May 112014

Warren Agin’s blog post on the survivability of contracts during bankruptcy prompted me to resurrect this blog post I had written on my law school blog during my semester studying in Germany.

In my French class* yesterday:

Me (reading aloud): “La resolution de contrat, lorsque celui-ci est syn… synal… synallagmatique?”

Teacher (in French): “It’s the same word as in German.”

Me: [sigh]

Actually, the word exists in English too: “synallagmatic.” But it’s not a word I’ve ever encountered before, not even in law school. Although interestingly, says it means “bilateral” in Louisiana civil law. I suspect, however, that it may mean “bilateral” in a distinctively civil law sense. In the common law system of contracts, when we mean bilateral we say “bilateral,” but then our whole perception of the directional dynamics of a contractual agreement may be significantly different from those in civil law systems.

Take German law, for instance. German contractual law includes the concept of separation. This means that in any transaction involving the transfer of ownership of some good, there are at least three separate agreements bound up in the transaction:

– A contract for the sale of the good
– A contract to transfer the ownership of the good, and
– A contract to transfer ownership of the money used to pay for the good

These agreements may be thought of as three strands twirled into one rope. And, by analogous extension, as we all understand ropes to work, cutting one strand will not necessarily cause the whole rope to be cut. (This separate strand-cutting is known as the principle of abstraction.) In other words, just because one contract fails does not mean the entire deal fails too.

To a common law American, this situation may seem strange. If one of those strands gets broken, how can the rest remain? We generally see each strand as a condition necessary for the contract to retain its overall enforceability. For instance, if the ownership of the bargained-for good has been transferred, but the money has not been paid, how can the party who received the good still keep it? Under American contract law, he couldn’t. But even under German law he likely couldn’t either, although via different legal reasoning than American law.

It is, of course, possible in Germany to structure the overall transaction so that the (sub)contracts contain conditions precedent. In other words, the overarching contract could be constructed so that the agreement for the transfer of ownership in the good wouldn’t become valid until the money was paid. This kind of arrangement can work to both parties’ benefit: the payer can make payment conditional on possession of the good, and then the seller can make the transfer of ownership (which is not the same as possession of the good – ownership refers more to the possession of the title of the good) contingent on receipt of the money. In this sense the German approach to contract enforceability looks a lot like the American way of hinging a contract’s validity on the satisfaction of its bargained-for conditions.

But what happens when the contingent conditions seem to have been met, but something else still invalidates one of the agreement strands? German law, as a codified civil law system, contains a lot of specific rules governing contracts’ validity. For instance, it has a rule prohibiting exploitative pricing. If such exploitative pricing exists within the agreement, any parts of the agreement depending on this pricing would become void. In a contract like the one in this example, this rule would invalidate the (sub)contract to transfer of the money, and also the (sub)contract addressing the general agreement to transfer the good. But the rest of the transaction would still be in effect, meaning that the payer would get his money back yet still also have the good since the (sub)contract governing the transfer of ownership would remain valid. But Germany has even more rules governing contracts, including those that can address this sort of inequitable situation. For example, under German law a party cannot retain a good that he has no legal right to. Looking back at the contract as a whole we see that the part addressing the agreement to sell the good has become invalidated. Thus there is no longer any legal basis for the buyer to retain the good, and so he will have to give it back.

In US common law the same result would be reached, but the rules governing it are a bit more fluid. Even in a bilateral agreement, where both parties promise to do something, the agreement is still much more unified. If one party fails to perform, then the whole contract fails for breach and the injured party gets to sue for damages to “be made whole again.” However, it should be noted that American contracts are not necessarily any more fragile than those in Germany, where the other contractual threads can still hold a fractured agreement together. Common law allows for the notion of “partial breach,” where the courts will try to keep the contract from failing completely by simply requiring the breaching party to pay damages to the injured one to compensate it for the breach it caused. So if, for example, one party had agreed to pay an amount for a good, and the good that the seller delivered was not sufficiently equal to the one bargained for, rather than forcing the entire transaction to be voided, with the good to be returned to the seller and the money to the buyer, the court could instead maintain the transaction by simply ordering the seller to compensate the buyer for the difference in value of the goods.

Also, even in a case of exploitative pricing, American courts can achieve a similar just result as the German courts could in invalidating a contract by invoking the doctrine of unconscionability. In such case the courts could declare the entire contract void, and the transaction would be reset, with the money returned to the buyer and the good to the seller – the same result that German courts would also be able to achieve through the aid of their many statutory rules.

It may be true that the German rules addressing aspects such as exploitative pricing are more precise than the fuzzy common law doctrines on unconscionability. In theory, this might mean that German contractual disputes would have more predictable results. But on the other hand, by not being beholden to strictly articulated rules, American courts may have more flexibility in achieving just results.

Still, neither system is so completely foreign to the other. Though each jurisdiction may structure its system in its own way, with its own internal balance, in the end the underlying ability to contract exists equally in both places. While there surely remain differences between how German and American contract disputes might be resolved, I would suspect they would be found mostly along the edges – the fringe cases. In terms of the basic results, however, they are likely much the same.

* 2014 update… here’s what I had to say about that class:

I’m taking a “juridique” course and just had the first session today. Actually, the course began last week but I was slow on the uptake and didn’t decide I wanted to take it until after it began. C’est un dommage, mais ce n’est pas grave…

It’s a mind-expanding endeavor on two levels: one, it’s French language practice, and two, it’s an explanation of French legal structure. And it’s a particularly interesting class to take with German students. In a sense, we’re all equal because now we’re all fumbling around in a second language for a change. On the other hand, the German students still have some advantages: the class is all in French, but the provided vocabulary lists provide only German translations. Also, when we consider legal hypos, each hypo maps well to the Germanic tradition of jurisprudence, and I’m the only weirdo in the class whose thinking defaults to the American approach.

Today, for instance, when we were discussing the types of errors that could result in a contract being deemed void, I was the only one who started talking about cows. Why cows? Because in the back of my mind I remembered a case we studied in my first year contracts class on the subject of mistake involving people buying the wrong cow.

Of course, in having brought up that case in our discussion now all my German classmates probably think all of American jurisprudence has to do with cows. Which obviously isn’t the case – for instance, there have been some very important cases involving chickens.

Both posts slightly edited prior to reposting.

 Leave a Reply

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>