternatives to Litigation: Factors in Choosing” (1989) 52 M.L.R. 480.
60. A monitoring of contractual performance is particularly useful in cases where time is of the essence and there is delay in performance by the promisor. See J. E. Standard, “The Contractual Last Chance Saloon: Notices Making Time of the Essence” (2004) 120 L.Q.R. 137.
61. The buyer's right to terminate future transactions is creating a call option that equals to an “insurance against decreases in the buyer's valuation of the exchange”. See R. E. Scott and G. G. Triantis, “Embedded Options and the Case against Compensation in Contract Law” (2004) 104 Colum. L. Rev. 1428, at 1490.
62. See A. Schwartz and R. E. Scott “Pre-Contractual Liability and Preliminary Agreements” (2007) 120 Harv L Rev 662.
63. 120 Harv L Rev, at p. 702.
64. For an overview of legal restrictions applied, see BGB 307–309.
65. J. von Staudinger, Kommentar zum Biirgelichen Gesetzbuch mit Einfuhrungsgesetz und Nebengesetzen (n.22, above), Buch 1.
66. K. Laranz, Lehrbuch des Schuldrechts. Erster Teil, Allgemeiner Teil (Munich 1987), at p. 88.
67. See the example of BGB 305b Vorrang der Individualabrede.
68. M. Stoffels, AGB-Recht (Munich 2003).
69. Theoretically, unless all terms of a contractual arrangement are agreed there are no binding obligations. See J. Beatson, Anson's Law of Contract (Oxford 2002).
70. D. Allan, “The Gentleman's Agreement in Legal Theory and Modern Practice” (2000) 29 Anglo-American L. Rev. 204.
71. Although the doctrine of consideration defines the key measure of contractual liability, courts are prepared to find practical benefits as consideration, see Williams v. Roffey Brothers and Nicholls (Contractors) Ltd. [1991] 1 Q.B. 1.
72. See also M. Chen-Wishart, “Consideration: Practical Benefit and the Emperor's New Clothes”, in Beatson, and Friedmann (eds.), Good Faith and Fault in Contract Law, 123–150.
73. See Baird v. Marks & Spencer plc [2001] EWCA Civ 274, [2002] 1 All E.R. (Comm) 737.
74. 133 NW 2d 267 (1967).
75. (1988) 164 C.L.R. 387.
76. R. E. Scott, “A Theory of Self-Enforcing Indefinite Agreements” (2003) 103 Colum. L. Rev. 1641.
77. Charny's pioneering work on non-legal sanctions contributed to a better understanding of alternative mechanisms of enforcing commitments See D. Charny, “Nonlegal Sanctions in commercial relationships” (1990) 104 Harv. L. Rev. 373.
78. See also R.E. Scott, n.51 above
79. B.D. Richman, “Firms, Courts and Reputation Mechanisms: Towards a Positive Theory of Private Ordering” (2004) 104 Colum. L. Rev. 2328.
80. A. Schwarz and R. Scott “Contract Theory and the Limits of Contract Law” (2003) 113 Yale L.J. 541.
81. Llewellyn described contract as a “framework highly adjustable, a framework which almost never reflects real working relationships, but which affords a rough indication around which relationships vary, an occasional guide in cases of doubt and a norm of ultimate appeal when the relationships cease in fact to work”: see K. N. Llewellyn, “What Price Contract? An Essay in Perspective” (1931) 40 Yale L.J. 704, at 737.
82. See J. Tirole, “Procurement and Renegotiation” (1986) 94 J. Pol. Econ. 235.
83. See A. Schwartz, “Relational Contracts in Courts: An Analysis of Incomplete Agreements and Judicial Strategies” (1992) 21 J. Legal Studies 271.
84. M.A. Eisenberg, “The Emergence of Dynamic Contract Law” (2000) 88 Cal. L. Rev. 1743.