CHAPTER 2

Formation of Contracts

Section 1 : General Provisions

Article 2:101: Conditions for the Conclusion of a Contract

(1) A contract is concluded if:
(a) the parties intend to be legally bound, and
(b) they reach a sufficient agreement
without any further requirement.
(2) A contract need not be concluded or evidenced in writing nor is it subject to any
other requirement as to form. The contract may be proved by any means,
including witnesses.

COMMENTS

A. Contract
In these Principles the notion contract covers:

- agreements under which two or more parties have undertaken an obligation to

make a performance,
- agreements where the offeree accepts the offer by doing the act or suffering
the forbearance which the offeror asks of it,
- agreements where only one party has obligations and where its promise
needs acceptance by the offeree,
- promises to which one party is bound without acceptance by the other, as
provided in Article 2:107 below.

The rules on contract also govern agreements to modify or end existing contracts, see
Article 1:107.

B. Intention
In order to be bound by a contract a party must have an intention to be legally bound.
Whether in fact it has such intention is immaterial if the other party has reason to infer
from the first party’s statement or other conduct that it intends to be bound, see
Article 2:102.

C. Agreement
Where more than one party is to be bound the parties must agree. Their agreement
may be reached by one party’s acceptance of the other’s offer, see Section 2, by

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agreeing to a contract which has been drafted by a third party, or in other ways. What
constitutes sufficient agreement is spelled out in Article 2:103.

In some cases where only one party is to be bound an expression of agreement

by the other party is not needed. Promises which are intended to become binding
without acceptance are to be treated as contracts, see Article 2:107.

D. No Further Requirement
Whether or not agreement is needed there are no further requirements. No form is
required, see Comment F. Nor is it necessary that a promisee undertakes to furnish or
furnishes something of value in exchange for the promise (consideration). Even an
undertaking to lend money and a promise to receive a deposit are effective before they
have been performed. A contract is not invalid because at the time of its conclusion it
was impossible to perform the obligation assumed, see Article 4:102.

E. Binding Character of a “Gratuitous” Promise

Some legal systems do not enforce a party’s “gratuitous” promise. Some do so but
only if it is couched in a solemn form or is found to serve a socially desirable purpose
which cannot be achieved by other means.

The fear that the enforcement of such “gratuitous” promises, even though no
formality has been observed, will lead to socially undesirable results is not well
founded. In fact many of these promises serve legitimate commercial purposes.

Nor is it necessary to inquire into the social desirability of the promise if it is

sincerely made. Experience shows that the legal systems which enforce gratuitous
promises do not encounter problems. “Crazy” promises made by persons of a sound
mind are so rare that they may be disregarded, while even the presence of a formality
or of an exchange does not guarantee that the contract is a sensible one. On the other
hand, those legal systems which do not enforce “gratuitous” promises have faced
problems when such promises sincerely made have since been revoked. These
problems do not only arise when the promisee has acted in reliance on the promise,
and injustice can be avoided only be enforcing the promise, but also in other
situations. For this reason these promises should be enforced.

F. No Formal Requirement
Article 2:101(2) lays down the principle that, unless the parties otherwise agree, the
conclusion as well as the modification and the termination by agreement of a contract
are valid without any form, be it writing, sealing, authentication by a notary, filing in a
public registry etc. This principle is widely accepted among the legal systems at least
as far as commercial contracts are concerned. For international contracts it is
particularly important since many such contracts have to be concluded or modified
without the delays which the observance of formalities will cause.

This provision also applies to unilateral promises, see Article 2:107.

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 NOTES

1. Introduction. National Laws

In BELGIUM, FRANCE and LUXEMBOURG the rules on formation are laid down
in the decided cases which are inspired by the 18th century writer Pothier, Obligations
Art. 1108 of the Code civil of BELGIUM, FRANCE and LUXEMBOURG is the
only provision of the codes dealing with the formation of contracts. It provides that
the necessary conditions for the validity of a contract are consent of the party which
assumes an obligation, capacity to contract, a certain object which forms the matter of
the agreement and a lawful cause . The SPANISH CC. has similar rules in arts. 1261
and 1262. It mentions that the agreeement of the parties mainfests itself by the offer
and acceptance.
In ENGLAND, IRELAND and SCOTLAND the rules on the formation of contracts
are based on case law. In the other Member States rules on the conclusion of
contracts are provided in codes and statutes.

2. Art 2:101( 1)” A contract is concluded when...”

The concept of contract as adopted in the Principles is an agreement which creates
legal obligations. It generally involves two or more parties whose obligations are
reciprocal. However, contract also covers promises to perform, for instance to pay a
sum of money, if the other party performs an act, and it covers obligations assumed
only by one party, such as a promise for a gift, and promises which are binding
without acceptance, see Article 2:107.

In this and other respects there are differences between the legal systems,
mostly of a terminological character. FRENCH, BELGIAN and LUXEMBOURG
CCs art. 1101 define contract as an agreement by which one party binds himself to
another to give, to do or not to do something. The Codes distinguishe between
contrats synallagmatiques and contrats unilatéraux, see CCs arts. 1103 and 1104. The
former create reciprocally binding obligations for the parties; the seller, for instance,
must deliver the goods and the buyer in return pay the purchase money. Les contrats
unilatéraux only create obligations for one party and rights for the other. They need
acceptance by the offeree in order to be concluded.

Promises which are not accepted by the promisee are generally not binding as
contracts. However, certain unilateral engagements, for example a promise to fulfil a
“natural obligation”, may under certain conditions bind the promisor without
acceptance, see Terré, Simler & Lequette, Obligations nos. 47 ff.

In ENGLAND Treitel describes a contract as an agreement giving rise to

obligations which are enforced or recognized by law, see Treitel, Contracts 1 The
common law makes a distinction between bilateral and unilateral contracts. A
bilateral contract is a synallagmatic contract. A unilateral contract is one under which
a counter promise of the offeree is not required. His acceptance consists in doing the
act or suffering the forbearance which is asked of him. Under the doctrine of
consideration, see note 3(a) below, the act or forbearance is the counter-per

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rformance which makes the promise of the offeror binding. An offer for a reward made
to the public is accepted when a person being aware of the offer does the act which is
asked for. Gift promises are not enforceable unless made in the form of a deed which
is not considered to be a contract. Unilateral promises which are binding without
acceptance are very seldom recognized in English law, see notes to Article 2:l07.

In GERMAN and AUSTRIAN law a contract is one of several juristic acts. A

juristic act (Rechtsgeschäft) is an act by one or more persons the purpose of which is
bring about legal effects. Every juristic act must consist of at least one declaration (or
conduct) which expresses a person’s intention to be legally bound by the effect which
the declaration purports to bring about, also called a declaration of will
(Willenserklärung), and to which the law gives that effect because it is intended. A
promise is a Willenserklärung which binds the promisor, and it may bind him without
acceptance. Some promises, such as a promise of a reward made to the public
(Auslobung),are binding on the promisor even though they do not reach the promisee.
Others are only binding when they reach the offeree, such as an act whereby a person
confers upon another person the power to act for him (Auftrag). The rules on
“Willenserklärungen” are to be found in title 2 of book 1 part 3, of the BGB.

A contract (Vertrag) is a legal transaction which consists of at least two declarations

of will which express agreement. It may be unilaterally binding or bilaterally binding.
A unilaterally binding contract, such as a promise to make a gift or to stand surety for
another person, only creates duties in one person. In principle it needs acceptance by
the other party. However, acceptance of a promise to make a gift is presumed when
the other party remains silent, see BGB § 516(2). A bilaterally binding contract is one
which creates reciprocal duties on both parties, such as a sale and a lease. It
presupposes the parties’ concordant intention to be legally bound, see Larenz/ Wolf,
AT §§ 22 and 23, RGRK - Piper § 145, Rz. 42/43, Erman (-Hefermehl), Vor § 145, Rz.
1. The formation of a contract ( Vertrag) is treated in title 3 of book 1 part 3 of the
BGB. .

DUTCH and PORTUGUESE law also treat juristic acts and contracts separately in
their Codes. In Portuguese law a unilateral promise, which only binds the promisor,
and which requires a acceptance, is a juristic act not a contract.

3 “without any further requirement”

Article 2:101 also provides that a contract is concluded if the parties intended to be
legally bound and they reach a sufficient agreeement, “without any further
requirement”. On the intention to be bound, see notes to Article 2:102 and on
sufficient agreement, notes to Article 2:103.

As was mentioned in the Comment, the words “without any further requirement”
implies that the Principles do not require consideration or cause, nor do the Principles
require that to create certain contracts, property must be handed over to the party
who is to receive it (real contracts).

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(a) Consideration
In ENGLAND and IRELAND a promise by one party which is not supported by
consideration is generally not binding. The doctrine of consideration is complex and
unclear, but its essence seems to be that 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 promises to give or do something (‘bilateral’
contract), in exchange for the promise. Thus a ‘gratuitous promise’ for which there
was no exchange is not binding, see e.g. Re Hudson (1885) 54 LJ Ch 811. Equally, a
promise made in respect of an act which has already been performed (e.g. a promise to
reward someone who has just rescued the promisor) is not binding, since the rescue
was not exchanged for the promise, cf Re McArdle [1951] Ch 669, C.A.; “past
consideration is no consideration”.

It is not necessary that the action taken or promised is of direct benefit to the
promisor. What is important is that the promisee has in some sense acted to his
detriment in exchange for the promise. Thus a promise to a bank to guarantee a loan
made to a third party is made for good consideration though the guarantor may obtain
no benefit; the bank incurs a detriment by advancing the money to the debtor. But if
the money has been advanced already, and the bank does not give the debtor any
concession as a result of the guarantee, e.g. extra time to pay, the guarantee will be
without consideration, see Treitel, Contract 75; compare Alliance Bank v. Broom
(1864) 2 Dr & Sm 289 (actual forbearance by creditor, therefore consideration).

Certain actions, or promises of actions, are treated as not being good

consideration because they involve the promisee in no detriment. For example, a
promise to pay someone to perform an act he is already obliged to do under the
general law is usually treated as being for no consideration: Glasbrook Bros.v.
Glamorgan CC [1925] A.C. 270, H.L.

However, consideration is not required if the promise is made by a deed. This

is a document which is expressed to be a deed and which must be witnessed. It no
longer has to be sealed, see Law of Property (Miscellaneous Provisions) Act 1989, s.
1. Further, the doctrine does not often prevent enforcement of a promise which the
courts wish to enforce. There are a number of points:

(i) The consideration need not be ‘adequate’, i.e. of equivalent value, so that a small or
even a purely nominal payment is good consideration, e.g. Thomas v. Thomas (1842)
2 QB 851.
(ii) The courts seem to ‘invent’ consideration by fixing on some action, or the
possibility of some action, by the promisee and treating it as exchanged for the
promise: e.g. de la Bere v. Pearson [1908] 1 KB 280. In that case a newspaper’s
promise to give readers financial advice was held to be contractual, because the
newspaper had the right to publish the readers’ letters if it so wished. See generally
Treitel, Contract 67-68. Atiyah argues that this means that the doctrine is incoherent
and means no more than ‘a good reason to enforce the promise’: Essays 241.

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(iii) In cases of promises to convey property, if the promisee has acted on the
promise to his detriment, it may be enforceable even without consideration on the
basis of ‘proprietary estoppel’: e.g. Crabb v. Arun DC [1976] Ch. 179, C.A.

However, ENGLISH law has not yet followed American law in treating a
gratuitous promise on which the promisee has reasonably relied as binding (cf
Restatement, 2d. Contracts, § 90). In ENGLAND the doctrine of promissory
estoppel applies only to promises not to enforce existing rights, Combe v. Combe
[1951] 2 K.B. 215, C.A. In IRELAND, however, the Supreme Court in Webb v.
Ireland [1958] I.L.R.M. 565 held that a promise by the Director of the National
Museum to a finder of historic aretfacts that he would be honourable treated, would
be enforced against the State, see McMahon & Binchy 155 ff. with references.

In relation to agreements to alter the terms of existing contracts, there were

formerly in ENGLISH law considerable difficulties when the terms were varied in a
way that benefited only one of the parties; e.g. one party promised to release the
other from part of his obligation (Foakes v. Beer (1884) 9 App. Cas. 605, H.L.) or to
increase the price payable to the other (Stilk v. Myrick (1809) 2 Camp. 317). More
recently, the courts have prevented the promisor from going back on his word (unless
it was unfairly extorted from him) via, in the first situation, the doctrine of
promissory estoppel (see WJ Alan & Co Ltd v. El Nasr Export & Import Co [1972] 2
Q.B. 189, C.A.) or, in the second, by treating the promise as being for good
consideration if the promisor got a ‘practical benefit’, even though the promisee was
doing no more than it was previously bound to do (Williams v. Roffey Bros & Nicholls
(Contractors) Ltd [1991] 1 Q.B. 1, C.A.).

SCOTLAND and the CIVIL LAW COUNTRIES do not require consideration.

(b) Cause, causa

The Principles do not expressly provide for a requirement of cause or causa. Causa
is, however, mentioned as a requirement for the formation of a contract in
AUSTRIAN law, in FRENCH, BELGIAN and LUXEMBOURG CCs arts. 1108
and 1131-1133, ITALIAN CC arts. 1325 and 1343-45 and SPANISH CC art. 1261.

In AUSTRIAN law the causa signifies the economic purpose of the contract,
which has to be transparent from the contract itself or the circumstances. A promise
which has no apparent purpose is not binding.

It is not possible to give a definition of cause in FRENCH law which will be

accepted universally. However, many authors distinguish the “objective and abstract
cause” that would apply to all parties to a contract of a particular type (e.g., in a
contract of sale, to obtain the property or the money) and the “subjective and
concrete cause” or motive (e.g. the seller sells the property to raise money to pay his
other debts, or the buyer buys property in order to smuggle it out of the country):
see, e.g., Terré, Simler & Lequette Nos. 312 ff.. A contract will not be valid unless it
has an objective and abstract cause; the mere intention to incur an obligation is not

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sufficient. If for example the cause is erroneous, the contract will not be valid. Thus a
person who has promised to pay a debt, but who had forgotten that he had already
paid it , is not obliged to do so, because his obligation had a false cause, see notes to
Article 4:103 on Mistake as to Facts or Law. Under the second aspect the cause must
be legal. Therefore, the sale of an object intended to be used for committing a crime is
void. On French law, see Malaurie & Aynès, Obligations no. 492 ff., and on
BELGIAN law, t’Kint 138. On illegality, see Article 4:101.

Some DUTCH authors argue that causa, although no longer mentioned in the
DUTCH BW., does remain a requirement for the validity of a contract - see van
Schaick (with summaries in English, French and German) and Smits (with a summary
in English). Other authors consider causa as “the content of the contract as a whole",
see on these theories Becker 237. If used in this sense the causa is hardly a
requirement other than that the contract must contain legal obligations for the debtor.

The GREEK and PORTUGUESE civil codes do not require cause as a

condition for the formation of the contract, but articles 174-178 of the Greek CC
provide that contracts the contents of which is unlawful are invalid and arts. 904-913
that payments made without a cause or without a lawful cause may be recovered. On
this basis, some Greek writers infer that cause is an essential element for the validity
and enforceability of contracts (Kerameus-Kozyris 65f). The same is the predominant
view in Portugal, see Fernandes s. 287.

Causa has no role in the formation and validity of contracts in the COMMON
LAW. Nor is the concept used in GERMANY, see Zweigert & Kötz 381, the
NORDIC COUNTRIES, see for DENMARK, Ussing, Aftaler 113, or SCOTLAND,
see Smith, Short Commentary 742 f.

(c) Real contracts

In FRANCE, BELGIUM and LUXEMBOURG it has been held that the so-called
"real contract" (contrat réel) was not validly concluded until the property to which it
relates had been handed over to the creditor or some other person authorized to
receive it. This applied to donations, loans of money and other property, bailment
(dépot) and pledge. However, the writers do not like the idea that these contracts are
not enforceable. Today these agreements are often intepreted as a promise to make a
contract to lend, deposit, pledge, etc. which is enforceable (see on the formal
requirments note 4 below), and when performed these contracts are governed by the
same rules as the other contracts (see for France Ghestin, Formation nr 447ff and for
Belgium de Page, Traité II nr 505). Under the PORTUGUESE CC the rules on real
contracts are applied to loans, bailment and pledge. However under the influence of C.
Mota Pinto’s Cessào da posicao contractual, 11ff, it has been held that the mere
agreement between the parties makes these contracts enforceable.

In SPAIN, AUSTRIA and the NETHERLANDS the concept of the “real contract”
still exists: in Spain for loans, including gratituous loans, bailment (deposito), and
pledge, see Diez-Picazo p 139; and in Austria for bailments, loans for use, loans of

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money and “orders to sell” (Kaufaufträge), see ABGB § 1086 and Rummel § 86, Rz
9. In the Netherlands the rules only apply to loans.

“Real contracts" are not known in the other countries. It is not necessary as a
condition for the coming into existence of a contract that the goods or money
contracted for should be handed over to the creditor. However, in the common law a
unilateral contract requires an act or the commencement of an act by the offeree for
completion, see note 1(b) above.

The handing over may, however, be a condition for the perfection of a security
interest in relation to third parties.

Some laws also require the existence of an objet. On this see the notes to
Article 4:102.

4. Formal requirements
(a) No formal requirement for contracts in general
In the majority of countries of the European Union, writing or other formalities are
not required for the validity of contracts in general. This holds true of DENMARK,
see Danske Lov art. 5.1.1, SWEDEN, see Adlercreutz I 147; FINLAND, see Hoppu,
36; GREECE, CC art. 158; GERMANY, BGB § 125 (impliedly); AUSTRIA, AGBG
§ 883; PORTUGAL, CC 219ff.; and of the UK. The DUTCH BW art. 3:37 lays
down that unless otherwise provided declarations, including communications, may be
made in any form. The same rule applies in SPAIN, see CC art. 1258, Commercial
Code art. 5l and art. 11 of the Retail Trading Act (l996). The GREEK CC provides
that contracts and other juridical acts have to be made in a certain form when the law
so provides (CC art. 158) or the parties have agreed on it (art. 159 (1)) and this holds
true of the other laws which do not require form. On merger- and no oral modification
clauses, see notes to Articles 2:105 and 2:106 below.

CISG art. 11 provides that a contract for the sale of goods need not be
concluded in writing and is not subject to any other requirement as to form. It may be
proved by any means, including witnesses. Under art. 29(1) a contract may be
modified or terminated by the mere agreement of the parties. A State which is party
to the Convention may , however, make a declaration to the effect that articles 11 and
29 do not apply where any party has his place of business in that State. None of the
Members of the European Union has made such a declaration.

Art. 1.2 of the UNIDROIT Principles provides that nothing in the Principles
requires a contract to be concluded in any form. It may be proved by any means,
including witnesses.

(b) Writing required

Unless the defendant is a merchant, the FRENCH courts will not admit proof of
contracts for the value of FF 5000 or more unless it is in writing, see CC art. 1341.
But the requirements of writing are not great. A “commencement de preuve par

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écrit” (a first step towards evidence in writing) is sufficient, see CC art. 1347, and in
special cases where it was not possible for a party to provide a written document, oral
testimony is allowed, see art. 1348. Under art. 109 of the Commercial Code, oral
testimony of contracts made between merchants is allowed. BELGIUM and
LUXEMBOURG have similar rules. In BELGIUM writing is needed for contracts
for a value of 15000 francs or more.

In ITALY proof will not be allowed for contracts above the value of 5000 lire
unless they are in writing, see CC art. 2721 (1), but there are a number of exceptions
from this rule. Thus art. 2721 (2) provides that the court can admit proof by witness
even beyond that limit, taking into account the character of the parties, the nature of
the contract and any other circumstances.

In FRANCE, BELGIUM, LUXEMBOURG and ITALY, where CISG is in

force, an international contract of sale which is governed by the Convention is not
subject to any requirement as to form, see CISG art. 11.

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(c) Specific contracts
In all the countries, specific contracts need to be in writing or in a notarial document in
order to be valid.

(aa) Formal requirements for special agreements are found in some conventions. For
arbitration clauses, the New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards of 1958, art. II requires writing. Art. 17 of the Brussels
Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial
Matters puts formal requirements on a jurisdiction clause. See also arts. 12 and 96 of
CISG.

(bb) In IRISH law informality is the rule but a considerable number of contracts must
be evidenced in writing: contracts of guarantee, contracts for which the consideration
is marriage, contracts for the sale of land or an interest therein, contracts that will not
be performed within one year (see Statute of Frauds (Ireland) 1964, s. 2), contracts for
the sale of goods in excess of £10 (Sale of Goods Act 1893, s. 4) and hire purchase
contracts (Consumer Credit Act, 1995, s. 30)

In ITALY writing is required for the sale of land, see CC art. 1350, which
includes a number of other contracts regarding land. In GERMANY, BGB § 313
requires a notarial document, as do PORTUGUESE CC art. 875 and SPANISH CC
art. 1280. In the U.K., contracts for the sale of land must be in writing and signed by
both parties (not by deed - that is required for the conveyance), see Requirements of
Writing (SCOTLAND) Act 1995 s.1 and ENGLISH Law of Property (Miscellaneous
Provisions) Act 1989, s. 2. (replacing the earlier requirement that the contract be
evidenced in writing; the Statute of Frauds 1664 still requires that guarantees be
evidenced in writing). In SWEDEN writing and in FINLAND writing and the
signature of an official sales witness are required, see SWEDISH Land Code ch 4, 1§
and FINNISH Land Code ch. 2, 1§.

In several systems a contract for the sale of land will not transfer the property to the
buyer; further formalities are necessary to achieve this.

(cc) Also a promise for a gift, but not a perfected gift, requires form in a number of
countries. In FRANCE, BELGIUM and LUXEMBOURG it must be made before a
notary, see CCs art. 931; for ITALY, see CC art. 782; for the NETHERLANDS, see
BW art. 7A:1719; for GERMANY, see BGB § 518, for AUSTRIA, see the Law on
Compulsory Notarial Acts of 1871; for SPAIN see CC arts. 632 and 633; and for
PORTUGAL see CC art. 947. In the COMMON LAW gratuitous promises are
enforceable only if made in the form of a deed or for a nominal consideration.

In SCOTLAND gratuitous promises not undertaken in the course of business

must be in writing, see s. 1 of the Requirements of Writing Act 1995. In the
NETHERLANDS a draft for a title on gifts in the BW purports to strike out the
present requirement of the old code for a notarial document for a promise to make a
gift. Writing will then suffice. In FINLAND and SWEDEN a promise for a gift must

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be made in writing or made public, for instance in the press , see Finnish Act on Gift
Promises § 1 and Swedish Act on Gifts § 1. DENMARK is, as far as is known, the
only Union country where a promise to make a gift is valid without any formality.

This enumeration is not exhaustive. In some legal systems mandatory rules

require form for some specific contracts such as consumer contracts, for the
establishment of companies, loans, guarantees, sales of motor vehicles, employment
contracts and tenancies.

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Article 2:102: Intention
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.

COMMENTS

A. Intention
As provided in Article 2:101(1)(a) a contract is only concluded if the parties to it
indicate an intention to be legally bound. Parties often make preliminary statements
which precede the conclusion of a contract but which do not indicate any intention to
be morally or legally bound at that stage.

Sometimes the person who makes a statement intends only to be morally but
not legally bound. Depending on the words used and the circumstances, letters of
intent and letters of comfort may be regarded as statements which are morally binding
only.
Illustration 1: When subsidiary company asked the plaintiff bank to
grant it a loan of 8 million Euros, the plaintiff asked the defendant
parent company to guarantee the loan. The defendant refused, but gave
a letter of comfort instead. This read: “It is our policy to ensure that
the business of (the subsidiary) is at all times in a position to meet its
liabilities to you under the loan facility arrangement”. The letter also
stated that the defendant would not reduce their financial interests in
the subsidiary company until the loan had been repaid. When during
the negotiations the plaintiff learned that a letter of comfort would be
issued rather than a guarantee, its response was that it would probably
have to charge a higher rate of interest. When later the subsidiary
company went into liquidation without having paid, the plaintiff
brought an action against the defendant to recover the amount owing.
The action failed since the defendant had not made a legally binding
promise to pay the subsidiary’s debt.

However under certain circumstances the person may incur liability when it has acted
contrary to good faith, see Article 2:301.

Letters of intent and letters of comfort may also be couched in terms which
show an intention to be legally bound.

Illustration 2: Parent company M declares to a bank which lends

money to its subsidiary company D that M is aware of D’s

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 engagement towards the bank, that by all appropriate means it will see
to it that D is able to meet its obligations towards the bank, and that it
will give notice to the bank if it wishes to change this policy. Before
M has given such notice to the bank D goes bankrupt.

M’s letter of comfort is to be considered as a guarantee which obliges

M to pay D’s debt.

See also Illustration 2 of Comments to Article 2:107.

A party’s statement is sometimes an invitation to one or more other parties to

make an offer. Such an invitation is not meant to bind the party which makes it. It
may, however, produce effects later if it has provoked an offer and acceptance which
refer to the terms and conditions stated in the invitation. See also Article 6:101.

B. The Appearance of Intention

Article 2:102 lays down a general principle on the effects of a party’s statement or
other conduct. They are to be determined as they reasonably appear to the other
party. If the party’s true intention is actually understood by the other party, the
former is bound. The way in which it expressed its intention does not matter. This is
in accordance with the rule of interpretation provided in Article 5:101(1) that the
common intention of the parties prevails even if this departs from the literal meaning
of the words used. In other cases the contract is to be interpreted according to the
meaning that reasonable persons of the same kind as the parties would give to it in the
circumstances, see Article 5:101(2).

Other rules of interpretation such as arts. 5:102, 5:103(a) and (c-f) and 5:104
may also be applied to determine the offer.

C. Silence or Inactivity
Silence or inactivity will generally not bind a person, see Article 2:204(2). However,
exceptions from this rule are provided in several articles of these principles, see for
example articles 2:209, 2:210 and 3:208.

Silence and inactivity may also cause a party to lose a right, see for example
Articles 4:113, 8:102(3) and 8:303.

NOTES

1. Social engagements, engagements involving patrimonial imterests, moral

engagements

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In all the legal systems, a party's intention to be legally bound is a condition of the
formation of a contract. Promises given as a joke do not bind. A party is not bound if
the other party to whom it makes a statement knows or ought to know that the first
party does not intend to be bound.

In all the systems an intention to be legally bound is presumed when the

transaction involves a patrimonial interest for the parties, but not when it is only a
social engagement, such as a dinner appointment. Friends and family members often
offer to help each other, and such offers are not legally enforceable, the help given is
not to be paid for, see Kötz, European Contract l18 who cites the ENGLISH case
Balfour v Balfour [1919] 2 KB 571, C.A., FRENCH Cass. 19 March 1974 Bull. Cass.
I no. 117, and the GERMAN BGH 22 June 1956 BGHZ 21, 102. See also for
DENMARK Gomard, Kontraktsret 30 and for IRELAND, Friel 78.

Even in business relations, parties make undertakings which only oblige them morally,
not legally. It may follow from the language of an undertaking or be implied from the
circumstamces that the promisor, or the parties, assumed only a moral obligation, for
example if the agreement provides, ‘this agreement shall be binding in honour only’, as
in the English case of Rose & Frank .v JR Crompton & Bros Ltd. [1925] AC 445,
H.L.), see further Cheshire, Fifoot & Furmston 111 f and 116 f. and, for Ireland,
Cadbury Ireland Ltd v Kerry Co-operative Creameries Ltd [1982] ILRM 77, HC. See
also notes to Article 2:107 below.

In ENGLAND collective labour agreements are presumed not to be intended to create

legal relations: Ford Motor Co Ltd v AUEFW [1969] 2 Q.B. 303, Q.B. In IRELAND
statements made obiter in several cases suggest that they are, see Goulding Chemicals
Ltd v Bolger [1977] IR 211, SC and Ardmore Studios v Lynch [ 1965] IR 1, HC.

2. Real or apparent intention?

(a) Party bound by apparent intention
Even if in his inmost mind a party had no intention to be legally bound, most of the
laws will hold that he is bound if the other party to whom the statement or other
conduct was addressed had reason to assume that the first party intended to be bound.
Whether this is the case is to be decided under the rules of interpretation, see notes to
chapter 5.

The rule is provided in the DUTCH BW art 3:35: a person’s absence of

intention cannot be invoked against another person to whom his declaration or
conduct was addressed and who gave it a meaning which was reasonable in the
circumstances. In AUSTRIA, a similar rule is inferred from ABGB §§ 861 and 863,
see Schwimann (-Apathy) § 863 comments 1-4 and § 863 comments 1-2, where the
author uses the term “normativer Konsens”. In NORDIC LAW, the rule is based on
an interpretation e contrario of the Contracts Acts § 32, according to which an error
in expression does not bind the promisor if the promisee knew or should have known
of the mistake, see for DENMARK Dahl (-Møgelvang) 231 and Gomard,
Kontraktsret 56; for SWEDEN, Ramberg, Avtalsrätt 34. In GREECE the rule is based

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on CC art. 200, which provides that contracts are to be interpreted in accordance with
good faith, see AP l340/l977, NoB l978.l053; see also for GERMANY Larenz/Wolf §
28 Rdnr. 16 ff. In ITALY and PORTUGAL the rules on interpretation apply to
ascertain the intention of the parties; good faith and reasonableness play an important
part, see on Italy: Bianca, Il contratto 397-402 and on Portugal Almeida, Negocio
juridico 719ff. However, the statement is not binding if the party who made it was
convinced that the other party would realize that his statement was not serious or
where he was not conscious of having made a statement, see CC arts. 245 and 246.

The same rule applies in the COMMON LAW law. ENGLISH contract law is
concerned with objective appearance rather than with the actual fact of agreement. The
classic statement of the principle is that of Blackburn J. in Smith v. Hughes (187l)
L.R. 6 Q.B. 597, 607:

“If, whatever, a man’s real intention may be, he so conducts himself that a
reasonable man would believe that he was assenting to the terms proposed by
the other party, and that the other party upon that belief enters into the
contract with him, the man thus conducting himself would be equally bound as
if he had intended to agree to the other party’s terms.”

See also The Hannah Blumental, [1983] 1 A.C. 854 (H.L.) and Treitel, Contract 1; for
IRISH law, see Friel 78ff. In SCOTLAND the majority view is to the same effect. In
Muirhead & Turnbull v. Dickson [1905] 7 S.C. 686, 694, Lord Dunedin said:
“.. commercial contracts cannot be be arranged by what people think in their
inmost minds. Commercial contracts are made by what people say.”
See also McBryde, Contract 51-54 and 1992 Juridical Review 274; cf Stewart, 1991
Juridical Review 216 and 1993 Juridical Review 83.

(b) Subjective intention governs

In contrast to most other laws, FRENCH law will only hold a person bound in
contract if it is his real intention to be bound, see Malaurie & Aynès, Obligations nos.
347 ff. However, a party alleging that, contrary to his statement, he had no intention
to be bound must make this allegation plausible. If he succeeds he is not contractually
bound, but may be held liable in damages in tort if he has acted negligently, see Terré,
Simler et Lequette, Obligations no. 87, no. 131. The same rules apply in
LUXEMBOURG. PORTUGUESE CC arts. 245 and 246 impose liability on a person
who acted negligently when making a statement which he did not mean seriously or
when making a statement unconsciously, see (a) above.

(c) Divided opinion

In BELGIUM there is one school which sticks to the traditional FRENCH "doctrine
of the intention", see e.g. Verougstraete 1195-96, and another school which will apply
the same rule as the one in Article 2:102, see van Ommeslaghe, R.D.I.D.C. 1983 144
and M.E. Storme, Tijdschrift voor belgisch burgerlijk recht 1993, 336. The rule in
Article 2:102 has been applied by the Cour de Cassation in a decision of 20 June
1988, Pas. 1988 I 1256, where it was held that a principal was bound by an act done

c2-1, as proof 153

by the agent when the third party had reason to rely on the agent’s apparent
authority; see also Court of Appeal of Brussels 26 May 1996, Tijdschrift voor
belgisch burgerlijk recht 1996, 333 where the rule was also applied.

c2-1, as proof 154

Article 2:103: Sufficient Agreement
(1) There is sufficient agreement if the terms:
(a) have been sufficiently defined by the parties so that the contract can be
enforced, or
(b) can be determined under these Principles.
(2) However, if one of the parties refuses to conclude a contract unless the parties
have agreed on some specific matter, there is no contract unless agreement on
that matter has been reached.

COMMENTS

A. Agreement on the Terms

Where two or more parties conclude a contract agreement must be reached on the
terms which are necessary for determining their mutual rights and obligations and
which are decisive for each of them.

Thus, sufficient agreement covers two requirements:

- terms which are determinable, and
- consensus on disputed terms.

B. Terms which are Determinable

The parties must have made an agreement the terms of which are so definite that it can
be enforced.

Most contracts belong to the usual types of contract (sale of goods, supply of
services, employment, insurance, etc.). For these contracts the parties’ agreement on
the type of contract (e.g. sale) and a few crucial terms (type of goods and quantity)
will suffice. If the parties are silent on other issues (e.g. price and quality) these
issues will be decided by the rules of Chapter 6, notably Articles 6:104 - 6:108 of
these Principles. These issues may also be determined by other means such as usages
and practices between the parties, see Article 1:105, or by supplying an omitted
term, see Article 6:102.

If it is not apparent what type of agreement is being made, the agreement

cannot be enforced unless the parties’ essential rights and duties have been agreed
upon.

Illustration 1: Two enterprises have entered into negotiations about

their “future co-operation in the market”. There will be no contract
between them until they have agreed upon the essential features of
their co-operation, viz. the main rights and duties of both parties.

c2-1, as proof 155

See also on offers Article 2:201.

C. Terms Made Essential

An agreement to negotiate a contract (a contract to contract) is in itself a binding
contract which entails a duty on both parties to make serious attempts to conclude the
planned contract, see also comment A to Article 2:102 on letters of intent. However
the parties are not obliged to reach agreement, see Article 2:301(1).

A party may consider a term to be so essential for it that it will make its
assent to the contract dependent upon agreement on that point. For example, if the
parties bargain over the price of the goods to be sold, they show that the price is a
decisive term. Even points which are normally not considered essential points can be
made so by one party.

However a party which has made one or more points essential to its assent to
the contract may nevertheless accept performance of the envisaged contract by the
other party. In that case the contract is to be considered concluded by the conduct of
the parties, and the Principles and other factors, see comment B, will supply the
disputed terms.

Although two parties have not agreed on all terms they may agree to
commence performance of the contract. In that event, the factors mentioned in
comment A will supply the missing terms.

Illustration 2: A has negotiated with B to maintain B’s computers.

Although they have not agreed on A’s fee they have decided that A
shall begin. After one month they realize that they cannot reach
agreement and B asks A to stop. B will have to respect the agreed
notice of termination and to pay A a reasonable fee, see Article 6:104.

NOTES

1. Terms determinable
Under all the systems, there is only a contract when the terms of the parties’
agreement can be determined. The question may arise when the parties have left terms
open, see notes to Article 6:104 - 6:107, when they have agreed that they will later
make a contract, and when they have made a framework agreement (contrat cadre).

(a) Object required

The Romanistic systems require that a contract has an objet. Art. 1108 of the
FRENCH, BELGIAN and LUXEMBOURG CCs makes it a condition for the
validity of a contract that the contract has an object which constitutes the subject
matter of the agreement; see also the rules in arts. 1126-1130. This object must be
legal and determined or determinable. Similar provisions are found in ITALIAN CC

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art. 1325(3) and arts. 1346-1349, in SPANISH CC arts. 1261 and 1271 - 1273 and in
PORTUGUESE CC art. 280(1).

The purpose of the object is also to prevent agreements where one of the
parties arbitrarily fixes the contents of his or the other party's obligation, and the
other party is left at his mercy. On recent developments in FRENCH law concerning
the price, see notes to Article 6:104 and Ghestin, Formation 516 f.

(b) No requirement of object

Objet is not mentioned as a requirement in the other legal systems. However, as
provided in the NETHERLANDS BW art 6:227, it is everywhere a condition for the
formation of a contract that "the obligations which the parties assume are
determinable". The parties' agreement must make it possible for a court which is asked
to enforce it (either specifically or by awarding damages) to do so, with the help of the
terms of the contract and the rules of law, see the UNITED STATES Restatement 2d,
§ 33, and for AUSTRIA Schwimann (-Apathy) § 869 no 3 ff.; for DENMARK,
Ussing, Aftaler 33; for FINLAND, Kivimäki & Ylöstalo, 167 f.; for GERMANY,
RKGK - Piper; Introduction before § 145 Rn. 3; and for GREECE, Full Bench of
Areios Pagos 138l/1983, NoB 1984.1193-1194 and Athens 1027/197l, NoB 1971
1277-1278.

The common law of ENGLAND also requires that the parties’ agreement is
sufficiently definite to be enforced. There is no fixed minimum content ; but if a
critical term of the contract is left open or vague, and the court has no way of
determining what was intended, the contract will fail, e.g. Scammell & Nephew Ltd v
Ouston [1941] A.C. 251, H.L., where an agreement to ’sell’ a truck ‘on hire purchase
terms’ was held to be too imprecise, since the precise terms of the hire purchase were
not settled and at that date such contracts took a variety of forms. The rule is the
same in IRELAND, see Central Meat Products v. Corney (1944) 10 Ir.Jur.Rep. 34.
Also under SCOTS law the contract must be sufficiently clear to be enforceable, see
Mc Bryde, Contracts 44-5l.

2. Terms left open

Agreement between the parties to a contract is a condition for its formation. This is
expressed in several laws, for instance FRENCH, BELGIAN and LUXEMBOURG
CCs art. 1108, ITALIAN CC arts. 1321 and 1325(1) and SPANISH CC arts. 1258
and 1261.

However, the agreement of the parties need not always be perfect. After
having ended their negotiations the parties may not have reached agreement on a term.
Some point brought up by them or one of them has not been settled. Several of the
laws seem to agree on the following rules: If the unsettled point is one which is
generally regarded as material, there is no contract until agreement on that point is
reached. If the term is generally considered to be immaterial the contract is considered
to have been concluded, and the rules of law - or a later agreeement - will settle the
matter.

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 Parties may, however, have agreed expressly or by implication that their
failure to settle a point which is normally material, such as the price, shall not prevent
the contract from coming into existence. In these cases the rules of law will supply the
term which the parties have not agreed. Conversely, one part may state or let the
other party understand that he considers a term, which is normally held to be
immaterial, to be material, and the parties’ failure to reach agreeement on that term will
then prevent the conclusion of a contract, see for AUSTRIA, Rummel, § 869 no 10;
FRANCE, Ghestin, Formation no. 319 ff.; BELGIUM, Kruithof & Bocken 313f.;
DENMARK, Lynge Andersen 66ff.; FINLAND, Kivimäki & Ylöstalo, 188 f. and
SGA § 45; SPAIN, Durany, 1059ff; and SWEDEN, Adlercretutz I 62.

The DUTCH BW art. 6:225 provides that where a reply which was intended
to accept an offer only deviates from the offer on points of minor importance, the
reply is considered to be an acceptance and the contract is formed according to the
terms of the reply, unless the offeror objects to the difference without delay, see also
notes to Article 2:208. This principle also covers terms which have been left open
without there having been an offer and a reply. In that case the rules of law will decide
the issue.

PORTUGUESE law makes no distinction between material and non-material

terms. Every term is material if one of the parties consider it necessary for the
agreement, see CC art. 232 and Vaz Serra 130ff

In the COMMON LAW the parties must have reached agreement, and if some
matter is left ‘to be agreed’ there will be no concluded contract (May & Butcher Ltd v
R [1934] 2 KB 17n, H.L.) unless there are clear indications that the parties intended to
be bound nonetheless (e.g. the matter was minor and they have commenced
performance: Foley v Classique Couches [1934] 2 KB 1, C.A.). In SCOTLAND there
are essentials in law for particular contracts on which the parties must have agreed
before there is a contract, see also Rt. J Dempster v Motherwell Bridge & Engineering
Co 1964 SC 308; Avintair v Ryder Air 1994 SLT 613.

The GERMAN BGB provides in § 154 that in case of doubt a contract is not
concluded until the parties have agreed on all the points on which they or one of them
require agreement. § l55 BGB lays down that if the parties regard a contract to have
been concluded, without realizing that in fact agreement has not been reached on some
term, then what has been agreed upon is binding if it is shown that the contract would
have been concluded even without agreement on that term, see Münchener Kommentar
(- Kramer) §§ 154, 155; Staudinger (- Dilcher, §§ 154, 155. GREEK CC arts. l95 and
196 has similar provisions as the BGB, see on their application, AP 69/1966, NoB
1966,800; 827/1986, EEN 1987 265, 266 I; Athens 1010/1976, NoB 1976.737, 738 I.

A different question is where the parties have put forward differing proposals
and neither has agreed to the other’s proposal. On this see the notes to Articles

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2:208: Modified acceptance, 2:209: Conflicting general conditions and 2:210:
Professional's written confirmation.

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Article 2:104: Terms Not Individually Negotiated
(1) Contract terms which have not been individually negotiated may be invoked
against a party which did not know of them only if the party invoking them took
reasonable steps to bring them to the other party's attention before or when the
contract was concluded.
(2) Terms are not brought appropriately to a party's attention by a mere reference to
them in a contract document, even if that party signs the document.

COMMENTS

A. Acceptance required
Under Articles 2:101 and 2:103 a contract is only concluded if the parties have agreed
on its express terms. This rule must also apply when a party invokes standard terms
or other not individually negotiated terms as part of the contract. The other party can
only be held to terms which the first party took appropriate steps to bring to the
other’s knowledge before or when the latter accepted the contract.

This requirement will be fulfilled when the standard terms form part of the
contract document which the other party has signed. It is also fulfilled when the
terms are printed on the back side of the letter containing the offer or on a separate
enclosure when reference has been made to the standard terms in the offer.

However, terms are not brought appropriately to a party’s attention by a mere

reference to them in the contract document, even if signed on behalf of that party,
unless it knew of them beforehand - for instance, because in earlier similar contracts
between the parties the other party has brought the terms to the first party’s
attention; then a reference to them may suffice. If the first party does not know of
the terms referred to, they must be included in the document or other steps taken to
inform the party of them. It is not sufficient, for instance, to send the terms with the
letter which contains the offer without making a reference to them in the letter.

B. Before or at the Time of Conclusion

General conditions must be brought to the attention of the party when the contract is
made or before. Standard terms sent with a supplier’s acceptance of the customer’s
offer may be treated as a modified acceptance, see Article 2:208. Terms which the
seller sends with the goods which the buyer has ordered may be considered as
accepted by the buyer when it accepts the goods. However, terms sent with a
supplier’s bill which the customer receives after it has received the performance will
not bind the customer.

C. Waiver

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A party cannot unilaterally discharge the duty to bring its general conditions to the
attention of its contracting partner by a term in its offer or at a notice board in its
premises. However, before or after the conclusion of the contract, the other party
may waive its right to be informed of the terms, and such a waiver can be implied
when under the circumstances it would not be reasonable to require such information.

Illustration: On Friday A sends an advertisement to B, a newspaper,

asking B to publish it on Sunday. B receives A’s letter on Saturday. It
cannot be required to inform A about its general conditions regarding
advertising before it publishes the advertisement in the paper.

D. Usage
It may follow from a usage that not individually negotiated terms may be binding
upon a party who did not know of them. Thus, in a particular trade, terms which
have been published by the association of suppliers as the terms which its members
will apply, may be binding upon customers without further steps by suppliers who
are members of the association. Such usages may even bind foreign customers, see on
usages Article 1:105.

E. Effects
Terms which have been duly brought to the attention of a party will become part of
the contract. If a party has not taken appropriate steps to bring the terms to the other
party’s attention the contract is treated as having been made without the terms.

NOTES

1. In general.
The mere reference in the contract document to terms which were not included in the
document and which the stipulator had not brought to the notice of the adhering party
will generally bind the latter if it knew of them.

In ENGLAND, if a party has signed a contract document, all the terms in the
document, or referred to in it, form part of the contract (L’Estrange v. F Graucob Ltd
[1934] 2 K.B. 394, C.A.) However, the degree of notice given will be highly relevant
to whether the terms are unfair under the Unfair Terms in Consumer Contract
Regulations 1994 or unreasonable under Unfair Contract Terms Act 1977. If the
terms were not in a signed document, they will not form part of the contract at all
unless either reasonable notice was given of them when or before the contract was
made (Parker v. South Eastern Railway Co (1877) 2 C.P.D 416) or they are
incorporated by a course of previous dealing (Hollier v. Rambler Motors AMC Ltd.
[1972] 2 Q.B. 71, C.A.) or trade understanding (British Crane Hire Corp. Ltd v.
Ipswich Plant Hire Ltd [1975] Q.B. 303, C.A.) See also on the “Red Hand Rule”
below.

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 Some laws like the ITALIAN CC art. 1341(1) provide that general conditions
of contract prepared by one party are binding upon the other party if at the time of
the conclusion of the contract the latter knew them or, using ordinary diligence, should
have known them.

Other countries have general rules which protect both businessmen and consumers.
Under AUSTRIAN AGBG § 864a, enacted in 1979, unusual terms in general
conditions and standard form contracts which a party uses do not become part of the
contract, if, considering the circumstances and the appearance of the contract
document, they are disandvantageous and surprising for the other party, unless the
stipulator has explicitly referred to them. Art 1135-1 of the LUXEMBOURG CC, as
amended in 1987, provides that general contract conditions which have been
established in advance by one of the parties, are not binding upon the other party,
unless the latter has had the opportunity of acquainting himself with them when he
signed the contract, or if under the circumstances he must be considered to have
accepted them.

DUTCH BW art. 6:233(b) lays down that general conditions of contract are
voidable if the stipulator has not offered the other a reasonable opportunity to take
notice of the general conditions. Art 6:234 enumerates the ways in which the
stipulator gives the other party a reasonable opportunity. One way is to give the
other party a copy of the conditions before or at the time of the conclusion of the
contract. These provisions protect consumers and smaller enterprises.

Under the PORTUGUESE Decree Law 446 / 85 of October 25 1985, art. 5

the stipulator shall communicate the general contract terms in their entirety to the
adhering party, and the communication shall be made in an adequate manner and at
such an early stage that, taking into consideration the importance, the length and
complexity of the clauses, it is possible for a person using ordinary care to acquire
complete and effective knowledge of them. Under art. 6 the stipulator must also where
appropriate supply all the explanations necesaary of for their clarification.

ITALIAN CC art. 1341(2) provides that in order to be valid, certain contract

terms which have been drafted in advance by one of the parties must be specifically
approved in writing by the other party. This applies, inter alia, to exemption clauses,
cut-off clauses, and jurisdiction and arbitration clauses.

2. The “red hand rule”

In GERMANY and the NORDIC COUNTRIES, the stipulator must give the other
party a particularly clear and perceptible notice of unusually burdensome terms. In
GERMANY, General Conditions of Business Act of 1976, §3 protects both
consumers and businessmen. In the Nordic countries the rule is based on case law, see
for DENMARK, Lynge Andersen 78 ff., for FINLAND, Wilhelmsson, Standardavtal
87 and for SWEDEN, Grönfors, Avtalslagen 40f.

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This rule, which is called the “red hand rule”, applies also in ENGLAND, see
Interfoto Picture Library Ltd v. Stiletto Visual Productions Ltd [1989] Q.B. 433, C.A.,
and probably also in SCOTLAND. However, unless the contract is a consumer
contract governed by the 1994 Unfair Terms in Consumer Contracts Regulations,
which implements the EEC Directive, the “red hand rule” does not apply if the party
against whom the clause is invoked has signed the contract document.

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3. Rules covering consumers only.
The ‘Indicative and illustrative list of terms which may be regarded as unfair’ which is
annexed to the EEC Council Directive on Unfair Terms in Consumer Contracts of 3
April 1993, and which have been inserted in the Comments to Article 4:110, includes
in para. 1 (i) a term which has the object or effect of “irrevocably binding the
consumer to terms with which he had no real opportunity of becoming acquainted
before the conclusion of the contract”. This provision seems to presuppose that in the
absence of a clause as the one mentioned in 1(i), such inaccessible terms will not be
binding upon the adhering party in any of the Member States of the European Union.
On the Council Directive on Unfair Terms in Consumer Contracts and the Indicative
and illustrative list of terms mentioned above, see notes to Article 4:110.

§2 of The GERMAN General Conditions of Business Act of 1976 requires

that the stipulator makes express reference to his general conditions of business, and
that the other party agrees to them, an agreement which does not need to be express
and may be implied from the circumstances, see Münchener Kommentar (-Kötz) I
1816. This provision protects only consumers, see § 24 of the Act.

§ 6 of the AUSTRIAN Consumer Protection Act of 1979 contains a provision

similar to § 864a of the AGBG dealt with at no 2 supra.

Under art. 30 of the BELGIAN Act of 14 July 1991 on Commercial Practices

and Information and Protection of Consumers, the supplier, acting in accordance with
the requirements of good faith, shall provide the consumer with correct and useful
information on the characteristics of the goods or services supplied and the conditions
of supply, having regard to the information needs expressed by the consumer and the
use which he has indicated to make of the good and services or which were foreseeable
for the supplier (italics added).

The SPANISH Act of 19 July l984 on Consumers and Users art. 10(1)(a)
requires the clauses, terms or stipulations generally applied by the suppliers to be
written in a specific, clear and simple language which may be easily understood
without resort to texts or documents not provided prior to or at the time of conclusion
of the contract, and to which in all events an express reference shall be made in the
contractual document.

The GREEK Law 2251 / 1994 on Consumer Protection requires that the the
stipulator brings the standard terms to the consumer’s attention so that the consumer
is able to learn their contents.

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Article 2:105: Merger Clause
(1) If a written contract contains an individually negotiated clause stating that the
writing embodies all the terms of the contract (a merger clause), any prior
statements, undertakings or agreements which are not embodied in the writing do
not form part of the contract.
(2) If the merger clause is not individually negotiated it will only establish a
presumption that the parties intended that their prior statements, undertakings or
agreements were not to form part of the contract. This rule may not be excluded
or restricted.
(3) The parties' prior statements may be used to interpret the contract. This rule may
not be excluded or restricted except by an individually negotiated clause.
(4) A party may by its statements or conduct be precluded from asserting a merger
clause to the extent that the other party has reasonably relied on them.

COMMENTS

Merger Clauses
When concluding a written contract the parties sometimes agree that the writing
contains their entire agreement, and that earlier statements and agreements shall not be
considered. Such a merger clause may be useful when during the negotiations the
parties made promises and statements based on assumptions which were later
abandoned. A merger clause which has been individually negotiated, i.e. inserted in the
contract as a result of a mutual discussion between the parties, will prevent a party
from invoking prior statements and agreements not embodied in the writing. This
follows from the principle of freedom of contract embodied in Article 1:102.

The merger clause will not apply to prior agreements or statements which,
though made when the contract was negotiated, are distinct and separate from the
contract.

If, on the other hand, the prior agreement is one which has such a connection
with the contract that it would be natural to include it in the written contract, the
merger clause will apply.

Illustration: During the negotiations for the sale of a property the

parties orally agree that the seller shall remove an unsightly ice house
from a nearby tract. This agreement was not mentioned in the written
contract which contained an individually negotiated merger clause. The
buyer cannot require the ice house to be removed.

If, however, the merger clause has not been individually negotiated it will only
establish a rebuttable presumption that the parties intended that their prior statements

c2-1, as proof 165

should not form part of the contract, see Article 2:105(2). Experience shows that in
such cases a party should be allowed to prove that the merger clause was not intended
to cover a particular undertaking by the other party which was made orally or in
another document. It often happens that parties use standard form contracts
containing a merger clause to which they pay no attention. A rule under which such a
clause would always prevent a party from invoking prior statements or undertakings
would be too rigid and often lead to results which were contrary to good faith.

A merger clause will not prevent the parties’ prior statements from being used
to interpret the contract. This rule in Article 2:105(3) applies also to individually
negotiated merger clauses, but in an individually negotiated clause the parties may
agree otherwise.

On a party’s reliance on the other party’s later conduct, see Comment B to

Article 2:106, below.

NOTES

1. Merger Clauses in General

(a) Clauses upheld
A provision similar to Article 2:105(l) is to be found in UNIDROIT art. 2.17. Article
2:105 is also in accordance with PORTUGUESE law where it follows from the good
faith principle that a person shall not be allowed go back on an agreement earlier made
(venire contra factum proprium). Merger clauses are most often enforced in the
U.S.A., see Farnsworth II § 7, 3 ff.

(b) Merger clause probably not conclusive

This is so in ENGLAND. At one time it appears that English law prohibited the
bringing of ‘parol evidence’ (that is, evidence of terms which were not contained in the
document) to add to, vary or contradict a written contract. However, when faced
with clear evidence that the parties had in fact agreed on some term which was not in
the document, the courts evaded the rule by the simple expedient of saying that the
contract was not wholly in writing, so that the rule did not apply, see for example J.
Evans & Son (Portmouth) Ltd v. Andrea Merzario Ltd [1976] I W.L.R. 1078, C.A.
As the Law Commission points out, this renders the rule meaningless, and it is now
agreed that there is at most a presumption that the written documents contains all the
terms of the contract (Treitel, p 178). It is generally thought that a merger clause will
do no more than add weight to this presumption (Law Commission, Report on Parol
Evidence Rule) and it will not be conclusive; see Thomas Witter Ltd v TBP Industries
Ltd [1976] 2 All E.R. 573, noted at (1995) 111 LQR 385). The Contract ( Scotland)
Act 1977 has abrogated the parol evidence rule for SCOTLAND. In IRELAND the
rule, if it still exists, has been greatly modified, see Friel, 153-154.

Under DUTCH law, evidence of oral agreements may always be brought: there
is no such thing as a parol evidence rule. The landmark case is HR 13 March 1981,
Nederlandse Jurisprudentie 1981, 635 (Haviltex). It has been argued that clauses

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which purport to import the parol evidence rule into the Netherlands are invalid, at
least when they are to be found in general conditions of contract: Hondius, Entire
Agreement Clauses 24-34..

In FRANCE , LUXEMBOURG and SPAIN merger clauses are reported to be

rare, and there does not seem to be literature about them. In Luxembourg the rule on
evidence in CC art 1341. quoted in note 4(b) to Article 2:101 (2) above might indicate
that merger clauses will be enforced. They would probably be covered by the rules on
proof of judicial acts which in France are treated in Ghestin , Goubeaux & Fabre-
Magnan nos. 627 ff. In Spain the rules on intepretation may also be applied, see
Diez-Picazo 259-261. There is no clear rule in BELGIAN law on the validity of
merger clauses. The authors tend to give the clauses a restrictive interpretation, see
Storme, Invloed no. 183.

Rules as those provided in Article 2:105 (1) and (2) are not to be found in the
ITALIAN CC and the issues have not been dealt with in the legal writing or in
reported cases. On the one hand a rule on evidence in CC article 2711 provides that
“proof of witnesses is not permitted to establish clauses which have been added or are
contrary to the contents of a document, and which are claimed to have been made
prior to or at the same time as the document”. This rule may be relevant for merger
clauses. On the other hand CC art. 1362 (2) on interpretation of contracts provides
that “in order to ascertain the common intention of the parties, their common
behaviour, also after the conclusion of the contract, shall be taken into account.” The
mandatory character of this rule is confirmed by the writers, see Bianca, Il contratto I
399 and Carresi II 86, and by the courts, see for instance the Court of Cassation 2
March 1971 no. 528. This would exclude merger and no-oral modification clauses.

Merger clauses are not dealt with in the GREEK CC, nor in the reported cases.
Whether they will be enforced will probably be viewed upon as a question of
interpretation and of CC art. 200, which provides that “contracts are to be interpreted
in accordance with good faith having regard to business practices”. This provision is
mandatory in the sense that parties are not allowed to contract out of it, see Balis
para 53, Papantoniou para. 64 1, p 347-349; cf. AP 908/1978, NoB 1979,758.

(c) Merger clauses disregarded.

In the other countries of the union a merger clause has the effect that the written
contract is presumed to contain a complete record of the contract terms, but the
courts will admit evidence of an oral agreement whereby the parties expressly or
impliedly decide to disregard a merger clause. If the court is convinced, the merger
clause will be disregarded, and an oral agreement which adds to it or varies it will be
enforced. This holds true of the law in GERMANY, Larenz/Wolf, § 27 V p 528 and
Boergen; Die Effektivität von Schriftformklauseln, BB 1971, 202; see also BGH WM
1966, 1335; BGHZ 66, 378; for AUSTRIA see the presumption is provided in
ABGB § 884. For DENMARK see, Lynge Andersen 87. In FINLAND, a negotiated
term, even if made orally, takes priority over written standard form terms. Parties

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may orally agree to disregard a merger clause, see Telaranta 191; Wilhelmsson,
Standardavtal 86.

2. Not-individually negotiated merger clauses

With the possible exception of THE NETHERLANDS, few of the countries seem to
make any distinction between individually and not individually negotiated merger
clauses. However, the Indicative and illustrative list of tems which may be regarded as
unfair, annexed to the EEC Council Directive on Unfair Terms in Consumer Contracts
of 5 April 1993 includes in para. 1(n) a term which has the object or effect of limiting
the seller’s or the supplier’s ob1igation to respect commitments undertaken by his
agent or making his commitments subject to the compliance with a particular
formality. Under this rule a merger clause will (semble) not be upheld. § 10(3) of the
AUSTRIAN Consumer Protection Act invalidates clauses like the one mentioned in
para.1(n) of the EEC list of terms.

As under the PORTUGUESE Decree Law 446 / 85 of October 25 1985, art. 7

individually negotiated terms take priority over terms in a standard form contract, a
merger clause in such a contract cannot set aside a prior or simultaneous individual
agreement.

3. Extrinsic evidence on interpretation of the contract

In the systems which enforce merger clauses, it is generally held that the parties' prior
statements may be used to interpret the contract, see UNIDROIT Principles art. 2.17,
second sentence, and notes to Articles 5:101 and 5:102 below.

On reliance on merger clauses , see note 4 to Article 2:106, below.

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Article 2:106: Written Modification Only
(1) A clause in a written contract requiring any modification or ending by agreement
to be made in writing establishes only a presumption that an agreement to modify
or end the contract is not intended to be legally binding unless it is in writing.
(2) A party may by its statements or conduct be precluded from asserting such a
clause to the extent that the other party has reasonably relied on them.

A. ‘No oral modifications’ Clauses in General

Clauses in written contracts which provide that modification or termination (ending)
by agreement must be in writing often occur, especially in long-term contracts. Under
Article 2:106(1) such clauses will only establish a rebuttable presumption that later
oral agreements or agreements made by conduct to end or to modify the written
contract were not intended to be legally binding. It would be contrary to good faith to
let the parties’ agreement to use writing bind them to that form when later they have
clearly made up their minds to use another form. If, therefore, it can be shown that
both parties agreed to modify or end the contract, but did not use writing, effect must
be given to their agreement. This applies even if in an individually negotiated clause in
their contract they provided that they would not give effect to an oral agreement to
disregard the “no oral modification” clause.

B. Reliance in spite of a Merger or ‘No oral modification’ Clause

If the parties by their conduct - for instance by oral agreement - have agreed to modify
a contract containing a merger clause or a “no oral modification” clause and one party
has reasonably acted in reliance on this conduct, the other party will be precluded
from invoking the clause.

Illustration: A construction contract contains a clause providing that

“this contract may only be modified in writing signed by both parties”.
Subsequently the parties orally agree to some changes in favour of the
owner which are performed. When later the contractor invokes another
oral modification made in its favour the owner invokes the “no oral
modification clause.

The contractor may invoke the performance of the first oral agreement
to show that the second oral agreement, in favour of the contractor, is
binding on the owner. The contractor has in fact relied on the
abrogation of the “no oral modification” clause.

NOTES
1. Evidential value only

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The rule in Article 2:106(1) which only gives evidential weight to the written
modifications clause is in accordance with the laws of most of the countries of the
Union as far as contracts in general are concerned.

Thus in DANISH and SWEDISH law, even if the parties have agreed that any
modification of their contract is without effect unless made in writing, they may
nevertheless later orally agree to disregard their previous no-oral modification
agreement. However, a party invoking such a later oral agreement has to prove it, see
Ramberg, Köplagen 1995, 108 and Gomard & Rechnagel 94.

The same appears to be the case in GERMAN law see v. Caemmerel

Schlechtriem art. 29 Footnote 19. Parties who “seriously and definitely” wish to
make an informal modification of a contract which contains a no-oral modification
clause may do so. Such an informal agreement may, however, be difficult to prove, see
Dölle (-Reinhardt) art. 15 no. 68.

The Supreme Court of GREECE has held that even if the parties have agreed
to conclude their contract in writing, they may later orally agree to modify it (AP
1054/1976, NoB 1977, 508). Even contracts for which the law requires form for their
modification may be ended by oral agreement (AP l376/ 1982, EEN 1983, 600).

Article 2:106(1) also appears to be in accordance with the law of ENGLAND

and IRELAND, although there is no authority on this exact point. There are cases
holding that a contractor cannot recover extra payment when under the terms of a
building contract he should have secured a written instruction for a variation of the
contract, see Hudson §§ 7-058 - 060.

ITALIAN CC art. 1352 provides: “If the parties have agreed in writing to
adopt a specified form for their future contract, it is presumed that such a form was
intended as a requirement for the validity of the contract”. However, the writers and
the courts are hostile to the adoption of a special form for agreements to modify or
determine the contract, see Scognamiglio 461 and the Court of Cassation 9 January
1996 no. 100. On the other hand, special formalities may be agreed for acts which
enforce already existing rights and duties such as acts of communication or
performance, see Bianca, Il contratto I 307.

2. A mixed approach, or the law is unsettled

In those countries which refuse to admit proof of the existence of civil contracts not
made in writing, modifications must also be in writing, see FRENCH, BELGIAN and
LUXEMBOURG CCs art. 1341. Under art. l793, in a contract providing a fixed price
for the work as a whole, architects and contractors may only demand an increase in
the price for extra work if this extra work and its price have been agreed in writing.

However, BELGIAN courts have admitted evidence of behaviour, often

performance of the modification, which showed that the party invoking art. 1341 had
admitted the modification, see e.g. Cass. 28 February 1980, Arr.Cass No. 410.

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Likewise in SPAIN both CC art. 1593 and the Supreme Court admit oral and tacit
agreements on payment for extra work in building contracts once the work has been
carried out.

In FRANCE and LUXEMBOURG the question whether in commercial

contracts which need not be made in writing, no-oral modification clauses are valid,
has not arisen. The rule is that agreements on evidence, be it agreements on whether
evidence is to be admitted or on the effects of such evidence are enforced, see for
France Ghestin, Goubeaux & Fabre-Magnan no. 63l. In BELGIUM, however, the
courts have admitted evidence by other means than writing of agreements on extra
work in building contracts, once the extra work has been performed, see Cass. 22
March 1957, Pas. I, 887.

As any evidence is admitted for the existence of a commercial contract covered

by art. 109 of the FRENCH and art. 25 of the BELGIAN Commercial Codes, the
parties may orally agree to disregard a previous no-oral modification clause (Dölle (-
Reinhard) 105, who for FRANCE quotes Schlessinger (-Bonassies) II 165).

SPANISH law is reported to be unsettled.

No-oral modification clauses are generally not enforced in USA, see

Farnsworth II 228 ff. However the UCC § 2-209(2) enforces such clauses in sales
contracts , but, except as between merchants, such a requirement on a form supplied
by a merchant must be separately signed by the other party if the other is not also a
merchant.

3. No-oral modification clauses enforced

CISG gives effect to no oral modification clauses. Art. 29(2), first sentence, provides
that a contract in writing which contains a provision requiring any modification or
termination by agreement to be in writing may not be otherwise modified or
terminated by agreement, see also UNIDROIT art. 2.18. The AUSTRIAN law is
reported to give effect to no oral modification clauses except in consumer contracts,
see notes to Article 2:105(2) above.

4. Reliance despite merger clauses and no oral modification clause

Articles 2:105 (4) and 2:106 (2) provide that a party by his word or conduct may be
precluded from invoking a merger or no oral modification clause if the other party has
acted in reliance of the word or conduct. Similar rules are provided for the no-oral
modification clause in US UCC arts. 2.209 (4) and (5), CISG art. 29 (2) second
sentence, and UNIDROIT art. 2.18 . The same rules on reliance apply in
AUSTRIAN law, see Schwimann (-Apathy) § 884 no 3.

Even though they give effect to merger and ‘no oral modification’ clauses, in
those countries which allow the good faith and fair dealing principle to operate
generally, a reliance rule will probably apply, see notes to Article 1:201. In GREEK
law the principle of venire contra factum proprium would apply. On ITALIAN CC

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arts. 1175, 1337 and 1375 see Bianca, Il contratto I 171 and Court of Cassation 13
January 1993, no. 343.

In ENGLAND reliance may be invoked based on the doctrine of estoppel. If in

a binding contract the court finds that the employer allowed extra work to be done, the
contractor may recover payment for this work although the employer did not confirm
its consent in writing, see Hudson §§ 7-077 - 078.

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Article 2:107: Promises Binding without Acceptance
A promise which is intended to be legally binding without acceptance is binding.

COMMENTS

A. Unilateral Promise
An offer is a promise which requires acceptance. An offeror is not bound by its
promise unless it is accepted. Other promises are binding without acceptance and
they are nevertheless to be treated as contracts albeit with some modifications.
Whether there is such a promise depends on the language of the promise or other
circumstances. The promise must of course be communicated to the promisee or to
the public.

Illustration 1: When the Gulf War started in 1990 the enterprise X in

country Y published a statement in several newspapers in Y promising
to establish a fund of 1 million Euros to support the widows and
dependent children of soldiers of country Y who were killed in the
war. After the war X tried to avoid payment invoking big losses
recently made. X will be bound by its promise.

Some promises made in the course of business are binding without acceptance.
An irrevocable documentary credit issued by a bank (the issuing bank) on the
instructions of a buyer binds the issuing bank; a confirmation of such a credit by an
advising bank binds the bank as soon as it is delivered to the seller. Some guarantees
and some promises in favour of third parties also fall under this category, see Article
6:110.

Illustration 2: C sends a letter to the creditors of its subsidiary

company D, which is in financial difficulties, promising that C will
ensure that D will meet its existing debts. The promise is made in
order to save the reputation of the group of companies to which C and
D belong. It is binding upon C without acceptance since it is to be
assumed that C intends to be bound without the acceptance of each
creditor.

Under some legal systems a promisor may issue an instrument of debt

containing a promise which is binding per se, i.e. without regard to any underlying
relationship. These “abstract” promises which often require a form are not covered
by Article 1:207.

Even though a promise does not require acceptance it may be rejected by the
promisee. A rejection will destroy the promise, see Article 2:203.

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B. Application of the Principles to Promises which Do Not Need Acceptance
The Principles, including several rules of this section, apply to promises which do not
need acceptance, see Article 1:107. This holds true of Article 2:102 and 2:103. The
rules on notice in Article 1:303 also apply to such promises, and they are binding as
contracts under the rules in chapters 5 and 6. Some of the remedies provided in
chapters 8 and 9 apply in case of non-performance, notably damages and specific
performance. As they are binding without acceptance they are generally irrevocable.
See however Article 6:110 on stipulations in favour of third parties.

NOTES

1. Promises binding
Under some of the legal systems of the Union, promises may be binding without
acceptance when this is stated in the promise or follows from the nature of the
promise. This applies to GERMAN and AUSTRIAN law where, for instance,
promises of rewards (Auslobung) are binding without acceptance, see note 3(b)(dd) to
Article 2:201.

A promise is also binding on the promisor without acceptance in FINNISH

and SWEDISH law. These impose formal requirements for a promise to make a gift,
but do not require acceptance by the promisee, see for Finland, Timonen 280. The
promise is also binding without acceptance in DANISH law, which does not require
formalities for gift promises.

In THE NETHERLANDS such promises may be binding, see BW art 6:219

and 6:220, and the same holds true of BELGIAN law, see Arr.Cass l979-80 1132 and
1139; Cass. 3 Sept l98l, Tijdschrift Aannemingsrecht- L’entreprise et droit, 1982, 131;
van Ommeslaghe, J.T. 1982, 144. However, for special contracts subject to formal
requirements, such as gifts, Belgian law explicitly requires acceptance, see CC Art.
932.

In SCOTS law there are”unilateral” promises for which no consideration is required

and which are binding without acceptance, see McBryde, Contract, l3-27 and
Requirement of Writing (Scotland) Act l995, s l.

2. Acceptance required
The COMMON LAW differs from the Principles in two respects. First, promises
generally need acceptance. The only clear cases of a binding promise which do not
require acceptance are (i) the deed - the beneficiary need not know of it - but this is
seen as kind of property transfer, and not as a contract, and (ii) the irrevocable letter
of credit. The latter is considered binding as soon as the confirming bank notifies the
seller that the credit has been openened, see Atiyah, Sale of Goods 422; Treitel,
Contract l40-l4l; Goode, Abstract payment undertakings. In the common law a party
can accept a promise by performing an act, see note 2 to Article 2:101 above. Second,

c2-1, as proof 174

the common law requires promises to be supported by consideration, see note 2(a) to
Article 2:101 above.

FRENCH, LUXEMBOURG and PORTUGUESE law require acceptance of

promises, including when (as in France and Luxembourg) the contract is a contrat
unilatéral, and (in Portugal) where it is a unilateral act where only the promisor is
obliged, see note 2 to Article 2:101 above. In SPANISH law promises are not binding
unless accepted which may take place by performing the act required, see SPANISH
Supreme Court
17 Oct l975 , RAJ (1975) 3675 and 6 March l976 RAJ (1976) 1175 and Sancho,
Elementos 173-181.

Equally acceptance is generally required under GREEK law; a mere promise is

not enough. However, CC art. 193 provides that under special circumstances the
acceptance as such may suffice, regardless of whether it has been dispatched or arrives
at the offeror’s place, see Erm AK (-Simantiras ) l93 no 11.

ITALIAN CC art. 1987 provides that a unilateral promise of a performance,

i.e. an undertaking which does not require acceptance, is not binding except in specific
cases provided by law, such as an offer to the public for a reward.

3. Application of rules of contract

On the application of the rules of contract to promises binding without acceptance see
notes to Article 1:107.

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