“In the beginning of commercial contracts, there was a giving.”1
The development of contract law in Roman law and in the early common law was at first remedial, i.e., it grew with the availability of “forms” or causes of action and defenses for a specified group of contracts that were mostly entered into or performed by at least one of the parties. As was apparent during the Roman and Medieval law periods, with some exceptions such as in the Mideastern trade among Jewish merchants, executory promises remained nuda pacta in civil and common law countries until credit and promises to give or repay loans became common in the marketplace. As noted by Professor Patrick Atiyah, the distinguished historian of English private law, until the late eighteenth century, the English law of contracts was “largely a law of executed contracts, and not a law of executory contracts.”2 In contrast, the modern law of contracts under both civil and common law legal systems resulted from a “general theory of contract”3 that identified the basic elements of a binding contract and its constituent promises such as, among others, mutual assent, capacity, cause or purpose (causa) and consideration. The questions addressed by this theory were of little or no interest to the Romans or to early common law lawyers. Typical among them were: What is a contract? Why is a contract binding and among whom? What are the constitutive elements of binding contracts and promises? And, of particular interest to this Chapter, how and when is a contract formed?
This chapter focuses on the formation and main elements of contracts. Prominent among these are the Code Civil inspired element of “causa” and the Anglo-American “consideration.” They will be studied mostly from the vantage point of commercial or for-profit transactions. This context excludes gratuitous, charitable contracts or contracts for the rendition of professional services which, like the services of medieval guilds, continue to earn tariff-based “honoraria” (instead of negotiated fees) in many a civil law country. As discussed in an earlier chapter,4 the latter types of contract will also be referred to as “civil” and are largely governed by the Code Civil and its progeny.
Despite the for-profit nature of commercial contracts, the reader will soon be introduced to a connection between altruism in the form of gift giving and the development of the Anglo-American contractual element of consideration. As with the comparison of other legal institutions, the main purpose of this chapter’s comparison 862between causa (or the reason for the enforcement of a contract) and consideration (or the giving of something of value to initiate the life of a contract or a binding promise) is to determine which of these concepts best facilitates the formation and enforcement of commercial contracts. Stated otherwise, which of these elements, if either, is the true and effective catalyst of a binding promise or agreement? In order to best compare these two institutions, it will be helpful, as is customary in this book, to place causa and consideration in their respective normative and socio-economic contexts. This contextual comparison promises to be especially rewarding because of their contrasting intellectual pedigrees—while causa traces its pedigree to none other than Aristotle, consideration’s pedigree is more pedestrian: It grew up from custom and usage, ancestral as well as medieval, and was invariably associated with the giving of gifts. Why one of these elements (causa) never succeeded in performing its mission and the other (consideration) has had a very successful, multi-century career but by now has lost much of its usefulness, is an inquiry pursued throughout this chapter because of the lesson it teaches about sound commercial law making.
Hopefully, the reader will become familiar with the method of forming contracts that emerges from the trust and gift giving that act as catalysts of cooperative behavior between the parties. Only when formative, customary behavior such as gift giving is present will there be room for the so-called “rules of traffic” that delineate when the subsequent steps should be expected and manifested. The more customary a contract law is, as has been the case in Anglo-American law, the more successful will be its legal institutions, as compared to its intellectualized counterparts found in such places as the Code Civil.
The search for the suitability of causa or consideration as an encouragement of commercial contracting is part of a broader inquiry into the formation of two contradictory conceptions of contract. One is the product of a bilateral or joint decision that resulted from a face-to-face meeting and a writing often formalized in a ceremony before public officials, notaries and/or witnesses. Typical of this version of contract is the formal deed of sale of real property in the Code Civil. As discussed in an earlier chapter,5 this contract must be executed inter praesentes, i.e., by parties or their representatives acting “face-to-face” before a notary public or subject to the official validation of their signatures.6 The seriousness with which the notarial deed was regarded by Robert Pothier (among other pre-Code-Civil commentators) was illustrated in an earlier chapter.7 He acknowledged that some contracts required no formalities beyond the mere assent of the parties, as was the case with the consensual contracts in Roman law (such as sales, loans, partnership and leases). Yet, if in addition to agreeing on every term and condition of such a consensual contract the parties also agreed to execute a notarial deed, they were, according to Pothier, at liberty to walk away from the remainder of the agreement until a notarial instrument was subscribed. In other words, despite the agreement, there was no contract. What mattered in Pothier’s eyes, then, was not that the parties agreed on the substance of the contract, but that such a 863substance had not been properly memorialized, as also agreed by the parties. One wonders why Pothier was not willing to grant the victim of the breach (the party who did not walk away) an action to force the reluctant promisor to execute the public deed including the rejected terms and conditions. By doing this, the judge would preserve both the integrity of the substantive agreement and its formality. This, incidentally, is the remedy granted by Article 1279 of the Spanish Civil Code.8
I should add that a contract so formally created was generally used in sales and mortgages of land whose transactional life was to last for generations, during which time their terms and conditions usually remained unchanged. The above-described contracts were not peculiar to Pothier’s France. A less but still excessively formal contract that required face-to-face negotiation and agreement was also popular among seventeenth-century common law lawyers. As summarized by Professor Kevin Teeven of Bradley University, in this method of contract formation “the parties either emerged from face-to-face negotiations with an agreement or they didn’t.”9 And as noted by a seventeenth-century manual on pleading: “If two speak together about an Agreement, and they in the midst of their discussion break off, and they say they will talk further of it tomorrow; this is imperfect, and no Action will arise upon this conference.”10
Commercial sales, on the other hand, were treated as birds of an entirely different feather by the commercial codes of the same civil law countries whose civil codes were insistent on costly and time consuming formalities for the purchase and sale of real property. Article 109 of the French Commercial Code of 1807 listed the evidence that could establish the existence of a sale of goods as follows:
Purchases and sales can be established by: (Les achats et les ventes se constatent) 1) Notarial or public documents (par actes publics); 2) Documents under private signature (par actes sous signature privée); 3) Detailed note or memorandum or decision by a foreign exchange agent or broker duly signed by the parties (par le bordereau ou arrêté d’un agent de change ou courtier, dûment signé par les parties); 4) An accepted invoice (par une facture acceptée); 5) By correspondence (par la correspondance); 6) By accounting books of the parties (par les livres des parties); 7) By the testimony of witnesses, when the court deems it admissible (par la preuve testimoniale, dans le cas o%21g le tribunal croira devoir l’admettre.).11
This approach to commercial contracts was also widely followed in the civil law world and is apparent in some of the Spanish and Mexican decisions transcribed in the Appendix to this chapter. Its underlying principle is referred to as “spiritualist”: Commercial contracts exist even if entered into orally as long as the spirit of the transaction can be found in extrinsic documents or made clear by testimony before the court. Anglo-American readers will readily point out that this is not the approach of the statute of frauds embodied in § 2–201 of the U.C.C.12 Under this section, oral agreements over $500 require not only “some writing sufficient to indicate that a contract for sale has been made between the parties,” but also a written confirmatory 864statement or memorandum “signed by the party against whom enforcement is sought….”13 Yet, I must warn the reader that despite the view that attributes the “spiritualist principle” to a conceptual breakthrough by keen commercial codifiers, in my view, one must also take into account that the “spiritualistic” approach may well be due to the low esteem with which French citizens held small or retail merchants at the time of codification. For those who regarded retail merchants as dealing with “vile things” (res mobilis, res vilis), there was not much of a need for firm evidence on the existence of their transactions.14 As will be apparent in this chapter, the civil vs. commercial characterization of contract in civil law countries is neither clearly nor uniformly applied by courts. Thus, insurance (supposedly commercial contracts) are treated as ceremonial and essentially formal (ad solemnitatem) contracts, and so, are promises to sell commercial land, among others.
Although much less formal than the “static” Code Civil contract, the “classic” contract of United States nineteenth- and early-twentieth-century decisional law evinces static features which were also apparent in the Restatement (First) of Contracts (hereinafter Restatement (First)).15 Professor Richard Speidel illustrates them in the following example:16 A and B agree that A will supply a certain service to B for price to be determined in the future. A starts to perform the service but after his initial performance, B repudiates the bargain. A brings an action against B for breach of contract and claims damages based upon what he reasonably expected to profit as a result of his full but interrupted performance. B argues that no contract was formed and Professor Speidel asks, “Who should prevail”?17 He then traces the answer to Professor Samuel Williston’s first edition of his treatise on contracts, and from there to the Restatement (First):
Professor Williston, in the first edition of his treatise, stated that there could be “no legal obligation” in cases of this sort until the parties had agreed in fact on the price. Because either party could refuse to agree, it was “impossible for the law to affix such an obligation to such a promise.” The Restatement of which Williston was Reporter, prescribed that an offer “must be so definite in its terms, or require such definite terms in the acceptance, that the promises and performances to be rendered by each party are reasonably certain…. The answer, then, was clear: A had no contract claim against B and, unless part-performance could be severed or had benefited B, A had not claim for restitution. This followed even though A might have been able to establish a reasonable market price for the agreed services.18
The policy behind such a rule, as Speidel points out, is the conclusion that as of the time of formation, it should be certain if a contract exists. To which he added, in typically understated but insightful fashion, that Professor Williston’s conclusion was based upon the empirical assumption that bargains are “discrete transactions.”19 This was the same assumption of discreteness of the bargain-contract present in the seventeenth-century English law referred to by Professor Kevin Teeven in which: “the parties either emerged from face-to-face negotiations with an agreement or they didn’t.”20 As the reader will recall, this was the same conception of contract formation of the Code Civil that I described as “ceremonial.” It was, according to Dean Roscoe Pound’s characterization, a “mechanical” type of jurisprudence, or one whose rules demand a complete agreement on all the formative terms before a bargain-contract can be formed.21 Pound’s criticism was shared by Professors Arthur Corbin and W.W. Cook. The latter suggested that the “relevant phenomena” for observation should not have focused as much on the judicial doctrines or holdings, but on the transactions involved in those cases as reflected in their factual patterns.22 Professor Corbin’s transactional universe did not just include attention to factual patterns—it was considerably broader than Cook’s, including: “[T]he customs, business practices, feelings, and opinions of man—the prevailing mores of the time and place.”23 Not surprisingly, Karl Llewellyn, one of Professor Corbin’s most faithful and esteemed disciples (and the guiding spirit behind Article 2 of the U.C.C.), dispensed with the “rigid rules of offer and acceptance contained in the first Restatement.”24
As stated by U.C.C. § 2–204(1) and (3):
(1) A contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.25
U.C.C. § 2–305(1):
The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case, the price is a reasonable price at the time for delivery if
(a) nothing is said as to price; or
(b) the price is left to be agreed by the parties and they fail to agree; or
(c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and is not so set or recorded.26
As concluded by Professor Speidel, “A more complete triumph of standards over rules is hard to imagine.”27
According to the ceremonial-static conception, one must assume that even if one of the parties promised irrevocably to do or not to do something, the failure to arrive at an agreement on what the parties were supposed to promise and to do precluded the enforceability of such a promise.28 This version of contract is reminiscent of the being of things espoused by Parmenides (a fifth- and sixth-century Greek philosopher and logician):29 For something to acquire its individual being, argued Parmenides, once created it remains unchanged. If it is altered, it becomes a different thing, and whoever maintains an opposite view (i.e., that change is inherent in the nature of being) contradicts himself, for the being of a thing, no matter what it is, cannot be equal to its opposite (the non-being).30
The constitutive elements of such a Parmenidean contract reflect the nature of its being. Thus, Article 1108 of the Code Civil requires: 1) “The consent of the party who binds himself;” 2) “His capacity to contract;” 3) “A definite object which forms the subject-matter of the undertaking;” and 4) “A lawful cause in the obligation.”31 Another constitutive element was the formality, or better still, the solemnity of a contract whose amount was over a certain specified sum. As required by the original version of Article 1341 of the same code:
An act must be made before notaries or under private signature, respecting all things exceeding the sum or value of one hundred and fifty francs, even in the case of voluntary deposits; and no proof can be received by witnesses against or beyond what is contained in such acts, nor touching what shall be alleged to have been said before, at the time of or subsequently to such acts….32
The absence or failure of these elements renders the contract null and void, and according to some codes, such as Mexico’s Article 2224 of its Civil Code of 1928, it can be held “non-existent” and without legal effects.33
This view of non-existent contracts, deprived of any legal effects, could only exist in a world of an exclusively formal logic and of robotic and lifeless beings. Consider, for example, a classroom exchange in a course entitled “Introduction to Civil Law” that I 867witnessed at a Mexican law school in 1988. One student asked the professor to give him an illustration of a non-existent contract for lack of a valid object, and he replied that one such a contract was a marriage between homosexuals. He then added:
Since the object of such a contract is a marriage between a male and a female, the absence of such an object renders the marriage non-existent and without legal effects. As Article 2224 of the Civil Code states, [such a contract] as a non-existent contract … is not susceptible of being confirmed by the parties, nor can any rights therein be acquired by a statute of limitations and its non-existence can be invoked by any interested party. In effect it is as if no contract had ever been executed by the parties.34
Another student then asked him about the legal status of a child who had been adopted by such a “non-existent” marriage. The professor quickly pronounced the legal status of such a child as non-existent, but apparently realizing the factual and human absurdity of his statement, he quickly added the term “unadopted” or as if the adoption “had never taken place.” I then silently asked: “How about the legal status of all the contracts that had taken place as a result of that adoption and while the child lived as an adopted legal person?” Would or should the law require that those transactions, and the many others based upon them, be erased from the legal universe by returning the services rendered, goods sold or moneys paid in connection with the life of a non-existing legal person? Needless to say, my colleague could not have given any answers to these questions even if I had asked them aloud.
Inherent in the Parmenides-like vision of the being and non-being of contracts is not only a denial of the life that goes on outside the confines of a legislature, court of law or notarial office, but also the manner in which contracts must be interpreted. Accordingly, Article 1319 of the Code Civil states that: “[A]n instrument in public form [i.e., an acte authentique or a notarial deed] is absolute proof of the agreement which it contains between the contracting parties and their heirs or legal representatives.”35 As previously noted, Article 1341 added: “[A]nd no proof can be received by witnesses against or beyond what is contained in such acts….”36
One net effect of such a conception of contract is that it threatens the annulment of contracts that involve the largest and poorest segment of the business community, whose joint ventures, partnerships, limited liability or corporate businesses seldom fulfill all the requirements of a static or ceremonial contract.37 Another effect is the prevention of enforcement of economically important transactions such as options to purchase or promises of sale. While supposedly binding on the promisor, they are not binding on the promisee until he can satisfy himself that the conditions for his purchase or lease or exchange are propitious. Yet, once he does satisfy himself of those conditions, and even within the time period of validity of the option or promise to sell, he cannot enforce his option or the seller’s promise because neither is binding until both parties reciprocally agree to be bound. Lawyers and businessmen in highly 868promising developing nations such as Colombia and Mexico have told me that many an important investment did not take place because of such unenforceability.38
While commercial contracts can also be formed formally, ceremonially and statically, their largest number is formed “dynamically” and “inter absentes.” By “dynamically,” I mean a contract formed as a result of a unilaterally binding promise or of the conduct of the contracting parties, even though their express or implied promises are not reduced to writing or do not occur simultaneously or reciprocally. Such a contract is usually formed, changed or terminated more quickly than its static or civil counterparts. This is not to say that commercial contracts, even when organically connected, do not enjoy a discreet existence. They do, but as a rule, they exist for a shorter period of time than that of their civil/static counterparts because merchants cannot make a living from buying and holding on indefinitely to the goods they bought, any more than a deposit banker can earn profits by not lending or investing what was deposited with him.
The fact that contemporary commercial contracts are mostly inter absentes should not be overlooked. Otherwise, concepts intended for-face-to-face transactions would have to be applied to transactions among strangers dealing at a distance from each other, and relying on internet or catalogue descriptions of the goods or services involved instead of on the “eying and touching” methods used in European medieval street markets. The nature of the market and methods of marketing have changed significantly. As warned by Professor Karl Llewellyn in his 1930 edition of his casebook on the Law of Sales: “The concepts that took shape on the basis of a face-to-face dealing with present goods have in a short century and a quarter been tortured into application to the nationwide indirect marketing structure of today.”39
Inter absentes formation can be quite varied. Contracts can be formed by: 1) the issuance of a promise followed by a counter promise that accepts the proposed terms and conditions of the initial promise but not infrequently includes new terms and conditions requiring either re-negotiation or excision; 2) performance of the terms and conditions proposed by the offeror or promisor; 3) the issuance of a “firm” or “binding” promise that remains irrevocable and binding on the promisor-offeror for the period stated in his offer or promise even though the offeree or promisee is not bound until he accepts the offer or promise; 4) the conduct (not the promises) of two or more parties that indicates that they are willing to be bound by the same terms and conditions set 869forth in a pre-existing “Master Agreement” or in a “contract of adhesion”; or 5) the commercial conduct of two contracting parties who in the past have entered into contracts with similar terms and conditions and tacitly accepted their course of dealing or usage of trade as binding. The formation of contracts in these five transactions (as well as unlisted others) is dynamic not only because of the likelihood of subsequent changes in rights and duties of the contracting parties without requiring a novation, but also because of the speed with which many of them are formed.
Consider, for example, a bilateral contract that the parties label a “lease of equipment” and that contains a clause that grants to the lessee the option to purchase the equipment at any time by paying an additional sum, thereby converting what was originally a lease into a sale in installments. Notice that such a purchase will be accomplished without any contractual ceremony; the mere payment of a certain amount by the lessee instantaneously transforms such a contract into a sale agreement. Consider also the so-called “short sale” of securities. In such a sale, the seller “S” of the securities borrows the securities from a broker-lender “B” and sells them immediately at the current market price to “P,” assuming that shortly after this sale the price of the securities he borrowed and sold will fall and that when the time comes to replace the securities he sold to P, the price will be sufficiently low that he will be able to purchase them cheaply enough to “cover” his “short position.” His profit is the difference between the price at which he sold his stock and his cost of buying it back.40 Accordingly, in a short period of time, S becomes a buyer, seller and borrower of similarly denominated stock in transactions that involve three parties at a minimum, but could involve others as well.
Similarly, in a “line of credit” agreement, the underlying loan can be made subject to constant changes, adjustments or variations that depend upon the proportion between the market value of the borrowers’ collateral and the amount of the loan. Normally, the line of credit lender will be able to enforce his rights based upon the time he filed his security interest. However, his rights can also be made subject to special priority rights given to other later-filing creditors such as one with a “purchase money security interest,” thereby changing, often unexpectedly, pre-existing priorities.
Yet another clear illustration of the diverse and often progressive or successive formation of contemporary commercial contracts is the “pro forma” invoice. It is used by large numbers of buyers and sellers in local and international trade each day. I looked for a description in a source that was likely to be consulted by a large number of lay users, thus reflecting the popularity of its use world-wide. It was provided by Wikipedia, which is usually not a scholarly source, but in this case, a reliable one after I verified its description with commercial lawyers in Europe, Asia and Latin America:
[A] document that states a commitment from the seller to provide specified goods to the buyer at specific prices. It is [also] used to declare value for customs. It is not a true invoice, because the seller does not record a pro forma invoice as an accounts receivable and the buyer does not record a pro forma invoice as an accounts payable…. [It] is not issued by the seller until the seller and buyer have agreed to the terms of the order. In few cases, [the] pro forma invoice is issued for obtaining advance payments from buyer, either 870for start production or for security of the goods produced. [Finally, it is followed by a formal invoice when the invoicing party performs.]41
Please notice its differing uses, and the malleability of its legal features: Its liability is not firm enough to warrant its recording as an account receivable or payable, yet is not issued until there is agreement “on the terms of the order.” Meanwhile, once issued, the pro forma invoice can help obtain the buyer’s advance payment. Would the fact that the “true” invoice is not issued until the contract is deemed performed by the supplier not indicate that in certain agreements, invoices are used to document different and successive parts of the same contract?
Finally, consider a computerized method of doing business pursuant to a “Master Agreement” among various merchants and suppliers of services whose sequence is triggered by a buyer “B” sending a purchase order to the seller “S” of product “X.” Immediately upon receipt of B’s purchase order, S’s computer issues an application for the issuance of a letter of credit or documentary to issuing bank “IB.” Prompted by this application, IB issues its letter of credit to S. B’s purchase order also triggers S’s computer’s issuance of a message to a freight forwarder “FF” requesting that he procure shipping space in vessels owned by carrier “D.” Upon D’s response to FF, the latter issues a communication assuring S of the shipping space requested. B’s purchase of X from S depends upon the performance of all the other transactions, which thereby become constitutive elements of the formation of such a sale. Yet, these transactions do not involve B and S directly nor could they be considered to be contracts between them, even though they are the result of a Master Agreement among all the participants. The speed with which unilateral firm promises, such as the present-day computerized “buy order” of stocks and bonds become binding sale agreements, or with which leases can be transformed into installment sales, or loans of securities become part of “short” sales, requires a model of contract formation other than that of the static, bilateral meeting of the minds and its usually ceremonial formation. It requires a conception unnatural to those who associate contracts invariably with a bilateral, simultaneous meeting of the minds’ transaction. The dynamic commercial contract can come about unilaterally at first or by the performance of expressed, unexpressed or implied terms and conditions first by one party and then by another. It can also come about by a course of dealing that supersedes terms and conditions originally agreed upon by the parties, but tacitly waived or renounced by the reiterated conduct of the parties.
In sum, commercial contracts are often borne in the perennially flowing waters of commerce. Such a formation is the opposite of that contained in the static conception reminiscent of the teachings on the nature of being by Heraclitus (also a Greek philosopher, circa 500 AD): A being which is constantly either changing or subject to change, and thus equal to a “non-being.”42 And as will be discussed in later sections, the notions of “causa” and “consideration” reflect these static and dynamic versions of contract: Causa reflecting an unchanging and static element of a Code Civil “civil” contract (“once a causa, always a causa” was one of my contracts teachers favorite sayings) and consideration at times taking the form of an act or performance in 871exchange for a unilateral executory promise, at other times a promise, and at others the contractual conduct of the parties.
And the same is true with formalities: While the requirement of a public deed or acte authentique in civil-static contracts is often treated by the courts as an essential solemnity without which the contract is either non-existent or absolutely null, the requirement of a writing or of a registration of a commercial (dynamic) contract or transaction is functional or pragmatic; it is used to evidence the seriousness of the contracting party’s intent to bind himself, or to provide public notice to third parties of the creation of rights in goods or services, including the performance of a contract or the proceeds of an account.43 In the final analysis, the catalyst in the formation of a dynamic contract is invariably a form of giving, whether actual or symbolic.
In principle, a contract, whether statically or dynamically formed, is governed by a nation’s “official” or “positive” law, which, as defined earlier,44 includes not only its constitution, statutes, administrative and court decisions, but also, depending upon the jurisdiction, its “general principles” and legal commentary. In fact, many a commercial contract is governed by the living law of their marketplace and, as just noted, this law will deem the contract formed when it is in compliance with its customs, usages and practices or course of dealing. Among the many commercial contracts so formed are, for example, purchases and sales of cattle in Spanish fairs (with no more than the parties’ handshake, although at times forcefully encouraged by a “contract facilitator”);45 sales, consignments, pledges and deposits of diamonds in New York’s Diamond District concluded by the pronouncement of a ritual Hebrew saying-blessing followed by a handshake;46 purchases and sales of present or future commodities expressed by an open outcry of exchanged offers and acceptances by brokers and trading floor specialists in commodity markets in Europe and United States.47 As technology evolves, transactions diversify and global markets rely on new technologies, there is every reason to expect increased growth of the living law of automated customary rituals.
Yet, while the living law of contract formation progresses at an ever quickening pace (some of it being increasingly compiled as written usages of the trade or profession), its official or positive law counterpart continues to move at a snail’s pace and with occasional regressions. Interestingly, this is not just a contemporary phenomenon. It was the case, for example, with the Roman law of pledges during the 872middle ages. While the Roman pledge (pignus) had become less formal during the classical period of Roman law and some renowned jurists such as Ulpian started characterizing it as an informal “consensual” contract,48 consensual contracts themselves ceased to be enforceable during the early middle ages in Southern Europe and in Professor Gorla’s words, “it took a long time before they became enforceable again.”49
Another notable regression in the evolution toward a more dynamic law of contracts took place after Lord Mansfield’s decision of Pillans v. Van Mierop in which he held consideration was unnecessary in commercial contracts once merchants had chosen to express their promises in writing.50 This informal and dynamic view of contract was rejected thirteen years later by the House of Lords’ decision in Rann v. Hughes.51 At times, the regression is motivated by a decline in commercial activity, as during the early middle ages, and at times by the lack of vision of law makers and adjudicators. Hopefully, the frequently-cited UNCITRAL Convention on Contracts for the International Sale of Goods (CISG),52 the UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles),53 and the European Principles of Contract Law (EPCL),54 whose provisions on the formation of contracts were inspired by best contemporary commercial contract practices, will accelerate the modernization of national positive law.
What is at stake in understanding the static versus dynamic dichotomy is not an exercise in erudition or in showing off fancy legal nomenclatures. It is the realization that depending upon whether a contract is formed in static or dynamic fashion, so will it be interpreted and so will its breaches be remedied, as will be apparent in the subsequent chapters.55
The willingness of merchants to enter into commercial contracts generally depends upon their ability to predict outcomes, not only at the end, but also at different stages of the transaction. During the formation stage of, say, a sale agreement, one of the principal concerns of merchants is whether their recently agreed-upon contracts are binding enough and confer upon them proprietary or possessory rights sufficient to enable them to transform, resell or exchange what they bought or replaced. As just discussed, unlike the land-owning bourgeois of the notarial deeds (actes authentiques) of the Code Civil, retail or wholesale merchants cannot carry out their day-to-day business if they or their attorneys would have to investigate the “historical” or chain of title of their wares. Surely, they need to know that the twenty-year lease that they negotiated for their business premises is enforceable or that they enjoy an exclusivity 873of their patent rights for an even longer period of time, but in their day-to-day transactions they have to be able to assume that, as stated by Article 2279 of the Code Civil, “in matters of moveable goods, their possession is the equivalent of title,” or as more succinctly stated by the heading of U.C.C. § 9–202, “Title to Collateral [is] Immaterial.”56 Simply put, commercial transactions carry with them peculiar sets of reasonable expectations and thus peculiar rights and duties.
Furthermore, what is reasonable in these expectations cannot be dictated by metaphysical or “ivory tower” criteria absorbed by questions such as “What is the ultimate reason for a contract to be binding?” As discussed in previous chapters,57 the reasonableness of commercial expectations is based upon what similarly situated contracting parties would have expected when pursuing their own advantage but refraining from interfering with their counterparties’ ability and willingness to profit from the same transaction. If the counterparty finds it necessary to sell at a loss, it would not be unreasonable to purchase at the lower price. What would be unreasonable, however, would be to coerce that party to do so by the use of a superior force or economic power. As long as these reasonable expectations are reflected in the outcomes of their agreements, commercial law will be predictable because, as pointed out in these chapters, commerce is at its root a cooperative and not a zero sum game. Hence, causa and consideration must be evaluated in light of how each satisfies such reasonable commercial expectations. Of central importance, then, is the study of the evolution of these concepts, including the consequences of their static or dynamic perspectives.
Causa was an essential element of contracts in Roman and Medieval law. However, the meaning of causa in Roman and Medieval law was far from precise. For a considerable period of time, Roman law made the formation of contracts dependent upon the type of contract involved. As was discussed earlier, some contracts, such as the stipulatio, were formed once their formal, ritual questions and answers were voiced and, at a later stage, written out.58 Others, such as sales, rentals, partnerships and agencies (known as consensual contracts), were formed by the parties’ mere consent,59 while the type of contract known as “real” was formed once the thing (res) lent or deposited was delivered to the obligor, who thereafter became bound to return it or its equivalent.60
Causa was linked by the Romans to the above and other typified contracts in a manner that made its meaning redundant, for causa was what characterized each type of contract.61 If one were to ask a Roman jurist what made the contracts that contained a causa enforceable, his answer would likely be that each type of contract had its own causa and performance in accordance with such a causa is what made them binding.62 Hence, if the contract was of the type known as “real,” its causa was the delivery of the 874thing (res) to the borrower, lessee or bailee and this delivery prompted the express or implied promise to return it. Or, if it was a consensual contract, its causa was what the parties’ to everyday transactions such as sales, leases, agencies or partnerships typically agreed upon in those transactions.
It is true that in post-classical and Justinian law, the actio prescripti verbis63 became a more general (less typified) contractual action and applied to any promise or bilateral agreement, particularly to atypical or innominate and “synallagmatic” contracts which consisted in reciprocal doing or giving (“I give so that you give,” “I do so that you do,” or variations thereof). Yet, because of the need for reciprocity, the actio prescripti verbis was granted only when one of the parties had performed her obligation, i.e., “when she has given or made something in exchange for the promise intended to be recognized in a lawsuit.”64 This giving or doing something, once performed, was the causa data of the contractual obligation.65 Uncertainty prevailed, then, not only conceptually, but also transactionally: The need for giving or doing something (causa data) meant that until those acts had taken place, all promises were revocable. Despite the unenforceability of the promise(s) that preceded the giving or performing a causa data, Gorla suggests that this initial performance by one of the parties was influential in the development of both causa and consideration.66 As will be discussed in later sections, Gorla seemed on the right track where consideration was concerned; however, where causa is concerned, the reader should be the judge.
The medieval glossators’ and commentators’ search for a more precise meaning of the Roman causa of contracts led them to Aristotle’s classification of the causas of everything that existed. In his books Physics and Metaphysics, Aristotle discussed four causes for the existence of acts or human behavior and things: 1) the “material” cause or the physical ingredients out of which a thing is made, e.g., the bronze of a statue; 2) the formal cause or that which gives form to the action or thing, such as the shape of the statue; 3) The efficient (also referred to as “impulsive”) cause such “as the art of bronze casting” that enabled the transformation of shapeless bronze into a statue; and 4) the “final” cause or the end or purpose for which the thing is made or the acts undertaken, such as the enjoyment or profit of having or selling the statue.67
Such was the awe of Aristotle’s observations on nature and man among the medieval glossators of the Corpus Juris Civilis (incomplete and redundant as Aristotelian observations were) that the twelfth-century glossator Johannes Bassianus relied on two Aristotelian causes to explain not only why but when a contract was unenforceable. As translated by the Chilean legal historian Alejandro Gomez Brito, Bassianus’ gloss stated:
[W]hen there is a giving of something as a contractual (datio) and this giving was caused by an (efficient) or impulsive cause (ob causam impulsivam), which turns out to be false, (causa falsa), an action to recover what was given because of an unfulfilled causa data is inappropriate (condictio causa data 875causa non secuta u ob causam datorum); whereas, if a thing was given as a final cause (ob causam finalem) and such a cause was not fulfilled or could not be fulfilled (causa non secuta), then the above action would be appropriate and the plaintiff would succeed in recovering what he gave.68
Guzmán Brito suggests that Bassianus’s distinction between an efficient or impulsive and a final cause was based on the scholastic principle that once a final cause ceases to exist, so cease the effects of the agreement (cessante causa (finalis) cessat effectus).69 Even though this distinction was advocated by other glossators and appeared in Accursius’ influential Glossa,70 it did not explain how an efficient cause that Aristotle characterized “as the art of bronze casting” applies to the formation of a contract, especially with an outcome so contrary to the contract’s final cause. Assume, for example, that the efficient cause of my buying the statue is that it is artfully casted, but my final cause for buying is my expectation that I will be able to profit from its resale. The final cause may well be a more precise description of what caused my intent to purchase the statue, but why assume that the failure to obtain an artfully-casted statue is incompatible with my inability to profit from its resale, especially when the “final” cause may well depend upon the fulfillment of the “efficient” one?
Article 1108 of the Code Civil states:
Four requisites are essential for the validity of an agreement (convention): The consent of the party who binds himself; His capacity to contract; A definite object which forms the subject-matter of the undertaking (engagement); A lawful cause in the obligation (Une cause licite dans l’obligation).71
The stark consequences of a lack or failure of a lawful cause were spelled out by Article 1131 of the Code Civil in words that echo Bassianus’ gloss and the scholastic principle cessante causa (finalis) cessat effectus: “An obligation without cause or with a false cause, or with an unlawful cause, may not have any effect.”72
Please note the draftsmen’s difficulty in finding a common term for contract even within the same code provision. The generic term used by the drafters seems to have been convention. Yet, they also used engagement, which is a term often used in connection with an individual’s undertaking or promise, and obligation, a term equally applicable either to an individual, mutual or reciprocal undertaking. This multiplicity of terms reflected an unresolved difficulty: Do all the terms have the same meaning or are engagements and obligations constituent elements of contracts, and if so, what is their relationship with causa? If, say, obligation is such an element, then a particular obligation (among others) of a contract may be unenforceable while other obligations (and at least part of the contract) may be enforceable. If, however, obligation is 876tantamount to a contract, then its falsity or illegality would render the entire contract without effect. As if these possible redundancies were little, why would a false causa not be an unlawful one? Was there a true need for the additional category of unenforceability?
These and other difficulties plagued the interpretation of the Code Civil’s causa provisions from the time of their enactment. Faced with the lack of uniformity and precision rather than doing away with causa, the first interpreters of the Code Civil suggested further distinctions and classifications of the still imprecisely defined causa. For example, Victor Marcadé’s 1848 eleven volume commentary on the Code Civil states that the cause of a contract reflects the drafters’ use of both a technical language (le langage du droit) when it refers to the cause of the contract (la cause du contrat) and an everyday or “ordinary language” when referring to the cause of the obligation (la cause de l’obligation). Then, to clarify the proper application (and meaning) of causa, he added two types:
When I sell you my farm, the cause of my contract or of my obligation, if you will, is the motive that prompts my engagement; sometimes it may be the necessity of paying out considerable sums, or sometimes the need to receive rental payments. But in technical legal language, the first motivations [when entering into a contract] ought not be considered; only the last and immediate motive of the obligation are the ones to be considered as their legal cause: when I obligate myself to deliver my farm, my immediate motivation, the legal cause of my obligation, is the counterparty’s willingness to pay me a sum of money without regard to the use that I planned for that money.73
As apparent in the above-quoted passage, the archetypal contract and contracting parties envisaged by Victor Marcadé were identified in an earlier chapter as of major interest to the Code Civil and to its archetypal bourgeois landowner—the occasional, formal and certain conveyance or acquisition of real property—rather than the contracts regularly entered into by everyday businessmen.74 However, even though the immediate-final cause was more objective and thus more predictable than the subjective motive of each contracting party, the latter version of causa is quite alive and one can find it even in connection with the commercial sale of promises such as in an insurance policy, as will be discussed shortly.
Uncertainty as to the meaning of causa remained and, not surprisingly, other nineteenth-century Latin American legislators who were generally inclined to follow the Code Civil expressed their displeasure with Article 1108’s causa. Among them was the drafter of the Argentine Civil Code (1871), Dalmacio Velez Sarsfield, whose notes to Article 499 of Argentina’s Civil Code indicate that he thought that the cause of an 877obligation and of a contract are different entities whose legal features were confused by Article 1108. Accordingly, Article 499 of the Velez Sarsfield’s draft of the Argentine Civil Code stated: “There is no obligation without a cause, that is to say without being derived from one of the facts, or from one of the lawful or unlawful acts, of family relations, or of civil relations.”75
Yet, note how Velez Sarsfield, who had been dissatisfied with the uncertain meaning and scope of Article 1108, added to the confusion by enlarging its scope and extending it to juristic acts or relations (presumably other than contracts) instead of providing causa with a more precise meaning. Thus, according to Article 499 of the Velez Sarsfield code, the absence of a valid causa could determine the life or death of an obligation that emerged from a fact such as an accident or from a juristic act such as a unilateral promise to pay an amount certain as done in a promissory note or in a government bond, among many others. The reader will recall the effect that a similar evaluation by French interpreters of Article 1108 had upon the absence of a secondary market for government bonds in nineteenth-century France, as contrasted with the presence of such a secondary market in causa-free jurisdictions such as Great Britain and Germany.76
In the final analysis, the question that the advocates of causa as a necessary element of commercial contracts must answer is: Do they wish to encourage the execution and performance of as many lawful contracts as possible or is it their policy to make it possible for lawyers and judges to continue to find grounds with which to invalidate these contracts on hyper-technical grounds prior to or after the parties’ performance? The uncertainties that causa gives rise to especially after contracts have been performed explain why a significant number of civil and commercial codes enacted during the late-nineteenth and early-twentieth centuries ignored causa as a contractual element. Among these were: The Austrian Civil Code (1811); the Portuguese Civil Code of 1865 (whose Article 643 pointedly only required that the parties have the capacity to enter into contracts and give their consent to enter into an agreement which had a valid object); Germany’s BGB (1900); Switzerland’s Loi Fedérale qui Complet le Code Civil (March 1911); Portugal’s Civil Code (1966); Holland’s Civil Code (1992) and in the Americas, the civil codes of Mexico (1870), Nicaragua (1904), Brazil, (1916), Peru (1936, 1984), Paraguay (1984, 1987) and Quebec (1991).77
As pointed out by Professor John Dawson, even in France, the cradle of contemporary causa, only a few authors continue to fight a “losing rear-guard action in its defense, but to most it has long been clear that the Code provision means nothing more than that a contract should have a purpose.”78 Yet, there are purposes and there are purposes, and an unpredictable number of them as a necessary condition for 878contracting can have uncertain and thus undesirable effects upon economic development.
Article 1133 of the Code Civil states: “A cause is unlawful when the law forbids it, when it is contrary to good morals or to public order.”79
An often quoted 1957 decision by the Cour de Cassation in this book80, involved an insurance policy with the buyer’s mistress as a beneficiary discussed earlier, illustrates one of the possible meanings of the “good morals” component and held that there was an immoral cause in the conveyance. Professor Paul Esmein of the University of Paris tells us that this holding follows well-established case law in accordance with which a donation in favor of a concubine is not per se invalid as it can be valid in the case of adulterous relationships. It is null, however, for the immorality of its cause, when, purporting to be a donation, it is in reality the payment of a price to bring about or to secure a concubinacy.81 The net effect of the ruling may be to discourage conveyances detrimental to one’s widow and heirs, but another could well be the discouragement of the purchase of life insurance policies in favor of otherwise “moral” third parties because of the uncertainties of possibly questionable motivations unknown to the insurer or insured at the time of the issuance and sale of the policy. Imagine the mistress—beneficiary having to prove that her much older lover had fully seduced her and she consented to their relationship on a purely amorous basis.
Professor Henry Capitant’s classic study on causa in French and comparative law discusses similar decisions concerning real property rented for purposes of prostitution or for the operation of gambling houses.82 The French courts’ distaste for such agreements can best be gauged by their unwillingness to order restitution so as to bring about the status quo ante. As expressed by an indignant court in Bourges in 1889, “such parties are not worthy of appearing before a court of law.”83
What is the moral or religious basis of this indignation? Demogue argued that “good customs,” as the basis of the morality of the cause, should be based upon public opinion.84 Dean Ripert argued in favor of moral or theological foundations which one cannot fail to associate with Judeo-Christian principles of ethical behavior.85 And Professor Esmein posited that the morality of causa, at least when predicated on the notion of public order, is a malleable concept adaptable to the changing times and needs—a concept shaped by the judge, not by relying upon his own theology, 879philosophy or personal bias, but inspired by the morality of the entire corpus of law as it relates to the controversy.86
Why did the Cour de Cassation fail to follow Victor Marcadé’s advice to not dwell on the motivations of the parties to a contractual relationship and dwell only on their “objective” final motivations or causes? If it followed Marcadé’s advice and took into account only the final, objective or standardized cause of a purchase of an insurance policy, what would such a cause have been? How would it have differed from the motivation to protect dear ones—regardless of who they were—from necessitous circumstances? But is not that motivation also the final causa for the acquisition of most life insurance policies? Mutatis mutandis, would a rental agreement whose landlord was unaware that his lawful business premises were to be used subsequently by his tenant as a house of prostitution be subject to a nullity which may well entail his having to return the rents received before the agreement was declared null? If so, who would be recipient of the returned rents? Obviously it would not be the tenant who would have thereby significantly profited from his immoral contractual behavior. Would it be the same state that at different times in France’s history participated in the profits of such establishments? Is it reasonable, then, to impose such a sanction on the unsuspecting landlord?
The Spanish Civil Code of 1889 contains language that intended to clarify what the French draftsmen left unclear with respect to causa:
Article 1274: In onerous [profit-seeking] contracts causa is understood, for each contracting party, as the benefit or the promise of a thing or a service by the counter-party, in the remunerative ones the service or benefit remunerated, and in the gratuitous, the gratuitousness of the charitable party.
Article 1277: Even when the causa is not mentioned in the contract, its existence and lawfulness is presumed as long as the debtor does not prove the contrary.87
Do you think that the Spanish legislature succeeded in clarifying or rectifying what troubled so many interpreters of the earlier transcribed Code Civil provisions?88 Does the presumption of Article 1277 cure the uncertainty of acts or events by the purchaser or renter of goods and services, such as that of the tenant of lawful or moral business premises who turned them into a brothel? Consider also the discussion in an earlier chapter89 with respect to the approach taken by the BGB to the contractual element of causa: The BGB enforced “abstract” promises or obligations regardless of the underlying transaction or its cause, thereby deemphasizing, if not doing away with, the requirement of causa.90
The BGB enforced “abstract” promises, i.e., promises binding merely because as stated by its Section 780, the promise itself creates the obligation (regardless of the 880underlying reason or cause of such a promise).91 Not surprisingly, and in contrast with the BGB, the Code Civil and its progeny enforced only those promises whose issuance was supported by a morally and legally valid causa. As was apparent in a previous chapter’s discussion of the business of the House of Rothschild,92 abstract promises for the payment of sums of money or for the future delivery of investment securities or commodities have become key legal elements of the global financial marketplace. This abstraction became possible in the HGB and in the BGB because their drafters, unlike the drafters of the Code Civil and Code de Commerce, did not require a legally and morally valid causal connection between monetary promises and their underlying causes, especially when purchased or relied on as collateral by third parties acting in good faith.
What are the economic—especially financial market—consequences of not being able to sell abstract (or causa-less) instruments or securities to third parties in secondary markets? A secondary market is defined by a financial and investments publication as a “market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The national exchanges—such as the New York Stock Exchange and the NASDAQ are secondary markets.”93 Who are the third parties of such markets? If each of the securities or assets sold in such a market had to be a proud bearer of a moral causa, what effect would such a requirement have upon the third party’s decision to purchase it? Finally, would it be reasonable to expect each party (most likely unaware of the security’s causa) to inquire into the morality of the issuance of the security or of its sale to its previous purchasers?
It appears that some of the most respected European contract law scholars have decided to allow causa to die the death of a well-intentioned but harmful idea. The following are extracts from the European Union’s EPCL and from the UNIDROIT Principles.
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.
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.
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….94
Article 3.1.2:
A contract is concluded, modified or terminated by the mere agreement of the parties, without any further requirement.
Comment
The purpose of this Article is to make it clear that the mere agreement of the parties is sufficient for the valid conclusion, modification or termination by agreement of a contract, without any of the further requirements which are to be found in some domestic laws.95
The comment goes on to note that there is no need for consideration because:
“[C]onsideration” is traditionally seen as a prerequisite for the validity or enforceability of a contract, as well as for the modification or termination of a contract by the parties. However, in commercial dealings this requirement is of minimal practical importance since in that context obligations are almost always undertaken by both parties.96
And there is no need for causa because:
[It] is in certain respects functionally similar to the common law “consideration.”97
While this author agrees with these exclusions, he disagrees with the equation of the functionality of these two elements, as will be discussed hereafter.
The following are observations by persons in different walks of life of instances where gift giving and the need for reciprocity seem to have played an important part in the establishment and continuation of actual or potential contractual legal relationships among the participants.
Writing in 1896 about the benevolence of Londoners a usually acerbic, Mark Twain said:
In London poor old ragged men and women go up and down the middle of the empty streets, Sunday afternoons, singing the most heart-breakingly desolate hymns and sorrowful ditties in weak and raspy and wheezy voices … and the villagers listen and are grateful, and fling pennies out of the windows, and in the deep stillness of the Sabbath afternoon you can hear the money strike upon the stones a block away…. The spirit of benevolence is there, there can be no question about that. There is nothing that is quite so marvelous to the stranger as the free way in which England pours out money upon charities…. It is not to be disputed that in matters of charity the English are by a long way the most prodigal nation in the world.98
The great Costa Rican painter Rafael Fernandez (“Rafa”) added his own comparative observations on the benevolence and fairness of contemporary Londoners. Rafa and I became close friends in Costa Rica and often shared views on his art and my legal research interests. He seemed particularly interested in my attempts to understand the meaning of fair dealing in different legal cultures. In 1968, as a young and highly talented but largely unknown artist, he traveled to Spain for the first time to exhibit some of his paintings. On his way there, he spent a few days in London visiting the Tate museum, which included Turner’s canvasses of stormy seas which we both admired. Soon he ran out of money and tried to earn some by sketching the faces of the Tate’s patrons. After a week or so of sketching at Tate’s entrance, he managed to collect enough money to resume his trip to Spain. When he arrived, he sent me a note in which he provided some comparative details on the fair dealing of some of Tate’s patrons:
When I handed over my sketches to the English patrons, most thanked me, looked at them politely but at a respectful distance. Having observed other sketchers who did not ask for money when they handed over their sketches, I followed their example. As soon as they looked at the sketches, the English patrons asked me for the price of my sketch, and as did the other sketchers, I raised three fingers and fortunately many of these patrons paid me the three pounds and took my sketches. In contrast, when I tendered my sketches to Spanish or Latin American patrons, they immediately came very close to me, asked me what was my name where I was from, and upon hearing that I was from Costa Rica they embraced me warmly and enthusiastically congratulated on my talent, thanked me profusely and offered to host me in their home countries if I ever visited them. Yet, even though they all took my sketches, very few paid or offered to pay anything for them. I must say that 883this comparative experience (using your words) helped me understand a difference between fair and unfair dealing.99
Since my days as a law student, I have collected old commercial law textbooks, manuals and guides. I first visited London in 1970 while doing research for my chapter on letters of credit for the Max Planck International Encyclopedia of Comparative Law. It was then that I met Maurice Megrah Q.C., someone whose humanity and writings I admired. When I told him about my interest in acquiring historical commercial law writings, he recommended that I visit the Wildy’s and Sons bookstore where he was a customer. I did and found several books for which I had been looking for years. I could only afford one of them but did not have enough money with me to pay for it. An elderly gentleman who introduced himself as a member of the Wildy family asked me if he could be of assistance. I told him that I wanted to buy a book but did not have enough money with me (no internationally-accepted credit cards were available in those days). I told him that I would like to pay twenty dollars or so to put it aside. I explained to him that this was commonly done in “lay away” transactions in the United States. I also told him that I could mail him a cashier’s check from the United States and he could then mail me my book. After a few brief questions on what I did and how I came to know Maurice Megrah, he told me that I did not have to leave the twenty dollars as a deposit and that he would be glad to ship the books to me and that I could pay him after I got them in Arizona. Thus started a relationship that allowed me to this day to read and use many otherwise unavailable historical legal materials. In return, I recommended Wildy’s and Sons to many of my collector friends and colleagues. Wildy’s and Sons advertises itself today as “The World’s Best Stocked Law Specialist.”100
As you reflect upon these London incidents, I would like to tell you about another one that I witnessed thousands of miles away from London in tropical Cuba, my country of birth. As you read it, please consider what the following example of gift giving and fair dealing has in common with the preceding anecdotes, and, if so inclined, ask the question: Could it be that gift giving and altruistic conduct is inherent in successful commerce?
Hurricanes were frequent summer and fall visitors to Cuba, where my father Abram Kozolchyk was able to build up a substantial retail and wholesale business after very humble beginnings as a rural peddler. Following the visit of a damaging hurricane during the late 1940s to the city of Marianao, where my father had a store named El Encanto de Marianao (across the street from a recently inaugurated Sears and Roebuck store), commodities, including soap, quickly disappeared from the shelves of most stores. Coincidentally, El Encanto de Marianao had just re-stocked its inventory of Palmolive soap and this news quickly spread through Marianao. Shortly thereafter, dozens of steady and first-time customers showed up shouting their 884willingness to pay whatever the asking price was for it. I vividly remember the following exchange between one of my father’s clerks and my father:
Clerk: Abram our cost is five cents per bar, we can easily sell it for fifty cents a bar. No other store has soap in the entire city, everyone will be more than happy to pay it.
Abram: Can you and the other sales clerks single out steady customers in this crowd?
Sales Manager: Yes.
Abram: Give each of our steady customers four bars and charge them nothing; and sell our first time customers four bars at fifteen cents a bar.
Sales Manager: One of the sales people tells me that among the crowd are employees of Sears and Roebuck from across the street who are also our first time customers. What do we do, should we sell it to them as well?
Abram: Yes, do it. I know that we can make a good profit now by selling the soap at fifty or more cents a bar, but if our steady customers are rewarded for their patronage during a time like this, they will always be our customers. And if those who are not our steady customers see how well we treat our steady customers, as well as how fairly we treat them even if they are our competitors, they will either become our steady customers or send us customers when they do not have merchandise we have.
By the time he left Cuba and El Encanto de Marianao was confiscated by the Castro regime, it had a flourishing retail and wholesale business and its relations with the equally-confiscated Sears and Roebuck of Marianao were quite cordial and cooperative.
While discussing the features of pre-commercial society in an earlier chapter, I referred to the anthropological and economic history work of the late Professor George Dalton of Northwestern University, who defined reciprocity in pre-commercial society as the giving of gifts between persons in a socially-defined relationship.101 In that society, the gifts of produced items or of other factors of production such as labor were (and are) regarded as an expression of interest in the social relationship between the gift givers and recipients.102 What was the role of gifts in the “socially defined” relationships (landlords and their tenants, guild masters and their apprentices, and so on) of medieval-feudal Europe?103 Colorado State University Professor Barbara Sebek’s insightful essay “Good Turns and the Art of Merchandizing in Early Modern England”104 provides some answers to this question. She described the role of gift giving in seventeenth- and eighteenth-century England in a manner surprisingly similar to Dalton’s.
Professor Sebek relied on the cultural anthropological findings on the behavior in primitive societies by Marcel Mauss’ 1923 classic “The Gift”: Gift giving is significant because it “confers upon its participants a special relationship of trust, solidarity and mutual aid.”105 Mauss’ famous question was: “What power resides in the object given that causes its recipient to pay it back?”106 His answer was that aside from their utilitarian components, gifts are imbued with religious, mythical and magical mechanisms.107 The giver does not merely give an object, but also part of himself, for the object is tied to the giver: They are “loaned rather than sold and ceded.”108
England’s economy during the period from 1000 to 1500 also relied heavily on gift giving. In fact, according to Richard H. Britnell’s painstaking analysis of England’s commercialization during this period, the distinction between commercial exchange and reciprocal gift giving was difficult if not impossible to make. In his words:
Relations between landlords and craftsmen were often tenurial rather than commercial; the village smith often held land on condition that he should maintain the demesne ploughs. The frequent necessity for barter inhibited dependence on market prices. In these circumstances there could be economic interdependence between families without any need for regular markets…. The absence of an institutional [market] structure was particularly evident in northern England, where there was little formal organisation of trade outside York in the early eleventh century.109
Not surprisingly, a society in which bartered goods and services were frequently indistinguishable from gifts found it helpful to read writings that praised the superior morality of gift giving and its appreciation by gift receivers. One such writing was Arthur Golding’s 1540 English translation of Seneca the Younger’s De Beneficiis. In Professor Sebek’s words, “Golding’s translation of De Beneficiis is a manual for good giving which insistently distinguishes ‘benefiting’—the ‘doing, receiving, and requiting of good turns’—from merchandizing, or ordinary bargains and loans.”110 De Beneficiis focuses on why, when and how gifts should be given and on the proper methods and motives for giving as well how they should be received and reciprocated.
Despite the centrality of ingratitude in precipitating vice and disorder, benefiting is based on trust rather than legal coercion. Bestowers of benefits who meet with ungrateful recipients do not have recourse to the law; legally-enforced bonds or contracts “stain” the honor of benefits, stripping them of their true estimation or value…. This value, however, cannot be measured. The motive for giving benefits is not profit, but fellowship: a benefit is a thing which “most of all other knitteth men together in fellowship” … it is a “foul 886shame” to “reckon” or quantify: “It is a vile Usury to keep a reckoning of benefits, as of expenses.”111
Early modern England (roughly from the sixteenth through the eighteenth centuries) was when new modes of production and organization of markets became apparent in many English cities, especially in Southern England as money became a popular medium of exchange. The need for gift giving as a means to encourage a greater number of exchanges of goods and services was beginning to wither away and historians have pinpointed the beginning of this transition. As noted by R.H. Britnell, even in an increasingly-commercialized southern England as well as in a less-commercialized northern England, the blurring of market and gift forms was still apparent from 1000 to 1500, a period when the distinction between commercial exchange and reciprocal gift giving was often “impossible to make.”112
The transition from a feudal to a commercialized England sharpened the cultural divide between an agricultural gift-giving economy and one based on commercial-capitalistic and monetary tenets.113 This divide affected the relations between “friends, family members, husbands and wives, masters and servants, rulers and subjects [all of which] were being reconfigured.”114 The waning past was that of a “status society” in which patronage was particularly important in non-commercial feudal relations. In such a society, one of the common ways to get ahead was by giving things or favors to your landlord if you were his tenant, to your master if you were his servant and so on. Seneca’s gifts were not only a moral but a practical imperative. In the emerging commercial and industrial society, the giving was of what could benefit not only the recipient, but also the gift giver and an increasing number of others—the market participants. The increasing use of money in loans and in payments for sales or for the performance of services was an integral part of that transformation.
Since Adam Smith’s “Wealth of Nations,” self-interest and its “invisible hand” became a favorite economic and moral explanation for the formation and growth of commercial contracts and of the markets in which they were concluded. One of Smith’s most oft-cited phrases on the role of self-interest was and is: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, 887but from their regard to their own interest.”115 Less frequently cited are his views on the economic importance of charity, benevolence or commercial altruism as expressed in his “Theory of Moral Sentiments,” which also articulated his moral philosophy: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”116
Moreover, Smith’s view of self-interest was more benign than a literal reading of the Wealth of Nations might indicate, because he denied that “[s]elf-love was a principle which could never be virtuous in any degree or in any direction.”117 In this respect, as I have noted elsewhere, Smith was part of a long moral-philosophical tradition already present in the fifth-century Talmudist saying: “There is good in [what appears to be] evil and evil in [what appears to be] good.”118 I added the preceding language to emphasize Adam Smith’s point that good or virtuosity as well as evil can be part of the same conduct although in degrees that, on balance, would make the conduct more or less evil or good. The importance of this view became apparent in early England’s (sixteenth- and seventeenth-century) credit markets.
In the last few decades, some economic historians and social scientists have challenged the assumption that self-interest was the primary motivation behind this growth, which was inspired by Adam Smith’s “Wealth of Nations.”119 They contend that the markets that developed in England during these centuries were largely the result of trust between or among contracting parties, especially to credit transactions, and that the “glue” for such a trust was provided by an altruistic conferral of benefits, albeit commercial motivations could not be discounted. My interest in this discussion is not to ascertain which ethical theory (self-interest or transactional altruism) provides the most accurate version of the cause of England’s commercialization and economic development. For as I just stated in the preceding paragraph, I do not believe that human behavior is susceptible to such “chemically pure” categorization and that as clearly stated by Adam Smith, self-interest and transactional altruism are not mutually exclusive and what starts out as an act of beneficence or altruism often leads to consequences very dear to the heart of the self-interested and vice-versa.
My interest in this dispute is narrower: to examine the information provided by those who intend to prove that transactional altruism was the engine of the growth of Modern England’s markets and see how this information relates to gift giving and transactional altruism in the formation of commercial contracts in Anglo-American law. Along these lines of inquiry, Professor Craig Muldrew of the University of Toronto, among other contemporary historians, maintains that the culture of the early modern English market was explicitly “moral” because:
[A]part from wholesaling, most buying and selling was done on trust, or credit, without specific legally binding instruments, in which an individual’s creditworthiness in their community was vital…. [And] this network of 888credit was so extensive and intertwined that it introduced moral factors which provided strong reasons for stressing co-operation within the marketing structures of the period. Individual profit and security were important, but neither could be achieved without the direct co-operation of one’s neighbours which trust entailed.120
Indeed, early modern South England had many weekly markets and often yearly fairs and its towns had many small shops and workshops where tradesmen sold their wares and laborers provided their services mostly on credit. Local merchants were also involved in national and international trade with some tradesmen such as mercers or grocers acting as middlemen between local producers and national or foreign distributors and many of their transactions were also on a credit basis: “[W]hether it was a husbandman selling corn in the market place, a cordwainer selling a pair of shoes or a wholesaler importing coal from Newcastle…. by the late sixteenth and seventeenth centuries [credit] was ubiquitous”121 Professor Muldrew quotes a telling question by Thomas Tusser, the sixteenth-century English poet-farmer and author of a widely-read instructional pamphlet entitled “Who Living but Lends?” He answered: “[B]e lent to they must; else buying [sic] and selling might lie in the dust….”122
As pointed out by Professor Muldrew, merchants trading between different communities did not have the same access to knowledge about one anothers’ characters as they would have had about their neighbors’ and merchants trading on a national scale were more likely to use sealed credit instruments.123 Yet, many long distance credit relations were performed informally. He cites the case of a young North England merchant who, after ending his apprenticeship, set up his own shop and traveled from Lancaster to London to purchase his inventory and despite being unknown there, London merchants “were still willing to extend him 50 per cent credit.”124 The same was true for merchants engaged in international transactions.125
Among other telling indicators of how widespread credit had become were: 1) a typical merchant was owed debts by over 330 people when he died; 2) ninety percent of all the court cases in Southern England in 1640 involved credit transactions and the total number of these cases in the central courts of King’s Bench and Common Pleas exceeded 28,000; 3) “in medium sized towns of about 7–10,000 people, such as King’s Lynn, Yarmouth, Newcastle and Shrewsbury, it was not uncommon for over 1000 suits to be initiated in a single year!”;126 4) “most litigation (83 per cent) [in a local borough court such as] King’s Lynn, for example, concerned sales credit, and credit extended for services rendered or for work done.”127 Typically, the actions were to recover the unpaid price for the “sale of beer, meat, livestock, wax, fish, bread and even hats or conny wool.”128 It is worth emphasizing that these actions did not seek the debtors’ specific performance or damages for the breach of executory promises (such as the 889promise to lend or perform a service in the future), but were brought against debtors who had received goods or services from their plaintiffs-creditors and had failed to return them or pay for them.
It is also worth noting that in contrast with the low esteem in which merchants were held during the same period in France and Spain, English merchants and traders “were valued members of the social order, and growth in trade was increasingly seen as advantageous to the commonwealth by increasing its wealth.”129 And unlike their Neo-Confucian Chinese counterparts, whose obedience was to Confucian-inspired rituals of family (and not necessarily commercially-inspired) etiquette,130 English merchants were aware that their success depended upon being known as trustworthy borrowers and lenders and that such trust was gained by being known as charitable with needy customers, including giving them gifts or granting them interest-free loans. Commercial altruism was thus found in a widely-read diary of a merchant named Thomas Turner, who was often quoted for the assertion that “ ‘the greatest part of trade [is] trust’….”131 Similarly, an educational pamphlet quoted earlier counseled that “ ‘lending to [a] neighbour, in time of his neede, winnes love of thy neighbour, and credit doth breede….’ ”132 Such standards were more than lessons on commercial morality or etiquette; they became the living law of a commercialized England. And since credit was a prerequisite for the formation of many commercial transactions, the giving of something of value to the borrower, which was the first step in the transactional sequence of loans, eventually became the rules of traffic that implemented the quid pro quo of many other enforceable transactions.
Against this socio-economic background, one must agree with Patrick Atiyah’s conclusion that:
[C]ontract theory until the late eighteenth century was still largely based on the idea that obligations were created by the acceptance of benefits, or by acts of reasonable reliance; obligations … were created by what men did, rather than by their pure intentions…. [Hence] up to the late eighteenth century [the law was] largely a law of executed contracts, and not a law of executory contracts.133
To which he added in an earlier section: “It was the consideration [or the giving something of value] which was the principal ground for the creation of the obligation; the promise played a subordinate role.”134
In addition to consideration, credit transactions also contributed to the development of other contractual legal institutions. Among them were standard (largely informal) practices, terms and conditions (including pricing) and occasional good faith requirements for contractual performance, although the practices differed 890depending upon the status of contracting parties. Wealthier, literate tradesmen used sealed instruments such as bills obligatory,135 and regularly recorded their transactions in their accounting books or ledgers. In contrast, other lenders and borrowers relied on witnesses as a formality for the execution of their mostly oral transactions.
By regularly involving other members of the community in witnessing the execution of contracts, the participants familiarized them with what eventually became standard terms and conditions of everyday transactions, especially since a large part of the population was illiterate and incapable of drafting contracts and keeping account books and records.136 Community involvement nourished a communal sense of reciprocity in exchanges often based on the collective awareness of the prices and other terms and conditions of the credit transactions they witnessed. Thus, today’s witnesses to a transaction “A” became tomorrow’s parties or counterparties in their own transaction “B,” which often resembled A in some respects. Gradually, standards for the extension of credit as well as “honesty, of plain dealing and the keeping of promises, dominated the way in which market relations were conceived.”137
Professor Kevin M. Teeven of Bradley University traced the development of consideration from a causa-inspired notion to the more commercially influenced notion of quid pro quo to sixteenth-century pleadings and court decisions.138 If what was exchanged was a promise for a promise, courts hesitated at first to enforce the contract for “lack of reciprocity or quid pro quo.”139 In other words, what the exchange in question seemed to lack was substance or the giving of something of value. Then, according to Professor Teeven: “[S]uddenly all seemed resolved in 1589, when it was announced in a laconic note reporting the ruling in Strangborogh v. Warner that there was consideration because the promises were reciprocal….”140 Then he quoted an English treatise141 for the clarification that a promise against a promise will maintain an action upon the case, “as in consideration that you give me ten pounds on such day I promise to give you ten pounds such a day after.” In other words, as a quid pro quo, the intangible promise (and its implicit consideration) had become material, even as material as ten pounds given as a loan and expected to be paid back.
That giving a quid pro quo had become not only an essential component of consideration, but also the first step in concluding a binding commercial contract, was confirmed three centuries later in Leone Levi’s two volume treatise entitled 891International Commercial Law, one of England’s first nineteenth-century treatises on that subject.142 Writing in 1863, Professor Levi stated:
It is essential to the validity of a contract that it be founded on a sufficient consideration. There must be something given in exchange, something which is mutual, or something which is the inducement to the contract, and it must be a thing which is lawful and competent in value to sustain the assumption. A contract without consideration is a nudum pactum, and not binding in law….143
This mid-nineteenth-century reference to consideration as an “inducement of the contract” is persuasive because Professor Levi was not only a knowledgeable commercial law scholar, but one of England’s preeminent commercial statisticians, which suggests that his assertion was based upon more than an occasional observation of how contracts were formed. Please also note that by the mid-nineteenth century, Levi and other English commentators applied the same nudum pactum characterization applied by the Romans to promises that were not part of typified contracts to the entire genus of contracts that lacked quid pro quo consideration.
Finally, as a result of the pervasiveness of credit transactions, many market participants regularly accumulated numerous reciprocal debts and claims against their usual contracting parties. A certain number of these debts were recorded in account books, and then mutually cancelled at convenient intervals.144 This method of settling debts was referred to as a “reckoning”; it was ubiquitous and involved comparing and crossing out reciprocal entries of debts and thereafter paying the differences in cash.145 Its use reflected continued courses of dealing among contracting parties; typically, one party’s rent obligation to the other was set off against the unpaid price for goods sold or performances of services owed by the landlord. The continued courses of dealing and the ease with which reciprocal obligations could be settled explain why interest was not commonly charged in commercial loans. In contrast with this continuing reciprocal contractual relationship, interest was generally charged in loans given by professional money lenders to their commercial and consumer borrowers.146
Professor J. H. Baker of Cambridge University, a highly precise chronicler of the law of consideration, asserts that “no other doctrine in English law can compete with ‘consideration’ for greatest diversity of historical explanation.”147 Professor David Harris Sacks of Reed College puts it more harshly: “There is probably no more important or more arcane and complicated concept in the English common law than ‘consideration.’ ”148 In its medieval legal context, as also noted earlier by Professor 892Teeven, it “emphasized the connection of a given agreement to the reasons or motives the party or parties had in undertaking it.”149 As such, canon law employed it to mean the lawful causes (causae) that bound the parties to perform the acts to which they agreed.150 He quotes from Christopher St. German’s English legal textbook “Doctor and Student” (circa 1530), in which a Doctor (or teacher) commented to his student:
[O]ne who made a vow to God “upon a deliberate mind … is bound to perform it [and] is bound in conscience to do it…. [A] promise made for charitable purposes or in the “service of God” would be binding “though there be no consideration of worldly profit that the grantor had or intended to have for it….” Only “if his promise be so naked that there is no manner or consideration why it should be made then I think him not bound to perform it.”151
The reference to a vow to God and to the contracting party’s conscience reflects the influence that canon law still had upon the law of contracts at that time. The reference to consideration is subsidiary; first a contracting party binds himself in conscience regardless of consideration, only if the promise was so totally devoid of conscience and quid pro quo will the purported contract become a nudum pactum. Yet, the correction formulated to his teacher’s statement by the student underscored the importance that consideration as a material thing had acquired in the common law of the early-sixteenth-century commercial Renaissance: “[A]ll promises lacking any evidence of a quid pro quo, even those for the honor of God or the welfare of the community, would have no obligatory force under the common law….”152 As further noted by the student: “[H]e to whom the promise is made has a charge by reason of the promise which he has also performed.”153 In other words, the damages claimed by a victim of a breach of promise who performed his side of the bargain may differ from those redressed by the forms of action in debt and detinue. As I will discuss shortly, the latter actions were conceived during feudal times and with little or no connection to the commercial world that England was pioneering. Thus, the advent of commercialization bestowed a protean role upon consideration, a meaning closer to the experience of merchants and their quid pro quo.
Professor Sacks cites the 1624 edition of John and William Rastell’s legal dictionary Les Termes de la Ley (first published a century earlier, and which bore a subtitle to explain its purpose: “Certain difficult and obscure words and terms of the common laws and statutes of this realm now in use expounded and explained”) as introducing a new definition of consideration.154 Reflecting William Rastell’s scholastic and Aristotelian training,155 the dictionary defined consideration as “the material cause of a contract without which no contract can bind the party.”156 This reference focused on the things of value exchanged between the contracting parties and 893distinguished this “consideration” from the human and divine purposes—the first and final causes for which an action is undertaken.157 Consequently, Les Termes de la Ley unhesitatingly describes a contract as “a bargain or covenant between two parties, where one thing is given for another which is called ‘Quid Pro Quo.’ ”158 The equation between consideration and a quid pro quo also reflects the increasing reliance on the form of action known as assumpsit for breaches of promise, thereby displacing the action in debt and detinue in breach of contract disputes, about which more will follow shortly.
The origins of the English remedial law for breach of contractual promises were apparent in Christopher St. Germain’s student’s quid pro quo version of consideration and in the distinction between the forms of action for “debt” and “covenant.” As summarized by Professor J. H. Baker: “The simplest distinction is that debt is a present obligation, arising from an executed contract or a grant, whereas covenant is ‘executory’ and to be performed in the future.”159 Thus, while to sue on an action on covenant and prove the existence of an executory promise in a manner that made the promise enforceable the plaintiff had to show the deed to the court, this was not the case with actions on debt.160 The requirement of a deed was confined to covenant because of the tendency in the common law to treat words as inferior to acts or deeds. Hence, legal rights could not arise from the party’s mere word; another kind of act or deed, a factum, was required.161 This requirement was best met when the parties gave each other something that they considered valuable. This material version of consideration, one that presupposed a quid pro quo, or a bargain and an exchange, helped to bridge the gap between the actions on debt and covenant on the one hand and assumpsit on the other. I would suggest that, transactionally speaking, it also helped to bridge the gap of distrust between contracting parties previously unknown to each other, much as Mauss’ and Dalton’s gifts had done in a pre-commercial society.
The action on the debt was the one most used in breach of contract cases when plaintiffs alleged that they had given something to the defendants who failed to return or pay for it as agreed upon. Columbia University’s late and lamented Professor Allen Farnsworth’s illuminating study on “The Past of Promise”162 cites Sir Frederic Pollock’s view that in English law, the creditor sued to recover monies after the Norman Conquest in exactly the same manner he would have used to demand possession in land. In other words, “the foundation of the plaintiff’s right was not the existence of a bargain or a promise, but the unjust detention by the defendant of the plaintiff’s 894property or goods.”163 Since the law of debt was unconcerned with bargains or promises generally, it could not be used to enforce oral bargains, especially those in which the parties promised to do or give something in the future.164
From a procedural standpoint, the main problem with the action on debt was that the defendant could request a “wager of law” in which he would “make his law” by taking an oath in open court that he did not owe the alleged debt. At a certain day assigned by the court, he would bring eleven neighbors (referred to as compurgators) who would take an oath that they believed that the defendant told the truth. This oath was decissory: Once taken by the defendant and attested to by the compurgators, the plaintiff would lose his action on the debt.165
No less an authority than Sir Edward Coke, one of seventeenth-century England’s most respected jurists, referred to the widespread concern among creditors-plaintiffs that, as used in actions on debt, the wager of the law was conducive to perjury: “The law presumeth that no man will forswear himself for any worldly thing; but men’s consciences do grow so large … [thus creditors] choose rather to bring an action upon the case upon his promise wherein [the defendant] cannot wage his law….”166 The 895action “upon the case” that Coke was referring to was an action in “assumpsit,” developed in the sixteenth century to deal, among others, with deceitful or tortious promises.167 Over time, assumpsit developed as the main remedy for breach of contract promises. In Professor Baker’s words: “The bridge was crossed almost invisibly when awards of damages came to represent prospective loss rather than restitution. The way was then clear for assumpsit to lie for services, which had happened by the time of Jordan’s Case in ‘1528.’ ”168
The late Michigan and Harvard Law School Professor John Dawson also finds that by the 1530s and 1540s, the failure to perform a promise began to be recognized as sufficient ground for the award of damages.169 However, he notes that consideration “was at the outset, the most pallid” term used mostly in preliminary recitals to laws or conveyances to explain their purpose.170 Gradually, English courts started connecting what was bargained and sold with what prompted such a sale by using the preposition “for” as the link between the two clauses. For example, in a King Bench’s decision rendered in the 1530s, a buyer of malt alleged that the defendant had bargained and promised forty quarters of malt for “two payments … and had failed to deliver, so that the plaintiff had had to buy malt elsewhere at a higher price.”171 The cause of action for damages awarded to the plaintiff for the defendant’s failure to perform his promise (non-feasance) was “trespass on the case.”172 And, as time went on, the something “for” which the promise was made was described increasingly in pleadings as “the consideration.”173 It was only a short step in the transition from the debt to trespass on the case that made executory promises enforceable.
The landmark decision that completed the transition from debt to trespass on the case and its contractual remedy also known as indebitatus assumpsit was Slade v. Morley, usually referred to as Slade’s Case.174 Slade entered into an informal contract with Morley in which Slade agreed to sell Morley grain still growing in the field. Humphrey promised to pay him sixteen British Pounds for the growing grain at a future date and failed to do so. Slade sued him in indebitatus assumpsit, an action that allowed the recovery of special damages that resulted from the defendant’s unwillingness to pay for the bargained-for grain. The courts were initially divided over whether the action could be maintained. Some had agreed with the defendant that if he had agreed to pay for a quid pro quo such as the delivery of the grain and failed to do so when the grain was made available to him, the proper action was that for debt. An action in assumpsit, the defendant argued, would have required Morley to issue a new 896promise following the accrual of the debt, and this promise would had to have been for the payment of the accrued debt.
The King’s Bench, contrary to the opinion of its jurisdictional rival, the Court of Common Pleas, held that a person harmed by another’s breach of contract could bring an action in assumpsit, even though the plaintiff could have also sued in debt, but his recovery would not be the thing owed or misappropriated; it would be monetary damages. As stated by the King’s Bench: “ ‘[E]very contract executory imports in itself an assumpsit, for when one agrees to pay money or to deliver anything, thereby he assumes or promises to pay, or deliver it.’ Thenceforth, the proof of the new promise becomes unnecessary.”175
The King Bench’s willingness to use as sweeping a statement as: “Every contract executory imports in itself an assumpsit” appeared, at least to this reader, as a response to a commercial marketplace’s need for assurance with respect to a creditor’s ability to collect on a promise to pay in exchange for the sale of a retailer’s goods or of a farmer’s crops. As summarized by Professor J. B. Ames, Harvard Law School’s true pioneer among United States’ contract law scholars:
[A]n express assumpsit was for a long time essential in the actions of tort against surgeons or carpenters, and bailees…. [Furthermore] a defendant who promised to pay a sum certain in exchange for a quid pro quo was, before Slade’s case, chargeable only in Debt unless he made a second promise to pay the debt. It was only by degrees that the scope of the action was enlarged…. In the first place, Indebitatus Assumpsit became concurrent with Debt upon a simple contract in all cases.176
In sum, the holding in Slade’s Case that the failure to pay a promised sum of money in exchange for another’s performance warrants an action in assumpsit led to the conclusion that every executory contract imports an assumpsit. This conclusion, in turn, laid the basis for the enforcement of the breach of promises to give or extend credit. Without such enforcement, it is difficult to see how a robust credit economy could function.
Professor Ames’ above-quoted article was written in 1888, a time during which many United States judges frequently cited English case law as persuasive if not primary sources. It started out, however, with a candid criticism of the common law of contracts as wrought by English courts: “Nothing impresses the student of the Common Law more than its extraordinary conservatism…. [and] the persistency of archaic reverence for form and of scholastic methods of interpretation.”177
The increasingly commercialized English and United States economies needed greater clarity and predictability from their law of contracts than that provided by the English sixteenth- and seventeenth-centuries forms of action. Slade’s Case was helpful in lifting the casuistic restrictions that weighed upon assumpsit. Thereafter, an 897executory promise to pay money by binding the promisor to do so—regardless of the promisee’s acceptance or performance—firmed up the legal basis for a commercial quid pro quo, one that allowed promises to be exchanged for acts or performances; it was a form of giving (not donating) by promising, and it reinforced the use of what became the ritual wording of countless Anglo-American contracts to this day: “In consideration of….” As will be discussed in a later section,178 this was a very useful “rule of traffic” for contracting parties to keep in mind. It assured them that what they would in all likelihood have done themselves in a society accustomed to giving something in exchange for something else was not only morally but also legally binding. Surely, this initial and binding step in the continuum of commercial contracting, which could be counted at a later time by a similar promise or act of performance, was a less formal and more commercial method of contract formation than that of the largely ceremonial and static method of Article 1108 of the Code Civil.
As with Professor Ames, the best among the common law judges who have contributed to the growth of a commercial and industrial society, whether Mansfield in England or Cardozo in the United States, carry with them the same distaste for hyper-technical scholastic interpretations. As was discussed in an earlier chapter,179 the search for rules such as that in Slade’s Case that could invigorate contract law and inspire similar decision-making in the future led United States scholars and judges to draft the American Law Institute’s Restatement (First) of Contracts in 1933 and subsequently the Restatement (Second) of Contracts in 1981 (hereinafter Restatement (Second)).
Accordingly, Section 1 of the Restatement (Second) defines contract as follows: “A contract is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.”180 Notice how this definition differs from that of Article 1101 of the Code Civil: “A contract is an agreement which binds one or more persons, towards another or several others to give, to do, or not to do something.”181 Under the Code Civil, then, the only promise that can be characterized as a binding contract is one that has been agreed upon by the parties.
As was done by Slade’s Case, the Restatement (Second) allows an executory promise to bind the promisor contractually, i.e., as a unilateral contractual obligation prior to the time that an agreement can be proved to exist. The comment to Section 1 distinguished between a contract and a promise in that a “ ‘contract,’ like ‘promise,’ denotes the act or acts of promising. But unlike the term ‘promise,’ ‘contract’ applies only to those acts which have legal effect….”182 In other words, a promise whose legal effect binds the promisor is subsumed under the meaning of “contract.” The Restatement (Second) strengthens this connection by defining “promise” in Section 2 as: “[A] manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.”183
It illustrates the binding effect of such promises by referring to those made by a house builder or inventor of material used in its construction who states to his buyer: “I warrant that this house will never burn down.”184 As noted earlier, similar effects can be attributed to a “firm” offer to sell “X” (real or personal property) “at price ‘Y’ and valid for a period of thirty days starting on….” They can also be attributed to more succinct “buy” orders of traded investment securities directed by their buyer to a broker-dealer such as: “Buy 200 stock of IBM at a price no higher than X and at a date or time no later than Y.”
As discussed in an earlier section, these are “dynamic” versions of contracts and as such are inconsistent with Hugo Grotius’ and Samuel Puffendorf’s bilateral and static “Will Theory” as enshrined in Article 1101 of the Code Civil, among many others. Yet, as pointed out by Allan Farnsworth (Co-Reporter for the Restatement with Professor Robert Braucher), a Will Theory was also in effect in the United States during the first part of the nineteenth century.185 Nonetheless, by the end of that century, this theory gave way to one in which the contract was based on the parties’ bargain. In Farnsworth’s words: “[T]he traditional requirement that consideration be either a benefit to the promisor or a detriment to the promisee had begun to be replaced by a requirement that the consideration be ‘bargained for.’ ”186 The difference lay in the fact all the promissee-plaintiff had to show was not the existence of corresponding benefits and detriments, but that the value given and received was the product of a bargain.
According to Yale University Law School Professor Grant Gilmore, the equation between consideration and bargain was a revolutionary invention by Justice Oliver Wendell Holmes.187 Harvard University Professor John Dawson, an equally illustrious scholar, regarded Gilmore’s suggestion as “surprising” and “astonishing,” especially when taking into account that the supposed revolution was accomplished by two sentences whose message was as representative of the status quo as “between promise and the consideration there must be ‘the relation of reciprocal conventional inducement each for the other.’ ”188 Dawson’s skeptical and ironic assessment of the “bargain” invention was that: “Whatever else Holmes may have invented, we can be sure, at least, that he invented this phrase.”189 Dawson also compared Holmes’ bargain-consideration to Chancellor Kent’s description of consideration “as something given in exchange, something that is mutual, or something which is the inducement of the contract”190 and noted what Holmes could have added to Kent’s requirements had he been more explicit:
[Holmes] seemed to say that both parties must agree that each was induced to promise or act by the promise or act of the other. Perhaps he derived this from the requirement of mutual assent, so that the parties must agree not only on what was exchanged but also why; this would mean that the why—the inducement—for each must be disclosed and agreed to by the other.191
Professor Farnsworth’s version of Justice Holmes’ suggestion agrees in part with Dawson, but does not demand the express disclosure of an agreement on the reciprocal inducements:
[I]t is not enough that the promise induces the consideration or that the consideration induces the promise, “if the other half is wanting.” The Restatement Second reaffirms this by defining bargain to require that the consideration both be “sought by the promisor in exchange for his promise” and be “given by the promisee in exchange for his promise.”192
This version of bargain appears in Sections 17 and 71 of the Restatement (Second). Section 17 reminds the reader that: “[T]he formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.”193 However, the comment to this section indicates that a number of commercial transactions would “not necessarily [be] subject to the requirements of assent and consideration.”194 As enumerated by Section 6, these are: (a) Contracts under seal; (b) Recognizances; (c) Negotiable instruments and documents; (d) Letters of Credit.195
Section 71 enumerates the exchanges that constitute consideration and thereby purports to add a clarification to the meaning of bargain:
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.196
Yet, this section does not answer whether the adjudicator must determine what in the language of subsection (1) the promisor sought to obtain from the return promise and vice versa, neither does it say whether the inducement for each must be disclosed and agreed to by the other. If the judge had to make such a determination, he would 900have to find what the parties, as Dawson suggested, must have agreed on, what was exchanged, and the reasons for each inducement. Needless to say, such a requirement would add considerably more facts and uncertainties to the determination of whether bargain-consideration existed for the contract. Indeed, such a quest could very easily be equated to that in the motivational version of causa. Contrast such a determination with one that seeks to find out if what was promised or given can be reasonably regarded as conferring a benefit to the promisor or creating a detriment to the promisee. Clearly, such a benefit-detriment test is more objectively, easily and promptly determinable than a motivationally-inspired bargain test. In fact, unlike the bargain test, which must wait until the bargain has been concluded to evaluate it, the objective benefit-detriment test can be applied a priori by the parties with a reasonable probability of predictive success.
It is true that Section 81 on “Consideration as Motive or Inducing Cause” tries to discourage a motivational interpretation of the above sections by warning in the heading of Comment b that the motive or cause of the bargain is immaterial and by adding that: “Even in the typical commercial bargain, the promisor may have more than one motive, and the person furnishing the consideration need not inquire into the promisor’s motives.”197 Yet what if he does? Or, better still, what if the promisee knows that the promisor’s motive is conduct that Article 1108 of the Code Civil would refer to as an “unlawful” cause or purpose, a concept that, as shown in the case involving a mistress as a beneficiary of a life insurance policy, included a violation of prevailing morality. How does such awareness affect the enforceability of the contract? Moreover, comment b adds to the uncertainty by stating: “Unless both parties know that the purported consideration is mere pretense, it is immaterial that the promisor’s desire for the consideration is incidental to other objectives and that the other party knows it to be so.”198 Given that the use of “peppercorns” as consideration is a well-known pretense by both parties and that this practice is extraordinarily widespread, even this rather narrowly-conceived exception opens up a multitude of bargains for a motivational inquiry.
Professor Farnsworth describes the bargain test of consideration as shifting the concern of judges “from the substance of the exchange to the bargaining process.”199 At the same time, he acknowledges that the requirement of a bargain has little impact on marketplace transactions “[w]here bargain [is] an almost inevitable ingredient” and adds that “bargain might well be lacking in transactions taking place outside or on the periphery of the marketplace.”200 This is another way of saying that such “outside” or “peripheral” transactions do not deserve to be binding because despite the use of words such as “I promise” or “I will agree to,” they are not really meant to be binding bargains.
One such a situation would likely be that of a father who promises an expensive trip to his son (a law student of all people) if he did well in school. According to Robert Pothier, that promise is not binding.201 While such a transaction would be deemed 901outside the marketplace by most commentators, there are many others that would be considered outside the commercial marketplace because they are entered into by non-merchants and from the computerized comfort of their home; yet, they are quintessentially commercial. These purchases, sales, exchanges and loans with the intent to profit are carried out on the Internet and in virtual marketplaces such as E-Bay which have greatly expanded the physical boundaries of Farnsworth’s “periphery” of the marketplace. Clearly, there would seem to be no reason to exclude them from the zone of bargained-for consideration.
One of the elements of bargained-for consideration is its definiteness. It must be definite for the adjudicator to be able to measure the promisee’s expectation interest.202 Otherwise, adds Professor Farnsworth, it would not be possible to calculate the damages that will put the promisee in the same position he would have been had the promise been performed.203 Yet how can a bargain be regarded as definite and precise enough by a court without delving into the promisee’s expectations—as his motivation—to enter into the bargain? For example, was he using the sale price of item “X” as an incentive to induce purchases of item “Y” or as a “loss leader”? If so, he was not necessarily expecting to make a profit from X and this explains the willingness to assume a loss when selling X. Hence, courts will not be able to avoid an immersion into the quicksand of the adequacy and sufficiency of consideration, even though Farnsworth and Section 81 of the Restatement (Second) would much rather they did not.
On the other hand, and despite this preference, the Restatement (Second) does not reject the immersion outright as it could have done by enacting a rule such as: “even a peppercorn—symbolic of something trifling in value—can be consideration….”204 Instead, the pretense of the peppercorn’s bargained-for-consideration is preserved “as long as it is bargained for….”205 As he usually did, Professor Farnsworth asked the key question: “Will the bargain test tolerate any imbalance, no matter how extreme in the exchange?” He also hinted at what I believe is the correct answer: It does not. The imbalance in the exchange is usually examined by courts of law or equity, not by testing the adequacy of the bargained-for consideration, but by looking into the equities of the transaction when it appears that there was misrepresentation, duress, mistake, incompetence or unconscionability affecting one of the parties to the contract.206
In contrast, when the bargain is between parties with similar knowledge of the transaction and bargaining power, as is frequently the case among merchants or their functional equivalents in present-day society, “the adequacy of consideration is not a proper subject for judicial scrutiny.”207 This statement belongs to the 1993 New York Court of Appeals decision that did not involve merchants, but a dentist trying to buy a deceased colleague’s practice and good will. The buyer promised to pay a certain 902amount that turned out to be disproportionately higher than the profits derived from the acquired practice. The court agreed with the holding in another case, which stated that if a buyer “chooses to pay for the expectancy that customers will return to the seller’s former location, believing the right to locate there is a valuable asset, and agrees on a price therefor, so be it.”208 In transactional terms, what this ruling means is that the seller of the dental practice and its good will does not need to obtain an opinion from his lawyer prior to entering into this transaction to determine whether the amount offered by the buyer was adequate (or not excessive) given his expectations of profit. Such a reading, incidentally, would have been required under Professor Dawson’s interpretation of Justice Holmes’ bargained-for consideration. It required that: “[T]he parties must agree not only on what was to be exchanged but also why; this would mean that the why—the inducement—for each must be disclosed and agreed to by the other.”209 Had this been the test, once the buyer’s profit expectations were revealed to the seller, he would have been expected to either agree with them or disclaim knowledge of their reasonableness. If he had agreed, the buyer would have had an action for breach of contract, fraud or worse.
As acknowledged by Professor Farnsworth, the bargained-for consideration test has little impact on marketplace transactions because in these transactions, bargain—at least as a process—is an almost inevitable ingredient.210 As discussed earlier, and as illustrated by the purchase of a dental practice in the previous section, the contracts that are negotiated in the periphery of the marketplace are increasingly commercial and thus bargained-for in nature. Those that remain outside of this “periphery” are mostly gratuitous or charitable promises.211 These are likely to remain outside the periphery because by definition they do not embody an inherently commercial bargain. When they do, there is no longer a reason for them to remain in the periphery. For example, when an employee receives a bonus in the form of an expensive watch and such a gift can be traced to an express or implied policy of reward for the productivity of employees, there is no reason for characterizing it as a gratuitous or charitable promise. Clearly, there are gray areas where the altruism of a gift is questionable, but these areas require case-by-case determinations where facts and equity play the central role, not the doctrine of bargained-for-consideration. In the following sections, I will examine some commercial contracts, old and new, where the positive law has refused enforcement because of the failure of bargained-for consideration while the marketplace and a visionary commercial law judge deemed the transaction binding and commercially necessary.
Contemporary multi-party agreements that rely on computer-to-computer communications and Master Agreements for their governance face considerable 903obstacles with the bargained-for consideration theory and its implicit requirement of privity of contract when several sets of contracting parties are involved. Assume that the Master Agreement transaction discussed in an earlier section212 started when a buyer “B” sent a purchase order for a given commodity at the CIF (Cost, Insurance and Freight) price quoted by the seller “S” from B’s to S’s computers. S replied to B, accepting B’s terms and conditions, but requesting that B procure the issuance of an irrevocable letter of credit to be confirmed by a bank in S’s place of business. This letter of credit was to pay S for the CIF cost of the ordered commodities, and included in the cost the transportation of the goods from S’s place of business to B’s as well as a port-to-port insurance policy. Accordingly, B sent via his computer an application for the issuance of an irrevocable letter of credit to his issuing bank “IB” asking it to issue its own irrevocable letter of credit and requested that IB select a confirmation bank “CB” of its own choice in S’s place of business to issue its confirmation to S. B’s application also contained an authorization for IB to debit B’s checking account with IB for the cost of the issuance and confirmation of the letter of credit to S. IB sent a SWIFT213 electronic message to CB in S’s place of business requesting its confirmation of IB’s letter of credit and providing the authorization for CB to debit IB’s account for the costs of CB’s confirmation.
Upon receipt by S of CB’s confirmation, its computer storing the Master Agreement generated requests by S for services by “FF” (a freight forwarder unknown to B), locating shipping space with “OC” (an ocean carrier also unknown to B), and to “IC” (an insurance company similarly unknown to B), requesting the issuance of its port-to-port ship insurance policy covering the shipment of the goods from S’s warehouse to B’s warehouse. These requests were followed by FF’s own computer-to-computer request to OC for shipping space in his ships. In turn, this request was followed by OC’s computer-to-computer response supplying FF’s requested space. Similarly, FF requested IC to issue the requested policy and IC responded by agreeing to do so. As with the purchase order, by B’s and S’s acceptance, all the subsequent communication between FF, OC, and IC was subject to the same Master Agreement. Yet this agreement did not state whose promise or performance was consideration for any other.
The Master Agreement involving B, S, FF, OC and IC governed their communications, while the transactions between IB and CB were governed by the S.W.I.F.T. Manual, reference to which was made in the Master Agreement. At the same time, some of the other transactions were set forth in separate sets of promises, offers, acceptances and performances. In addition, the consideration provided by B and S for their purchase and sale agreement, as incorporated into the letter of credit issued by IB and confirmed by CB, provided the money with which to pay for all of the described services, including the payments to S, FF, OC, CB and IB. Nonetheless, even though the bargain between B and S acted as the inducement for all subsequent bargains, B and S were not parties to the bargains between IB and CB or between FF and OC or FF and IC. And as implicit in Sections 71 and 75 of the Restatement (Second), consideration for each of these contracts had to be supplied by those who had bargained for them, i.e., those in privity of contract. As stated by Professor Farnsworth, Section 71 required that “the consideration both be ‘sought by the promisor in 904exchange for his promise’ and that it be ‘given by the promisee in exchange for his promise.’ ”214
In the absence of privity and bargained-for consideration between B and all the other participants except for IB and S, would the rest of the transactions become unenforceable for lack of bargained-for consideration? An agency rationale might be a tempting explanation for such consideration, but CB, FF, OC nor IC were not selected or known by B, nor did B have the power to act as their principal. Another possible resolution to this lack of privity problem was provided by Professor Farnsworth in the quote below, albeit it applied to a transaction involving fewer parties and did not mention a Master Agreement among the participants. Farnsworth suggested that the consideration to the bank (or in our hypothetical CB) may “move” to someone other than the promisor, and illustrates this movement as follows:
[S]uppose that a bank [CB] says, “We promise you seller, that we will pay you the price of apples if you deliver them to our customer, the buyer.” The seller’s performance is consideration for the bank’s promise, and the seller (the promisee) can enforce that promise, even though the apples are not delivered to the bank (the promisor) but to the buyer (someone other than the promisor).215
Yet, if the seller’s performance, i.e., the delivery of the apples, is consideration for the paying bank’s promise (CB in our hypothetical), it would mean that the bargain for which CB issued the promise of confirmed payment was between CB and S and thus, in exchange for that payment, CB would be the recipient of the apples. Aside from the fact that no self-respecting confirming bank would want to be known for bargaining for the sale of someone else’s apples, Farnsworth’s scenario raises the question not only of what the true bargain is, if any, between CB and B, but also how that bargain is connected with the bargain between B and IB.
If the CB receives the apples that S shipped to B as required by Professor Farnsworth’s bargained-for-consideration “move,” IB would not be able to seek reimbursement from the buyer for the amount CB debited to the account of IB. The reason would be that IB’s bargain with B was its issuance of the letter of credit to pay for the apples that B was to receive from S. If the delivery of these apples to CB is bargained-for consideration between CB and S, how could it be consideration between B and IB? On the other hand, since CB would not want to unjustly enrich itself by debiting IB’s account and keeping B’s apples, it would probably want to move the apples back to IB and have IB deliver the apples to B. Otherwise, no consideration would support IB’s claim against B, its customer, who is the payor of the letter of credit but would remain apple-less. Thus, if the proposed move of consideration from B to CB would provide support for the bargain between CB and S, it would do away with the support for the bargain between B and IB. In addition, please note that it was neither S nor B who bargained with CB for its confirmation of the letter of credit to S, the party who bargained for such a confirmation with CB was IB. Thus, as already decided by Anglo-American courts, if B were to attempt to stop CB’s payment to S or CB’s 905keeping the apples, its claims would be rejected precisely because they lacked the requisite privity of contract.216 Clearly, bargained-for consideration does not belong in this twenty-first century transaction.
The enforcement of a number of commercial or commercially-related contracts and promises remains uncertain as a result of court decisions that held that where the bargained-for consideration was “past consideration” it did not bind the promisor. Lord Mansfield’s opinion in Pillans and Rose v. Van Mierop and Hopkins (hereinafter Pillans v. Van Mierop)217 points both to the roots and the reasons for this uncertainty, as well as to its possible remedy.
The plaintiffs were Dutch merchant bankers who had agreed to accept and pay bills of exchange (drafts) drawn on them by White, an Irish merchant doing business in Holland. As merchant bankers, Pillans customarily accepted bills of exchange (also known as drafts) when requested to do so by other bankers with whom they had correspondent relations or who had a reputation for solvency and honesty. Customarily, they would also agree to pay drafts drawn on them by merchants who were their own valued clients or whose promise of reimbursement was guaranteed by another bank of known solvency. The promise that contained such an assurance of reimbursement to Pillans was known at that time as a “confirmation” or a “confirmed credit.”218 In this case, several letters had been exchanged among the plaintiffs, defendants, and White. The relevant ones were written by White to Pillans requesting that it pay his draft to Clifford, a creditor of White, and a letter written by Pillans agreeing to do so, but on condition that White obtain a “confirmed credit upon a house of Rank in London” committing to accept Pillans’ draft for the moneys advanced on behalf of White.219 Van Mierop sent such a letter undertaking to honor a bill of exchange.220
However, after Pillans paid Clifford (and one month before Pillans drew its bill of exchange seeking reimbursement from Van Mierop), White became insolvent. Realizing that White would not be able to reimburse them for the liability they had assumed with Pillans, Van Mierop refused to honor the bills drawn against them by Pillans. Pillans sued Van Mierop on assumpsit and the jury held for the defendants on issues related mostly to an allegation of fraud. Lord Mansfield ordered a new trial and 906in it defendants argued that the only consideration that could be proved was past consideration, i.e., the money that the plaintiffs had paid to Clifford prior to receiving the defendants’ undertaking to reimburse those advances. According to the defendant’s lawyers, since the credit the plaintiffs had given to White was extended one month before the defendants had agreed to accept the plaintiff’s draft, the consideration was past and done, before their promise was made.221
During a retrial of the facts, Lord Mansfield pursued a distinction between written and oral contracts where consideration was concerned. He asked defendant’s counsel whether he had found “ ‘any case … where the undertaking holden to be a nudum pactum was in writing’.”222 As surmised by Oxford Professor C. H. S. Fifoot (author of a legal biography of Lord Mansfield), this question took counsel by surprise and the best answer he could muster was that “ ‘It was anciently doubted’ … ‘whether a written acceptance of a bill of exchange was binding, for want of consideration.’ ”223 This reply “revealed a lacuna in the defendants’ arguments, of which Lord Mansfield at once took advantage.”224 He thereafter delivered his judgment without the citation of authority. Fifoot suggested that it was short enough to warrant his full transcription; in our case, space is more limited and for that reason the transcription will be shortened.
This is a matter of great consequence to trade and commerce in every light…. Both the plaintiffs and White wrote to Van Mierop and company. They answered “that they would honour the plaintiffs’ draughts” …. A nudum pactum does not exist in the usage and law of merchants. I take it, that the ancient notion about the want of consideration was for the sake of evidence only: for when it is reduced into writing, as in covenants, specialties, bonds, [sic] there was no objection to the want of consideration…. In commercial cases amongst merchants, the want of consideration is not an objection. This is just the same thing as if White had drawn on Van Mierop and Hopkins, payable to the plaintiffs … whether Van Mierop and Co. had effects of White’s in their hands or not, if they had accepted his bill. And this amounts to the same thing: “I will give the bill due honour” is, in effect, accepting it. If a man agrees that he will do the formal part, the law looks upon it (in the case of an acceptance of a bill) as if actually done. This is an engagement “to accept the bill, if there was a necessity to accept it, and to pay it, when due”: and they could not afterwards retract. It would be very destructive to trade and to trust in commercial dealing, if they could.”225
Thus, in Pillans v. Van Mierop, Lord Mansfield left us with two principles and a rule that even though severely questioned (if not overruled thirteen years later in Rann v. Hughes),226 were later accepted in commercially-minded jurisdictions in the common as well as in civil law world. The first principle was that: A nudum pactum does not exist in the usage and law of merchants. This was a powerful warning about the importance of differentiating between a commercial and non-commercial context. 907What could be a valid tenet in the latter could fail to be in the former and vice-versa. The second principle, as mentioned above, was that:
[T]he ancient notion about the want of consideration was for the sake of evidence only: for when it is reduced into writing, as in covenants, specialties, bonds, [sic] there was no objection to the want of consideration…. In commercial cases amongst merchants, the want of consideration is not an objection.227
In other words, because of the commercial context of contracts and promises, it was important to understand the historical (“ancient”) purpose of consideration: To evidence the seriousness of the parties’ intent. But such evidence was not required among merchants when they relied on written and signed promises. This was particularly true when merchants promised to pay money such as in their covenants, specialties and bonds. Formalities such as a writing warn the parties to the contract of the importance of what they are about to write and sign. The rule derived from the preceding two principles was seminal in the creation of a new promise that Mansfield referred to as an undertaking to honor a bill of exchange that is binding upon the party so undertaking, regardless of present, future or past consideration. While the above two principles apply to the entire field of commercial contracts and promises, the rule derived from them as applied to the facts of this case provided the conceptual and normative basis for the enforcement of irrevocably-binding documentary commercial and standby letters of credit as well as for bankers’ acceptances of drafts drawn under these letters of credit.228
Mansfield’s method of reasoning was vintage “logic of the reasonable”: His major premise was that “[t]his is a matter of great consequence to trade and commerce in every light….” This premise was based upon Mansfield’s review of the relevant facts involved not only in the case before him, but also in related commercial customs and usages. In this decision, he seemed to be saying to his colleagues something like: “My learned colleagues, there is too much at stake in this dispute for you to continue to think about preexisting debts (as was done prior to Slade’s Case) as the only cause of action for breaches of contractual promises.” Mansfield’s analysis evaluated past experience with the action on the debt and the salutary effects of a future with an assumpsit unshackled by past debt and past consideration. In sum, Mansfield’s was an analysis into the purpose of legal institutions whose ultimate goal was to instill trust in them and in those who used them.
Despite such clarity and soundness of reasoning, past consideration continues to cloud the judgment of adjudicators and commentators, regardless of whether it is part of a commercial or non-commercial promise or contract and regardless of its transactional context. In the abstract, one may posit that an exchange must be “synallagmatic” or “this for that,” but what if the relationship between those who exchange promises for acts or performances is one in which trust and creditworthiness have created a course of dealing or belong to a trade where it is customary that the promisor issue the promise after the action has been taken by the promisee? This is 908why I disagree with my admired late colleague, E. Allan Fransworth, when he summarized the rationale of the Restatement (Second) (and underlying decisional support). Professor Farnsworth asserts:
Imagine an exchange consisting of a promise on one side and some action, either promise or performance, on the other. Only if that action has not yet been taken when the promise is made can the promisor be bargaining for it when making the promise. If the action has already been taken, the promisor cannot be seeking to induce it. Such “past consideration”—action already taken before a promise is made—cannot be consideration for the promise.229
As apparent in Pillans v. Van Mierop, this non-contextual rationale would reward the Van Mierops of this world who, paraphrasing Lord Mansfield, retracted dishonorably and thereby engaged in conduct “very destructive to trade and to trust in commercial dealing.” It would, on the other hand, punish the Pillanses, who acted honorably and in a trusting manner by accepting or paying White’s drafts prior to receiving Van Mierop’s promised acceptance of their liability. It would also render thousands of security agreements and security interests unenforceable between suppliers and their customers. Often, suppliers sell their product against a promise of the customer to pay the purchase price in ninety days. But, when the customer experiences financial difficulties, the suppliers transform their sale agreements into security agreements that create a security interest in some assets of the customer, and the consideration the sellers provide is the previously-delivered goods on credit, i.e., past consideration.230 Significantly, Justice Story expressed many of the above concerns in his decision in Swift v. Tyson231 which is discussed in Chapter 21 and which, despite its being overruled on public law considerations in Eerie R.R. v. Tompkins232 still stands as an excellent example of a sound analysis on the minimal role of consideration and pre-existing debts in negotiable instruments law.233
Offers and acceptances are species of the genus of promises. Promises can be formulated as generally as in the “save harmless” clauses of maritime letters of indemnity: “[I promise to] indemnify you, your servants and agents and to hold all of you harmless in respect of any liability, loss, damage or expense of whatsoever nature which you may sustain by reason of the ship proceeding and giving delivery of the cargo in accordance with our request.” Or they can be expressed with specificity and terseness sufficient for an acceptance to “mirror” their terms and conditions. This difference was accurately captured by Section 58 of the Restatement (Second): “An 909acceptance must comply with the requirements of the offer as to the promise to be made or the performance to be rendered.”234
Etymology dictionaries trace the roots of “to offer” in the English, French, Germanic and Scandinavian languages to the acts of giving or presenting something either as part of a religious ritual or as a lay gift.235 One of the dictionaries traces the first recorded use of the noun offer (“offre”) to fifteenth-century France, roughly two centuries before Hugo Grotius, the renowned jurist, Romanist and theologian, was exiled there.236 Hence, by the time Grotius used this term in the seventeenth century in his “Law of War and Peace,” it was widely associated in the European continent with a form of giving. This meaning easily blended with the quid pro quo version of consideration, thereby adding functionality in England to the giving of consideration as the first step in the standard sequence of contract formation. Professor Reinhard Zimmermann, a distinguished Romanist, asserts that the concepts of contract, offer and acceptance enunciated by Grotius and Puffendorf and restated by Pothier were superimposed upon consideration and adopted during the nineteenth century by English contract law treatise writers, and, one is led to infer, by the English law of contract formation.237 The reason I am not persuaded by this assertion is because as a rule, Grotius’ executory promises were not enforceable when breached except when they had been accepted by the offeree, whereas Slade’s Case had made this enforcement possible since 1602. Grotius acknowledged that some promises—very few—were binding on the promisor regardless of the promisee’s acceptance, but these were part of fully-fledged conveyances of property. Having in mind such a conveyance, Grotius asked:
[S]ince the Property of a Thing may be transferred by the bare Will, sufficiently declared … why may we not in the same Manner transfer to one the right, either of requiring us to transfer to him the Property of a Thing (which is less than the actual Acquisition of the Right of Property itself) or of requiring us to do something in his Favour, since we have as much Power over our Actions as we have over our Goods?238
He buttressed the proposition that the right to claim the property transferred does not require an expressed acceptance by the transferee with a reference to the Hebrew Talmud: “Insomuch that the Hebrews maintain that Silence, in an Affair that will not 910admit of a Delay, has the force of a direct Engagement.”239 Yet, he distinguished the right acquired by the beneficiary of a grant or conveyance of property from that acquired in what he referred to as an “imperfect promise” or a Pollicitatio, a pollicitation.240
The reader will recall that “pollicitation” was the term borrowed from Roman law by Grotius and Pothier, among other civil law commentators, and meant a “Promise or free Offer” that the promisor made to a city, state or community conditionally and without conveying the right of property as is common with duties of charity and gratitude.241 Grotius contrasted this “imperfect” promise with the “compleat” promise, or one with the same effect as a man’s alienation or conveyance of his property.242 Thus, the English law of contracts seems more advanced than that influenced by Grotius’ and Pothier’s ideas on the unenforceability of unaccepted offers.
Offers and acceptances are integral elements of the dynamic method of commercial contract formation, especially those entered into by distant (inter absentes) parties. It is worth reiterating that in this method of contracting, a bargained-for consideration (for example, the offeror’s invitation to the offeree to supply his goods or services in exchange for the promisor’s payment of something of value) supplies the legal basis for the enforcement of executory promises. Yet, for inter absentes contracting to work in the commercial marketplace, even an offer or an acceptance silent as to the time of its binding effect must be able to be relied upon as binding for a duration of time that is commercially reasonable. Otherwise, why would merchants acting as offerees or offerors want to waste their valuable time with offers and acceptances that could be validly revoked at any time? Clearly, then, any rule inspired by the principle of revocability of offers and acceptances, especially when timely accepted or acted upon, is commercially unreasonable and leads to the costliest of commercial uncertainties—that the written word of a fellow merchant, even when expressed in the manner customary to his trade or profession, cannot be trusted.
The Anglo-American laws of formation of contracts inter absentes benefitted greatly from a healthy dosage of commercial reasonableness as set forth in two landmark English decisions handed down within one year of each other: Kennedy v. Lee in 1817243 and Adams v. Lindsell in 1818.244 Professor Teeven aptly summarized the importance of these decisions.245 In Kennedy v. Lee, Chancellor Eldon adopted the civilian (presumably Grotius’, Puffendorf’s and Pothier’s) version of binding-but-simultaneous offers and acceptances in the case of an offer accepted by mail. To resolve the problem created by an earlier decision that required the simultaneity of an acceptance, Eldon held that: “[I]f, within a reasonable time of the acceptance being 911communicated, no variation has been made by either party in the terms of the offer so made and accepted, the acceptance must be taken as simultaneous with the offer.”246
As noted by Teeven, this holding may have sufficed as a “complete solution” or as a rule of traffic (as I would call it) “had there not been a concern that if the offeror normally had the right to a notice of assent before being bound, then the offeree ought to have the reciprocal right to know that the offeror had assented.”247 The concern raised in the Kennedy case was one of the issues before the King’s Bench in Adams v. Lindsell. The court held that unless a specific point in time was set forth for the conclusion of the exchanges involving offers and acceptances, “the communications could go on ad infinitum.”248 Accordingly, it selected a time for the conclusion of the exchange and it was when the acceptance was sent by the offeree to the offeror. In doing this, the King’s Bench had to resort to a legal fiction as a result of the same requirement that Lord Mansfield had to struggle with in Pillans v. Van Mierop as discussed in an earlier section: the consideration for the exchange had to be simultaneous, or else it could be characterized as a “past” consideration. The fiction resorted to by the King’s Bench was that the offeror was making his offer “during every instant of time” up to the acceptance.249 Thus, Adams v. Lindsell, completed the task of setting forth the key rules of traffic for offers and acceptances: Offers as executory promises supported by consideration bind the offeror for a reasonable time until accepted, and acceptances bind the offeree from the moment they are communicated to the offeror.
Unfortunately, the above English decisions were not properly implemented by the Restatement (Second) where commercial, inter absentes transactions are concerned. Section 24 of the Restatement (Second) defines an offer as: “[T]he manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to the bargain is invited and will conclude it.”250
To qualify as a binding offer subject to acceptance, the Restatement (Second) first distinguishes among the degrees to which promises bind parties. For example, it places the offers of options to buy or sell at the highest obligation level because “is a promise which meets the requirements for the formation of a contract” and thus “limits the promisor’s power to revoke an offer.”251 It then accepts the possibility of conduct other than a writing as a means of assent,252 and requires precision and clarity from the offer such as on the determination of “the person or persons in whom is created the power of acceptance,”253 the form or format of the acceptable acceptance,254 and the reasonable 912certainty of an offer’s terms and conditions.255 Here, a transactional and not litigation-inspired or judge-made test of Restatement (Second) § 33(2) would have been preferable. The judge-made text posits that: “The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.”256 A transactional test would require the testimony of respected merchants or commercial experts on what they would deem as a reasonably certain offer in the field of commerce involved in the contract in question.
Consistent with the Kennedy and Adams decisions, Restatement (Second) § 35 grants to the offeree-acceptor “a continuing power to complete the manifestation of mutual assent by acceptance of the offer.”257 Similarly, Section 41 underscores the role of a reasonable time as a rule of traffic for offers and acceptances, especially as analyzed in the Adams case:
(1) An offeree’s power of acceptance is terminated at the time specified in the offer, or, if no time is specified, at the end of a reasonable time.
(2) What is a reasonable time is a question of fact, depending on all the circumstances existing when the offer and attempted acceptance are made.
(3) Unless otherwise indicated by the language or the circumstances and subject to the rule stated in Section 49, an offer sent by mail is seasonably accepted if an acceptance is mailed at any time before midnight on the day on which the offer is received.258
Yet, despite this language, and despite Comment b to Section 25’s acknowledgment of the need for irrevocable offers (unless they state that they are not revocable so that offerees can depend on their binding force), and despite the acknowledgment that the presumption of irrevocability is the rule “in many legal systems,”259 it also pledges loyalty to “[t]he common law rule, resting on the requirement of consideration, permits the revocation of offers even though stated to be firm.”260
Somewhat lamely, Comment b to Section 25 of the Restatement suggests that the offeree’s need for a dependable basis for a decision to rely on the seemingly binding offer “is met in part by the common-law rule that a mailed acceptance prevents revocation. Where more is needed, the option contract is available.”261 In other words, the useful legal fiction of Adams v. Lindsell that the offeror was making his offer “during every instant of time up to the acceptance” was not taken up by the Restatement (Second), thereby reviving the “archaic reverence for form and of scholastic methods of interpretation” that Professor Ames and other students of the common law of contracts found so counter-productive.262
The thrust of this comment is the rule in Section 42, although it is stated in an oblique and almost apologetic fashion: “An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.”263 Comment a to this provision is blunter—under the heading of revocability of offers, it states:
Most offers are revocable. Revocability may rest on the express or implied terms of the offer, as in the case of bids at an auction. But the ordinary offer is revocable even though it expressly states the contrary, because of the doctrine that an informal agreement is binding as a bargain only if supported by consideration. Inroads have been made on that doctrine by statute and by rules giving effect to nominal consideration and to action in reliance on that promise. Where such rules are applicable, or where the offer is itself a formal contract or an agreement binding as a bargain, the case is governed by Section 37 rather than by this Section.264
The major premise that “most offers are revocable” is not supported by the transactional facts of a contemporary marketplace. This is a marketplace whose innumerable offers are in the form of millions if not billions of advertisements of goods or services at specified prices with set time limits for “special deals,” “close outs” and “liquidations.” In fact, irrevocable offers encompass every sector of merchandising, from retail or wholesale dry goods businesses to automobile dealerships and the airplane or travel industries. These offerors actually depend upon this type of mass merchandizing to attract many if not most of their customers. If asked by legislators or judges, these offerors would be the first ones to tell them that their profitability is deeply tied to their customers’ trust in the irrevocability of what is stated in their offers as printed in newspapers, broadcasted in television sets or communicated through the Internet.
Irrevocability is so necessary that it has led to the “commodification” and liquidity (or easy negotiation and redemption) of vast numbers of “bearer” supermarket coupons, redeemable by their bearers’ tender to a supermarket cashier. Would such a transaction be possible if each time a supermarket cashier is ready to credit their bearers with a certain amount of the price rings up in his cash register, a warning flashed in her computer indicating that the irrevocable offer as widely announced has been revoked a week, a day or hour earlier? Did the drafters of the above comment take into account the effects that a presumption of revocability would have upon banks or savings and loan institutions whose offers to pay, say, a certain amount of interest for savings or deposit accounts is what attracts a substantial part of their depositor-investors? Or did they consider what this presumption would do to the letter of credit business, especially now that its best customs and practices world-wide have had to adopt the principle of irrevocability?265
As stated by § 2–205 of the U.C.C.:
An offer by a merchant to buy or sell goods in a signed writing which by its terms give assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months, but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.266
As noted by Official Comment 1 to this section, a firm offer no longer requires consideration to be binding on the offeror; now it is binding by “merely be[ing] characterized as such and expressed in signed writings.”267 Further, the meaning of the requirement of a signature reflects the influence of electronic messaging by making “authentication” its functional and reasonable equivalent. Nonetheless, since authentication by a writing (or its functional equivalent) is “the essence of this section,” even though “settled” courses of dealing or usages of trade allow for oral communications as firm offers, this provision would still require a writing.268
One of the purposes of a general theory of contract is not only to help litigators and judges “prophesy” what the courts will do in fact (a posteriori), but also to help the parties and their attorneys identify a priori its formative elements and their validity. For it is this identification that will allow the parties to predict when and how their contracts will be formed and from that moment on, when and how to assume further obligations, manufacture, transform, sell, buy, lend or borrow, based upon the existence of the formed contract.
For centuries now, consideration has been one of these elements and one of the purposes of this chapter is to evaluate its usefulness, especially as compared with causa, its civil law counterpart. There is no doubt that without the enforcement of executory promises, a credit economy could not have come about. This enforcement was made possible in English law by the King’s Bench decision in Slade’s Case that the defendant-promisor’s failure to pay the plaintiff “sixteen British Pounds for the growing grain at a future date” warranted an action on indebitatus assumpsit. In this respect, requiring the giving of something of value as the factual and legal predicate for the enforcement of executory promises was an extremely useful legal institution in the development of a credit economy.
Yet, as economies develop, some of the formative legal requirements are either discarded or de-emphasized for the sake of simplicity. As a law student, I remember reading Arthur Corbin’s warning that a number of contracts or promises may exist without bargained-for consideration. The latest edition of his magnum opus contains the same warning: “There are many agreements that are not bargains; and there are many contracts that involve no bargain….” (Among these he listed contracts under 915seal as well as the lesser known “informal contracts” without assent or consideration.)269 As shown in this chapter, the number of commercial transactions exempt from consideration has been growing during the last century, almost from one generation to another.
Meanwhile, as this chapter also shows, causa and bargained-for consideration are a hindrance to many an important commercial transaction—from the immoral causa that prevented French negotiable bonds, from being marketable for a considerable part of the eighteenth and nineteenth centuries, to the equally unenforceable insurance policies because of their immoral purpose. The same uncertainty could affect United States contract rights and accounts receivable as one of the most popular forms of collateral in secured lending if subjected to the acid test of “bargained-for consideration” and to defenses derived from it such as the presence of past consideration. It is therefore appropriate to reassess the contribution or hindrance of motivational causa and bargained-for consideration in the formation of commercial contracts.
To the extent that contractual elements that the parties thought were present at the time of formation could subsequently be found to be non-existent or seriously flawed by a judge or arbiter, the certainty of the supposedly binding promises or agreements is undermined. Meanwhile, as commercialization and financial globalization grow, so does the demand for certain contractual promises that can yield a reliable and profitable stream of income. Contract rights and accounts receivable derived from such promises have by now become an essential component of that marketplace.270 Consider this datum: In a recent trip to Chile, I found out that approximately thirteen percent of its GDP is comprised of “factoring” activities, i.e., the purchase or negotiation of accounts receivable and factoring. Consider also that factoring began in Chile in 2005,271 and less than two generations ago Chile was a developing South American nation, not the developed nation it is now.
Moreover, depending upon the certainty of collection of accounts receivable and their proceeds, they are not only more desirable by factors, but Chileans are also willing to purchase or negotiate them “without recourse” on their previous holders, sellers or assignors. Thus, reducing the uncertainty of collection by giving lending factors access to the proceeds of the contracts and accounts receivable free from underlying contractual claims and equities (including their “bargained-for consideration” or causas) enlarges their pool of liquid assets and induces their willingness to lend. Finally, consider that the ability of an original holder of accounts to sell or negotiate his accounts “without recourse” (i.e., without the factor’s ability to sue him for a failure to collect on the account assigned or sold). This would be possible when a negotiable instrument states that it is negotiated without recourse on its endorser or transferor, or when the account debtor waives his actions or defenses against the assignee of the account. In such cases, it may be possible for micro- or small 916businesses to have more unimpaired assets and thereby gain access to additional commercial credit.272
As with the ease of negotiability of eighteenth-century governmental bonds in France and Spain, then, the need for greater ease of assignment and sale of contract rights and accounts is an additional reason why causa and bargained-for consideration should not be allowed to undermine their certainty. The need for certain and liquid promises was recognized in some instances by both the Restatement (Second) and the U.C.C. when they exempted contracts under seal, negotiable instruments and documents, recognizances or public or formal acknowledgments of debt of unperformed conditions or duties, firm promises and letters of credit from the need for consideration.273 In fact, the entire genus of “abstract” or independent promises, i.e., promises whose enforcement is independent from their underlying contract’s causa or bargained-for consideration, is highly sought after by creditors and investors. As noted by Oxford’s Sir Roy Goode, England’s leading commercial law scholar: “[T]he rule that a contract must be supported by consideration is not absolute. An important exception is the abstract payment undertaking, a promise which the law will enforce as a matter of mercantile usage despite the absence of consideration or even reliance.”274
Similarly, Professor Farnsworth reminds us that Mansfield’s “heresy” (that putting a promise in writing should operate as an alternative to consideration) has a continuous appeal, especially after consideration started playing a larger role in the formation of contracts once the requirement of a seal was abolished.275 He also calls attention to notable attempts to excise consideration from the law of contracts, including a 1937 Recommendation by the English Law Revision Committee to enact a statute to make signed written promises enforceable without regard to consideration; and although this recommendation was not followed in Britain, some American states have enacted legislation along similar lines:
Pennsylvania has the most sweeping statute, under which any promise, even a purely gratuitous one, is not “unenforceable for lack of consideration, if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound.” A more common variety of legislation, found in over a dozen states including California, makes a writing “presumptive evidence of consideration.” New York has enacted statutes making a writing a substitute for consideration in a limited number of situations, including promises supported only by “past consideration.”276
In sum, once consideration is found in the mere issuance or in the exchange of a promise for a promise, a “bargained for” requirement is unnecessary and redundant. 917This is why Pennsylvania’s statute best embodies the wisdom of Mansfield’s solution. Where the enforcement of the original contract between its parties is concerned, eliminate the need for consideration, but make sure that the expression of the party’s intent (in the case of unilateral promises) or the parties’ promises faithfully portray their respective intent to be bound. And where what is sought is the protection of third parties interested in purchasing or negotiating contract rights and accounts, helpful international conventions and model laws as well as national statutes are now paving the way for progressively more abstract and liquid commercial promises. They allow for the account-debtors’ waiver of defenses related to the account holder’s improper performance or failure to supply adequate consideration as well as for the account debtor’s agreement to raise such defenses only against the original holder or assignor of the account.277
In a world where three-quarters of the securities transactions in the contemporary marketplace are done over the computer and are based on preexisting forms of “dynamic” contracting, neither causa nor the bargained-for version of consideration can be regarded as “catalysts” of this type of contracting. Nonetheless, a form of giving, whether an initial promise, an act or a symbol of both, continues to be the catalyst for such transactions. Accordingly, contemporary legislators, judges and commentators cannot ignore such facts and the official law that they are shaping should follow the trends apparent in international conventions such as the CISG and compilations of customs such as the UCP, the International Standard Banking Practice (ISBP) of the ICC, or ISDA and other sources of law, both official and customary.
This Appendix is devoted mostly to the study of formalities and solemnities in Ibero-American and United States court decisions and related statutory and customary law. As emphasized in the principal chapter, formality as a key element of the validity of contracts reflects a view of contract as a ceremonial event fixed in time and space (the latter by the terms and conditions set forth in the contractual document). In contrast, where contract is regarded as the parties’ commercial conduct, formality is no longer a key element. The main purpose of this Appendix is to illustrate the normative and economic importance of this dichotomy through court decisions, comments, and questions.
The jurisdictions chosen as representative of contrasting views on contractual formality are those of Spain and Latin America on the one hand, and the United States on the other. The reason for this choice is that many jurisdictions in the two camps have opposite views on the formalities required of commercial contracts. It is my hope that the compiled decisions will help us understand the reasons for the sharply different rules. Do they reflect conflicting normative views on the nature of the transactions involved—some more in need of a formal-evidentiary record than others—918or are they caused by contrasting methods of legal reasoning: A scholastic as opposed to a pragmatic or “logic of the reasonable” method of thinking.
In addition, while some of the Spanish decisions apply a principle of informality that resembles that of court decisions of the United States, many Latin American court decisions still cling to formality and solemnity as essential elements of the validity of a contract as commercial in nature as a life insurance policy. Is this divergence caused by the continuing presence of the Latin notaries and their modus operandi as discussed in Chapter 7? If so, what are the economic consequences, for example, of a small business not being able to obtain a loan secured by its inventory, equipment, or accounts receivable as collateral unless it is formally documented by a costly notarial deed that describes in detail all the goods that comprise the collateral? Can you visualize the cost of formally drafting and amending such a document each time new collateral is added to the secured loan or, when the goods described in detail as collateral are sold and others, similarly detailed, replace them? Finally, a reminder that I do not include cases on causa and consideration in this Appendix, important as these legal institutions are to the formation of commercial contracts, because court decisions on these issues are already an integral part of the discussion in the principal chapter.
Article 1596. Testimony of the parties’ witnesses will not be admitted as evidence to prove something different from the content of instruments [documents] or to justify something that was stated at the time of or subsequent to the granting of the instrument [document], even if its amount or value is less than 100 re-adjustable units.
Article 1574. Public instruments are all those official documents drafted or granted by authorized officials, according to the required forms and within their powers. Every public instrument is an authentic title, and as such it provides full proof, provided that it is not otherwise challenged by a claim of forgery. It is considered a public deed when the document is granted before a Notary Public and incorporated in the protocol [official paper used by Notaries] or recorded at a public registry. It is also considered a public deed when it is granted before an official authorized by law and in accordance with the requirements of law.
Article 644. An insurance contract requires a written policy which may be public or private (Article 202).
Article 645. All insurance policies or contracts, except for life insurance, require: 1) Date on which the contract is granted; 2) Name of who requests the insurance, whether in his name or on behalf of a third party; 3) A sufficiently clear identification of what is insured and its actual or given fixed value; 4) The amount of the insurance; 5) Risks undertaken by the insurer; 6) The effective term in which the insurer’s coverage of risks will begin and terminate; 7) The insurance premium; and 8) In general, all circumstances that might be of real interest to the insurer, as well as any other stipulations made by the parties.
…
SECOND:
The appellant filed her appeal to the Supreme Court alleging the violation and erroneous application of Articles 350 and 434 of the Code of Civil Procedure … and Articles 1596 [and] 1574 … of the Civil Code…. The appellant argues that the Trial Court erroneously evaluated the evidence presented in trial, especially the documents … which are public documents and as such prove that the insurance policy existed and was effective at the time of the incident.
She argues that it is prima facie evidence and thus the existence of the aforesaid contract cannot be disputed…. She further adds that because they are public documents, “according to Art. 1575 of the Civil Code, it cannot be disputed that … [the documents] are absolute legal proof of having entered into a contract and of its date….”
WHEREAS:
The Court unanimously dismisses the appeal filed by the appellant, affirms the reasoning and holding of the first and second courts … and imposes the costs and fees of this appeal on the appellant…. The issue of the appeal is whether the Trial Court erroneously applied the legal provisions related to the evaluation of evidence, especially that of public documents. The “findings of facts” [according to the Trial Court] … can be summarized as follows: It begins by affirming that it “fundamentally shares the final conclusion on the dismissal of the complaint; that there was never an insurance contract between the parties that allows recovery of the claimed compensation.”279
Forthwith the Court concludes: … that the original insurance policy in our records on file … shows that the document was never executed [because it lacked required formalities]…. In conclusion, there is no legal proof of compliance with the requirements stated under Articles 644 and 645 of the Commercial Code … [a] fact that has been acknowledged by the appellant when the appellant alleged the existence of a “material policy,” one which does not include [the essential requirement of] a price…. [The] main issue is to determine whether the contract really existed, and whether payment of the price enabled it to produce all of its effects upon the occurrence of the incident at issue.
Based on the previous facts, the Civil Court held that an insurance policy was never executed. Because the insurance policy is a solemn contract, it is an unavoidable consequence that the legal relationship was never perfected; and if this is true, the alleged beneficiary of the insurance policy cannot claim payment of the price…. An insurance policy must be executed in a public or private deed [Art. 644 of the Commercial Code], and even when executed in a public deed it must comply with the 920requirements of law; this is the first evidentiary standard that Art. 1574 of the Civil Code regulates.
Summarizing: The Civil Court evaluated the evidence according to the rules of reason and sound judgment [Articles 402 and 349 of the Code of Civil Procedure] … in order to know if the contract existed or not…. [T]he law provides no other way for the Court to determine it. If the Court would have accepted the existence of an insurance policy [i.e., that the contract was executed according to the requirements of law], then the solemnity of the insurance contract would have given it the value of prima facie evidence. However, in this case, deciding whether the contract was executed requires the use of reason and sound judgment, and the use of all means of evidence that may prove or deny the existence of said contract, including the use of assumptions, indications, circumstances, and even testimony. This proves that in order to determine whether the insurance contract existed, the Court used and correctly applied normal means of evidence.
Parmenides’ axiomatic affirmation that opposite terms (such “being” v. “non-being”) cannot each be valid is logically self-evident, but it does little to answer the basic issue of this case: Is a contract only a contract when it has been formally completed with all its t’s crossed and i’s dotted, or could a contract be valid if the parties behave as if they are governed by it? The Court’s reasoning was that if there is no formally completed contract (meaning a document whose price or premium has not been specified), no evidence exists that such a contract was concluded. However, this argument is factually untenable.
The Supreme Court of Uruguay concludes that: “[T]here is no legal proof of compliance with the requirements stated under Articles 644 and 645 of the Commercial Code … [a] fact that has been acknowledged by the appellant when the appellant alleged the existence of a ‘material policy,’ one which does not include [the essential requirement of] a price.” Yet, why is it essential that the insurance policy itself be the only possible document or record that sets forth the premium or price paid for it? Would the Court’s opinion have been different if insurance experts in Uruguay had testified that a side note between the agent for the insurance company and the insured agreeing to a certain premium is evidence of an agreement on the price of the policy and that such a price can be filled in subsequently and be made part of the issued policy?
Furthermore, what if the insured submitted receipts signed by the insurer acknowledging the insured’s payment of premiums? Or, what if the insurer’s accounting records showed the policy in question as one “in force”? How would the above case have been decided in the reader’s jurisdiction? Would the courts in the reader’s jurisdiction look at the parties’ conduct as suggested by the German author Christopher-Lehmann Haupt,280 and as done by a ruling by a German court (that this author discusses) which found that a contract had been formed between a car driver and a security guard of a parking lot as a result of their repeated conduct or course of performance? When a court ignores the contract made evident by the parties’ course of performance, course of dealing, or by commercial or economic sectors’ usage of trade, is 921it not protecting and encouraging contractual bad faith, as was made clear by the Roman Praetor’s “exceptio doli”?281
OPINION:
Almon, Justice
Robert Cagle brought an action for breach of contract against Roy Buckner Chevrolet, Inc. A jury fixed his damages at $11,522.17.
In November, 1977, Cagle went to Roy Buckner Chevrolet to discuss the purchase of a 1978 Chevrolet Corvette, known as a “Limited Edition Corvette CP”. General Motors Corporation produced only a limited number of these automobiles, which were referred to as “Indy Vettes” because one or more of them were used as pace cars at Indianapolis.
Cagle talked to the assistant used car manager, who referred him to Joel Kelly, the new car sales manager. The assistant used car manager partially filled out a “buyers order” form which was then presented to Kelly. After the initial discussion, Kelly agreed to sell Cagle an “Indy Vette” at list price. Kelly wrote “list price” and signed his name on the “buyers order”. His signature did not appear in the space provided for the signature of an officer of Roy Buckner Chevrolet, but rather was signed in the middle of the page. The form was only partially completed at the time of Kelly’s signature. Cagle also signed the order form and gave Kelly a $500 deposit. When the form was signed, Roy Buckner Chevrolet did not have an “Indy Vette” in its possession, but later received two such automobiles.
Roy Buckner Chevrolet notified Cagle that it would not sell him one of these cars and attempted to return his deposit. Cagle refused the attempted return of the deposit and brought suit.
There is no disagreement about damages, as the market value of this limited edition “Indy Vette” was substantially higher than the manufacturer’s suggested list or sticker price….
The appellant argues several issues for reversal, however. The principal one is whether a valid contract was consummated. Appellant asserts that there was never a meeting of the minds and that the memorandum was insufficient under Code 1975, § 7–2–201(1). That section states:
(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500.00 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not 922insufficient because it omits or incorrectly states a term agreed upon, but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.
The appellant claims that the “buyers order” was only partially complete and several important spaces were left blank, and therefore, that it does not comply with § 7–2–201(1). The “buyers order” is characterized by the appellant as nothing more than an agreement to enter into a future agreement. We do not agree [especially if due consideration is given to the testimonies of key participants of this transaction].
Kelly testified as follows:
Q: And you recall the situation and the dealings with Mr. Cagle on that occasion?
A: Yes, sir.
Q: Did you offer to sell that car to Mr. Cagle for list price?
A: Yes, sir.
Q: Did he accept that offer?
A: Yes.
Q: Did he make a down payment of $500 to Roy Buckner Chevrolet?
A: Yes, sir.
Q: Was he given a receipt for that down payment?
A: Yes, sir.
Q: Was he told that when the car came in, the first Indy ’Vette would be his?
A: Yes, sir.
Q: And when the car came in was he told it will not be sold to [sic] you?
A: Yes.
It is undisputed that Kelly was acting in his capacity as sales manager and was an agent for Roy Buckner Chevrolet, with the authority to contract. In light of Kelly’s testimony, it is obvious that he intended to bind the parties immediately and not merely to agree at a future date. The question then becomes whether the “buyers order” form is a sufficient memorandum under the statute of frauds contained in § 7–2–201(1).
It is true that the order form is only partially complete and is not signed in the designated place by an officer of Roy Buckner Chevrolet. However, open terms in a contract are not conclusive on the indefiniteness of the contract.283
[As stated in § 2–204:]
(1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
(2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.
(3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.
Code 1975, § 7–2–204.
The Official Comment to § 7–2–204 adds:
If the parties intend to enter into a binding agreement, this subsection recognizes that agreement as valid in law, despite missing terms, if there is any reasonably certain basis for granting a remedy. The test is not certainty as to what the parties were to do nor as to the exact amount of damages due the plaintiff. Nor is the fact that one or more terms are left to be agreed upon enough of itself to defeat an otherwise adequate agreement. Rather, commercial standards on the point of “indefiniteness” are intended to be applied, this Act making provision elsewhere for missing terms needed for performance, open price, remedies and the like.
The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement, but their actions may be frequently conclusive on the matter despite the omissions.
The form is signed by both parties, and states the quantity and price of the car. Even though the price is stated to be the list price, we feel this is sufficiently definite. Code 1975, § 7–2–305, provides that parties may conclude a contract even though the price is not settled. In agreeing to let the price be fixed at the amount stated on the list, both parties were bound by the obligation of good faith contained in Code 1975, § 7–1–203.
…
Accordingly, the judgment is affirmed.
Please note that the court’s principal goal was to satisfy the parties’ reasonable expectations, even when some of the formal elements of the sale agreement were missing. Also note how the parties’ disclosure of evidence with respect to the will of the parties prior to trial is influential on the result of the dispute. Each question asked during the oral hearing was matched to that which was previously discovered in the pre-trial discovery stage.284 This is because one of the cardinal rules of the U.S. oral evidence procedure with regard to witness testimony is that the examining or cross-examining lawyer should not ask questions whose answer he or she cannot anticipate. The best way to achieve this result is through pre-trial discovery. Finally, also remember the flexible type of claim that is required for filing such complaints285 under federal and most states’ procedural law—one which allows the court to arrive at a decision that is consistent with current usage and practices in the marketplace.
The principle that one or more terms can be left open in a sale agreement (including its price) if the parties intended to make a contract and a reasonably certain 924basis existed for giving an appropriate remedy (as formulated in U.C.C. § 2–204 and its Official Comment) is one of the core principles of the United States law of sales of goods. It was affirmed and expanded by the not yet adopted amendments to Article 2. Amended U.C.C. § 2–201(1) raises the contractual amount that requires a formality to $5,000.00.286 Additionally, instead of referring only to the formality of a writing (as did the original § 2–201), it refers to a “record sufficient to indicate that a contract for sale has been made between the parties and signed by the party against which enforcement is sought….”287 Amended U.C.C. § 2–103, in turn, defines “record” as “information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.”288
Reflecting the often quick and fluid nature of the negotiation of commercial contracts, the Official Comment to Amended § 2–201(1) states that:
The record required by subsection (1) need not contain all of the material terms of the contract, and the material terms that are stated need not be precise or accurate. All that is required is that the record afford a reasonable basis to determine that the offered oral evidence rests on a real transaction. The record may be written on a piece of paper or entered into a computer…. The only term which must appear is the quantity term.289
Mid-South Packers, Inc. v. Shoney’s, Inc.290
OPINION:
Per Curiam:
I.
The facts, as viewed in the light most favorable to Shoney’s, are as follows. In the spring of 1982, Mid-South and Shoney’s engaged in negotiations for the sale by Mid-South to Shoney’s of various pork products including bacon and ham…. The discussion concerned prices and terms at which Mid-South could supply bacon and ham to Shoney’s. At this meeting, Mid-South submitted a letter styled “Proposal” that set forth prices and terms at which Mid-South would supply Shoney’s with various types of meat. The letter also provided that Shoney’s would be informed forty-five days prior to any adjustment in price. The letter contained neither quantity nor durational terms. Shoney’s expressed neither assent to nor rejection of the prices outlined in the letter. Shoney’s estimated its needs from Mid-South at 80,000 pounds of meat per week. The legal effect of the letter proposal is the center of the controversy.
In July 1982, Shoney’s began purchasing goods from Mid-South. The transactions were initiated by Shoney’s, either through purchase orders or through telephone calls. On the day following each shipment, Mid-South sent invoices to Shoney’s containing additional provisions for payment of both fifteen percent per annum interest on accounts not paid within seven days and reasonable collection costs, including attorney’s fees. Shoney’s bought vast quantities of bacon from Mid-South until August 92512, 1982. On that date, Mid-South informed Shoney’s at a meeting of their representatives that the price for future orders of bacon would be raised by $0.10 per pound, due to a previous error in computation by Mid-South. Shoney’s objected to the price modification, apparently in reliance on the forty-five day notice provision contained in the disputed letter proposal. After negotiations, Mid-South agreed to increase the price by only $0.07 per pound. Shoney’s neither agreed nor refused to purchase at the new price. Mid-South’s new proposal was never reduced to writing.
On the first Shoney’s purchase order sent after the August 12 meeting, Shoney’s requested shipment at the old lower price. When Mid-South received the purchase order its representative, Morris Ates, called Shoney’s representative, Ray Harmon, and advised Harmon that Mid-South would only deliver at the new higher price. The uncontradicted testimony of Ates is that Harmon told Ates to ship the bacon and to note the higher price on Shoney’s purchase order. The bacon was shipped, and an invoice at the new price followed as did Shoney’s payment, also at the new price.
From August 18 until October 5, 1982, Shoney’s placed numerous orders for goods, including bacon, with Mid-South. Some if not all of these orders involved telephone conversations between representatives of the two companies, at which time Mid-South again quoted its increased selling price…. Shoney’s paid Mid-South’s quoted prices in all instances except the final order. On the final order … Shoney’s offset the amount due on the invoice by $26,208, the amount allegedly overcharged on prior orders as a result of the $0.07 price increase.
Mid-South then brought this action to recover the amount offset plus interest and reasonable collection costs, including attorney’s fees, as provided in the invoices. Shoney’s admits that it owes $8,064.00 of the offset to Mid-South, inasmuch as this amount is attributable to orders placed after the expiration of the forty-five day notice period which, Shoney’s contends, commenced on August 12 when Mid-South asked for the price increase.
II.
Shoney’s contends that it accepted the proposal of Mid-South to supply it meat by placing orders with Mid-South, thereby [because of the parties’ conduct] forming a binding contract between the parties. Shoney’s characterizes the contract as a “requirements contract” and asserts that the quantity term under the contract was that amount it reasonably and in good faith required. Accordingly, Shoney’s argues that the notice provision contained in the letter proposal contractually bound Mid-South to notify Shoney’s forty-five days before increasing its prices.
Mid-South asserts that the proposal was at most a “firm offer.” Mid-South argues that under Miss. Code Ann. § 75–2–205 (1972), Uniform Commercial Code § 2–205, (hereinafter referred to as U.C.C. or the Code), a firm offer is irrevocable despite a lack of consideration “during the time stated or if no time is stated for a reasonable time; but in no event may such period of irrevocability exceed three (3) months.” Thus, Mid-South contends that under any construction of the document, the offer must have expired three months after April 17, 1982, the date of the letter proposal, or on approximately July 17, 1982; therefore, it asserts the right on August 12, 1982, to increase the selling price without notice.
The district court, on consideration of cross summary judgment motions, adopted Mid-South’s theory, holding that no long-term requirements contract was created and 926that each purchase order constituted a separate contract for the amount stated at the price required by Mid-South.
Requirements contracts are recognized in Mississippi and are not void for indefiniteness. Miss. Code Ann. § 75–2–306(1). However, an essential element of a requirements contract is the promise of the buyer to purchase exclusively from the seller either the buyer’s entire requirements or up to a specified amount.
Ray Harmon, Shoney’s agent in the transaction, maintained that Shoney’s at all times had the right to purchase goods from suppliers other than Mid-South…. Thus, by Shoney’s own admission, no requirements contract could have arisen from the April 17 letter proposal and the meeting at which it was discussed.
Under the Code, the letter proposal and surrounding negotiations constituted, at most, a “firm offer” which was irrevocable, without consideration, only for a period of three months commencing on April 17 and ending on July 17, 1982. Miss. Code Ann. § 75–2–205. Thus, Mid-South had the right, after July 17, to raise its offered price as it did and the district court was correct in so holding.
The district court was also correct in holding that each purchase order stood on its own as a contract between Shoney’s and Mid-South…. Thus, each time Shoney’s manifested its assent, in telephone calls or purchase orders to Mid-South, a new and independent contract between the parties was created…. Finally, the parties’ “course of performance” is consistent only with Mid-South’s expressed offer and Shoney’s expressed acceptance of the new price.
Shoney’s remedy under the circumstances was either to reserve whatever right it might have had to the old price by sending its purchase orders with an “explicit reservation,” Miss. Code Ann. § 75–1–207, or to find a supplier who would sell at an acceptable price. No rational theory of the law of contracts could permit Shoney’s to manifest acceptance of Mid-South’s new offer, thus inducing performance, and then revoke that acceptance and demand compliance with the terms of the prior, withdrawn offer. See Miss. Code Ann. § 75–2–606(1)(b); § 75–2–607(1). Hence, the entire $26,208 offset by Shoney’s is due and owing Mid-South and the district court’s judgment, to this extent, was proper.
…
AFFIRMED.
Please note that the court finds that at the center of this controversy is a “letter proposal” that Mid-South submitted to Shoney’s. What is the precise legal nature of this letter? The court found that this letter set forth prices and terms at which Mid-South would supply Shoney’s with various types of meat. It also stated that the buyer of the meat would be informed forty-five days prior to any adjustment in price. Yet, the letter was said by the court to contain “neither quantity nor durational terms.” Hence, based upon U.C.C. § 2–201, as discussed in Buckner case, could this letter form the basis for a binding sale agreement? Further, Shoney’s did not, according to the court, express either assent or rejection of the prices outlined in the letter, although it estimated its needs at 80,000 pounds of meat per week.
In light of the difficulties of determining the U.C.C. elements of formation of contract, what made for a binding contractual relationship between these parties? Shoney’s and the United States Court of Appeals for the Seventh Circuit refer to the 927contract involved as a requirements contract. However, contractual classifications or typification do not seem to play any significant role in the previous or subsequent United States decisions. Why would the court have found it necessary to typify such a contract? It added that these contracts “are recognized in Mississippi and are not void for indefiniteness.”291 What made such a recognition and enforcement possible? I suggest that you read the subsequent Warder & Lee Elevator decision before you attempt to answer this question.
Financial Transactions: The Short Sales and “Naked” Short Sales of Investment Securities
In Whistler Investments, Inc. v. Depository Trust and Clearing Corp., Judge Sidney Thomas described short sales and naked short sales as investment securities:
“A short sale is a term of art used for a security trading practice in which a party ‘speculates that a particular stock will go down in price and seeks to profit from that drop.’ ” The seller sells a security he does not own, borrows the security from a broker to meet the delivery obligation, and then purchases an identical security to return to the broker. If the security has declined in price between the sale and the purchase, the seller profits. In contrast, “a ‘naked short sale’ occurs when a seller sells a security without owning or borrowing it and does not deliver the security when due.”292
What formalities, if any, are used in the short sale transactions such as those described? Given the quickness of their sequence, how detailed and solemn could these formalities be? You can assume that the amounts of money involved in each of these transactions vastly exceed the $500 that U.C.C. § 2–201 requires for a writing to be used or the $5,000 that Amended U.C.C. § 2–201 requires for a record to be kept. Then, what would be the likely text of the documents or records that contain the parties’ intent? What tools does a judge or arbitrator have to interpret such intent?
Warder & Lee Elevator, Inc. v. Britten293
OPINION:
McCormick, Justice
The question in this action for breach of an oral contract to sell grain is whether the trial court erred in holding defendant’s statute of frauds defense under the Uniform Commercial Code was defeated by promissory estoppel. We affirm the trial court.
…
Plaintiff Warder & Lee Elevator, Inc., operates a grain elevator in the town of Webster…. [On] July 4, 1974 … Defendant John W. Britten, a farmer in the area, came to the office during the morning with a friend. The elevator had purchased Britten’s grain for years, and he and Lee were well acquainted. At Britten’s request 928Lee quoted him the price the elevator would pay for new-crop corn and soybeans for fall delivery based on market prices of the prior day.
Britten offered to sell and Lee agreed for the elevator to purchase from Britten 4000 bushels of corn at $2.60 per bushel and 2000 bushels of beans at $5.70 per bushel for October–November delivery. [A bushel is a measurement equivalent to 35.24 liters.]
The elevator did not at that time require a seller to sign a memorandum or other writing to show the agreement. Instead, the only writing consisted of notes showing the terms of sale made by Lee for internal bookkeeping purposes. All of the elevator’s prior purchases from Britten had been upon oral agreement, and Britten had kept his promises on each occasion. In fact, no seller had previously refused to perform an oral agreement with the elevator.
It was the custom of the elevator not to speculate in grain but to act essentially as a broker. Thus on July 5, 1974, the elevator sold the same quantities of corn and beans as were involved in the Britten purchase for fall delivery to terminal elevators at Muscatine for a few cents more per bushel.
Grain prices increased substantially during July. On July 29, 1974, Britten called Francis Lee and said he wished to “call the deal off”. Lee told him: “You cannot call it off. We sold this grain, and we expect delivery this fall.” Britten said he would not deliver the grain.
In an effort to mitigate its loss and to enable it to meet its commitment to sell the grain, the elevator purchased appropriate quantities of new-crop corn and beans from other farmers on and shortly after July 29.
In August 1974, James Lee met Britten on a street in Webster. Britten initiated a conversation in which he said he would not fulfill his agreement and offered $500 in settlement. Although counsel for Britten objected to the admissibility of the evidence at trial, the objection was untimely and no motion to strike was made. Lee rejected the offer. He told Britten the elevator had sold the grain and expected him to perform under his contract.
Britten sold his 1974 crop elsewhere.
The elevator brought this action against Britten for breach of the oral agreement, seeking as damages the loss it sustained in covering its delivery obligation under the July 5 contracts by which it sold the quantity of grain purchased from Britten. See § 554.2712 of the Code. That loss was $6478.34, which was the amount, plus interest, for which the trial court entered judgment.
Britten offered no evidence at trial. He relied solely on the statute of frauds in § 554.2201 of the Code. The elevator urged promissory estoppel in bar of the defense.
The statute of frauds applicable to the sale of crops is § 554.2201. Under this statute an oral contract for the sale of goods for a price of $500 or more is unenforceable, with certain stated exceptions. The elevator does not contend any of those exceptions is applicable. Promissory estoppel is not among them.
Authority for use of promissory estoppel to defeat the statute of frauds, if it exists, must be found under § 554.1103. It provides:
Unless displaced by the particular provisions of this chapter, the principles of law and equity, including the law merchant and the law relative to capacity 929to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.
We have not had occasion to decide whether the provisions of § 554.2201 displace the doctrine of estoppel which would otherwise be available in accordance with § 554.1103. However, other courts which have considered the question have held the doctrine is available. Several of those decisions involved grain sales in circumstances analogous to those in the present case.
…
We have long recognized promissory estoppel as a means of defeating the general statute of frauds in § 622.32. We see nothing in § 554.2201 which purports to require a different rule under the Uniform Commercial Code.
The listing of exceptions to the statute of frauds in § 554.2201 is plainly definitional. The provision does not purport to eliminate equitable and legal principles traditionally applicable in contract actions….
If § 554.2201 were construed as displacing principles otherwise preserved in § 554.1103, it would mean that an oral contract coming within its terms would be unenforceable despite fraud, deceit, misrepresentation, dishonesty, or any other form of unconscionable conduct by the party relying upon the statute. No court has taken such an extreme position. Nor would we be justified in doing so.
…
The issue is whether one has acted to his detriment in reliance upon the promise of another, and it is immaterial whether that promise was unilateral or bilateral.
Specific circumstances which justify use of the doctrine as a means of avoiding a statute of frauds defense are now expressed in Restatement (Second) of Contracts § 217A (Tent. Draft 1–7, 1973) as follows:
(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires.
…
In order to obtain the benefit of the doctrine of promissory estoppel to defeat a statute of frauds defense, the promisee must show more than the nonperformance of an oral contract. Under § 217A the defense cannot be overcome, when it is otherwise applicable, unless the promisee proves (1) the promisor should reasonably have expected the agreement to induce action or forbearance, (2) such action or forbearance was induced, and (3) enforcement is necessary to prevent injustice.
…
AFFIRMED.
As apparent from the preceding decisions, U.S. courts do not typically discuss if they are dealing with a consensual, synallagmatic, commutative, or other type of 930contract. Rather, they focus their analysis on the facts, applying a pragmatic criterion with respect to the role that formality plays in the existence of a contract. A phone conversation, a partially completed and incorrectly signed purchase order, and telex communications can all be considered a contract, as well as a check with an annotation related to the transaction for which it was used. This case in particular reflects the importance that courts attribute to the parties’ contractual conduct, whether manifested in the course of performance in the contract in question or the parties’ prior course of dealing, and the usages or customs of the trade. Recall Judge McCormick’s findings of fact:
The elevator had purchased Britten’s grain for years, and he and Lee were well acquainted. At Britten’s request Lee quoted him the price the elevator would pay for new-crop corn and soybeans for fall delivery based on market prices of the prior day.
…
The elevator did not at that time require a seller to sign a memorandum or other writing to show the agreement…. All of the elevator’s prior purchases from Britten had been upon oral agreement, and Britten had kept his promises on each occasion. In fact, no seller had previously refused to perform an oral agreement with the elevator.
It was the custom of the elevator not to speculate in grain but to act essentially as a broker.294
These facts, which can be summarized as the contractual conduct of the parties and their usage of trade, are closely connected with the equitable doctrine of estoppel. As is the case with many of our contemporary legal institutions, the Roman Praetor led the way when refusing to enforce conduct that contradicts the parties’ previous and relied upon conduct. It is for this reason that he enjoined a party’s venire contra factum proprium.
Informality of contractual promises under Spanish civil law has a long, but not always aristocratic tradition. It will be recalled that according to the thirteenth century Fuero de Navarra, promises to do or give something in the future entered into by German-Spanish aristocracy (or that of the limited nobility or infanzones) did not bind them. However, villains (villanos, meaning not only peasants or miscreants, but also city dwellers) were bound to comply with promises of deferred performance by mere consent: “if a villain promises, he shall give.”295
The Spanish Civil Code of 1889 adopted a “spiritualistic” (or “formality is not required”) principle, particularly found in Articles 1254, 1258, 1278, 1279 and 1280 that provide, in their relevant parts:
Article 1254: A contract exists from the moment one or several persons consent in obligating themselves….
Article 1258: Contracts are perfected by mere consent….
Article 1278: Contracts are binding in whichever form they are granted, provided that they comply with the essential conditions required for their validity.
Article 1279: If the law requires that for a contractual obligation to be effective it needs to be granted in a public deed or by means of other special forms, the parties may compel each other to comply with said formality from the time of their consent and from the moment they comply with other elements required for its validity.
Article 1280: The following shall be granted in a public deed:
1. Acts and contracts, whose purpose is to create, transfer, modify or terminate any in rem rights over real estate property.
2. Lease agreements of the aforesaid assets, for a term of six or more years, provided that they are effective against third parties.
3. Marriage agreements and their amendments.
4. Assignments, rejections and disclaimers to hereditary rights or marital agreements.
5. Powers of attorney to enter into marriage, general power to litigate and special powers to be used in trials; powers to manage assets and any others whose purposes are acts that have to be granted in or drafted to be granted in a public deed, or that is effective against third parties.
6. Assignments of claims or rights resulting from an act granted in a public deed.296
It is also required to grant in writing, at least in a private document, any other contract where the value of the obligations, of at least one of the parties, exceeds 1,500 pesetas. As will be discussed,297 the renowned Professor Ernst Rabel, one of the pioneers of the comparative law of sales, characterized this principle in the 1950s as embodying modern legal science and urged Professor Llewellyn not to adopt it for Article 2 of the U.C.C.