4

Formation of contract

In this chapter, various circumstances surrounding the formation of contract will be considered from a promissory viewpoint.

Traditionally, the Common law and mixed legal systems have been against the idea that any liability of a promissory type might exist between negotiating parties before formation of contract, though that has not precluded duties arising between the parties based upon tort. By contrast, as will be seen, German law has a developed notion of culpa in contrahendo, a type of liability which appears to lie in the interstice between contract and tort. Increasingly however, even the Common law is recognising that some situations (such as breach of conditions of tender) merit liability, and promise can provide a rationale for such liability. The making of a so-called ‘firm offer’ is another circumstance where some systems consider that duties ought to arise, though this view is not shared by English law or South African law; in those systems where liability does arise, promise can again be used to explain the origin of the duties. Promises of reward and options are also considered: again, where these are legally enforced, promise provides an attractive solution to explain their basis in law. Letters of intent and the question of error in the formation of contract are trickier: the simple idea of promise does not provide an obvious solution to the problems that each raises, and some consideration is given as to how best therefore to characterise the results in cases raising those issues. The doctrine of consideration evidently plays a major role in the practical resolution of some of these debates, and a review of whether that doctrine ought to be maintained is undertaken later in the chapter. Lastly, as requirements of form or notarisation restrict promissory potential in some areas, some attention will be given to whether these restrictions ought to be maintained.

By way of some further preliminary remarks, it will be useful to restate briefly some of the classificatory terms and ideas set out in Chapter 1, as

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the solutions to some of the scenarios that follow entail an understanding of these terms:

(1)The distinction between juridical acts and obligations: a juridical act is a legally effective transaction which may be constituted by the actions of only one party (a unilateral juridical act) or more than one party (a bilateral or multilateral juridical act, depending on the number of parties); an obligation is merely one such type of juridical act, some obligations being unilateral juridical acts (unilateral promise and, in some jurisdictions, so-called ‘unilateral contracts’) and some being multilateral juridical acts (contract, delict, unjustified enrichment, and negotiorum gestio). Even where an obligation has been constituted by a bilateral juridical act (contract being one example), it may be affected by a subsequent unilateral juridical act, such as ­termination for breach.

(2)The distinction between gratuitous and onerous obligations: a ­gratuitous obligation is one in which only one party comes under any duties, an onerous obligation one where both (or all) parties do. In some jurisdictions, a gratuitous obligation is called a ‘unilateral’ obligation, but this causes confusion with the use of the term unilateral in relation to juridical acts, so such use has been avoided in this text. In jurisdictions where the doctrine of consideration applies, all contracts are onerous;1 where the doctrine does not apply, a contract may either be gratuitous or onerous. Promise (in its narrow sense of a ­unilateral promise) is always gratuitous, as a promisor can never compel the performance of any counter-obligation by the promisee: if the promisor can do so, then there is an exchange of conditional promises constituting a contract.

(3)The distinction between mutual (or synallagmatic) and onerous obligations: mutual obligations are those where a duty or duties on one side of the relationship are offered in exchange for one or more on the other side. As such, mutual obligations are but one class of onerous obligation: an obligation may be onerous, in that both parties may come under a duty or duties, but the duties of each may not be reciprocal to any duties on the part of the other.

Having provided this brief restatement of some important fundamental terminology, the discussion now proceeds by way of consideration

1  Save those undertaken, exceptionally, in deed form or under seal.