Introduction to the Law of Contracts

(1) Nature of the Law of Contracts

In modern law, we are used to thinking in terms of a general law of contract. What this means is that, while there will be special rules applying to some par­ticular kinds of contract, most aspects of most contracts will be governed by the same general rules and principles.

In Roman law, the approach was quite different. Beyond a recognition that all contracts involved agreement,⁴⁰ there was altogether very little idea of general principles of contract. Instead, the focus was very much on specific contracts. In principle — though this principle was departed from in some respects, as we shall see — an agreement had to be fitted into one of the recognised contracts, or else it was not binding. This is not a problem that can arise in modern law.

The different types of contract could be classified in various ways. For exam­ple, most contracts were bilateral, but sometimes a unilateral contract could be made. The difference between these is that, in a unilateral contract, only one party was undertaking obligations. In a bilateral contract, both parties undertook obligations.

Another classification of contracts was into those that were stricti iuris (of strict law) and those that were bonae fidei (of good faith). The stricti iuris contracts were developed earlier, and arose from the civil law. Their validity depended on adher­ence to formal requirements rather than on the parties' underlying intentions.

The method of classification of contracts used in the Institutes is a fourfold one, based on the way in which the different contracts were constituted: not all were constituted by consent.

Verbal contracts were constituted by the exchange of words in particular form. These are considered in Chapter 18.

Real contracts (contracts re) were constituted by the parties' conduct, specifi­cally the delivery by one to the other of the property with which the contract was concerned. These contracts are considered in Chapter 19.

Consensual contracts were the only ones that were constituted by the parties' agreement alone. This category contained what can certainly be seen as the most important contract, the contract of sale, and is considered in Chapter 20.

Finally, literal contracts (contracts litteris) were constituted in writing. We are concerned here with writing as a necessary constitutive element, not simply for the purpose of evidencing the transaction. It has always been sensible to record important transactions in writing, but a contract of sale (say) is not in the cat­egory of literal contracts even if its terms are reduced to writing. Literal contracts are considered in Chapter 21, along with certain further forms of agreement that were given some legal effect.

In the rest of this chapter, we shall be looking at some general principles of contracts. This could be seen in one sense as anachronistic: as we have seen, the Romans themselves did not approach the material in this way. However, we are not Roman lawyers, and we are not altogether obliged to approach the issues in the way they did. One of the main reasons for studying Roman law is for what it can teach us about modern law, and that justifies a different approach from that used by the Romans.

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D.2.14.1.3.

(2) The Role of Causa

As we have seen, the Romans had a law of specific contracts, rather than a gen­eral law of contract.

From a Scots law point of view, matters have moved on substantially, and here Scots law differs a great deal from English law (and indeed Roman law). The main source of this development was the medieval canon law which, as we have seen,^[1979] drew heavily on Roman law but did not follow it slavishly. The canon law, being concerned with matters of conscience and good faith, evolved the general rule that any seriously intended agreement was, in principle, enforceable. The maxim to follow was now pacta sunt servanda (agreements are to be kept). This meant a rejection of the idea that a contract was only valid if it could be fitted into a defined category. As Stair put it for Scots law, ‘every paction produceth action'.^[1980]

This development has had three notable consequences for Scots law. The first is that an agreement may be a valid contract, even if it is of a novel type. The second is that a unilateral promise may be held binding:

a promise is that which is simple and pure, and hath not implied as a condition, the acceptance of another... Promises now are commonly held obligatory, the canon law having taken off the exception of the civil law, de nudo pacto.^[1981]

Thirdly, in much the same way as a binding promise may be made, a contract may in Scots law create an obligation enforceable by a person who is not a party to the contract.^{[1982] [1983] This third party right, traditionally called a ius quaesitum lerl/o,19 could not have been created in Roman law.[1984] This ability now also exists in English law.}

(3) Contract Formation and Intrinsic Grounds of Invalidity

(a) Consensus and Error

As we have seen, all of the Roman forms of contract depended at some level on agreement between the parties. What, though, if one or both of the parties suffered from an error as to some essential element of the transaction? With stricti iuris contracts, this could hardly be relevant:^[1986] in a stricti iuris contract, the parties' agreement was judged simply by externals, so an unexpressed error in understanding could not be founded on.^[1987]

The situation was different with bonae fidei contracts. With these, the contract's validity was dependent on genuine agreement between the parties.^[1988] There had to be consensus in idem: the parties' minds had to be at one on the essentials of the contract, or else the contract was void.^[1989] It does not appear to have mattered whether the error lay with one party or with both, if the latter whether the parties suffered from the same error or different ones, or even whether one party could have known of the other's error. It was enough to make the contract void that the error existed, as long as the error related to an essential element of the contract. This is referred to here as an intrinsic ground of invalidity of the contract, because it was a defect in the contract itself rather than being something from outside of it.

A number of different types of error were recognised as relevant. The starting point is a statement by Ulpian:

In contracts of sale, it is obvious that agreement must be present. The purchase is not valid if there is disagreement as to the contract itself, the price or some other element.^[1990]

The reference here is specifically to sale, but it is generally taken to be of wider application.

The first type of error mentioned by Ulpian is known as error in negotio, which is an error as to the type of transaction that has been agreed:

If I give to you as if by way of deposit, and you receive as if as a loan, there is neither deposit nor loan. It is the same if you give as if as a loan for consumption, and I receive as if as a loan for use.^[1991]

Many other examples could be given.

The second is error in pretio, which is an error as to the contractual price. Despite the term ‘price', this is broader than sale:

If I lease land out to you for ten, and you think that you are renting it for five, there is no contract.^[1992]

Beyond these two examples, others existed, but the error had to do with some fundamental element in the contract. It would not, for example, be enough that I believed the thing I was buying from you to be more valuable than it in fact was.^[1993] If, however, there was a mistake as to the identity of the actual subject matter of the contract (error in corpore), that would be sufficient reason to hold the contract to be void.^[1994] For example, if I thought I was buying the Cornelian farm, and you thought you were selling the Sempronian farm, there was no contract.^[1995] That assumes, though, that we are genuinely in disagreement about the plot of land to be sold. If we agree about what land is being sold, but differ as to its name, the contract is valid.^[1996] This kind of error is known as error in nomine (error as to name).

The identity of the other party to the contract might also be fundamental to the contract. An error as to identity was an error in persona. Celsus gives this example:

If you asked both me and Titius for a loan of money, and I instructed my debtor to make a promise to you [i.e.

The situation here is that you have asked to borrow money from me and also from another person, called Titius. The money has come (indirectly) from me, but you believe it to have come from Titius. You are liable to repay me, but not because of any contract. There can be no contract here, because of the error. Instead, your liability arises from your unjustified enrichment at my expense.^[1998] This appears to be a case, though, where both Titius and I are known to you. There will be many cases where the precise identity of the contracting parties is a matter of complete indifference to each of them. For example, suppose that a stallholder in a busy marketplace is agreeing a sale of apples with a customer, while also passing the time of day. While they chat, the customer mentions that his name is Paulus. The stallholder mishears this as Publius. It would be nonsen­sical to suppose that an error like this would render the contract void. All that the stallholder needs to know is that he is doing business with the man in front of him, not the name of that man. An error of this kind seems more like an error in nomine which, as we have seen, does not affect the validity of the contract.^[1999]

A final form of relevant error was error in substantia, error as to the substance of the property that was the subject matter of the contract. It is important to note here that we are not concerned with quality in the sense of the presence or absence of defects in the property. Rather, we are concerned with what kind of thing it is. Ulpian explains:

Next it is asked whether, if there is no mistake in the identity of the property, but there is an error in the substance, there is a valid contract of sale, for example, if vinegar is sold as wine, copper as gold, or lead or something similar to silver as silver. In the sixth book of his Digest, Marcellus writes that there is a valid sale, because they are agreed about the identity of the property, even though there is a mistake about its substance. I agree in the case of the wine, because the substance is much the same, if the wine has gone sour. It is different if it is not wine that has gone off, but was vinegar from the start, as a condiment, then it appears that one thing has been sold as another.^[2000]

So, if there was an error as to the substance of the property, the contract would be void.^[2001] Unsurprisingly, there were often difficulties in determining whether an error was in substantia or not. For example, a sale purporting to be of a solid silver table, which was actually just silver-plated, would be void.^[2002] However, a sale of an alloy as a pure metal was not an error in substantia.^[2003] This last example makes reasonable enough sense if the unexpected ingredient is a trace amount only. The reasoning is rather more difficult to follow if the mix is such as to make something recognised as a different metal altogether, such as bronze or brass.

(b) Modern Developments

Modern Scots law has moved away from this subjective focus on the parties' actual intentions, and takes a more objective approach: the parties are taken to intend what an objective bystander would take them to intend. As this principle has been expressed: ‘commercial contracts cannot be arranged by what people think in their inmost minds. Commercial contracts are made according to what people say...'^[2004] A move to an objective understanding of intention was accompanied by a move to a more objective understanding of error. Under express reference to the Roman law on error in substantia^[2005] Stair had said that those persons ‘who err in the substantials of what is done, contract not'.^[2006] Modern law, however, has moved on substantially from this position, and the courts have developed an approach that more than simply unilateral error is required.^[2007] It has been said:

What, however, the courts were doing, by increments, was evolving a philosophy that unilateral error was insufficient to affect consent. There had to be something more — misrepresentation, taking advantage of the error, error by both parties, or a gratuitous transaction. To affect consent there had to be ‘error plus'.^[2008]

This, then, is quite different from the Roman position, where an uninduced, uni­lateral error would be enough for the contract to be void.

If a contract was not concluded, then in Roman law it followed that either party was free to walk away. The same is true in modern Scots law. Often that would give rise to no particular issues. Equally, though, there are situations in which that might seem unfair. For example, suppose there was an agreement for the sale of a quantity of goods. The buyer is in error as to some essential feature of the transaction. When the error emerges, the buyer withdraws from the trans­action, but by this time the seller has, in reliance on the apparent agreement, incurred expense in transporting the goods or has rejected an alternative offer for the goods. Roman law gave the disappointed seller no remedy here. In the nine­teenth century, however, the German jurist Jhering developed a doctrine called culpa in contrahendo (fault in contracting).^[2009] This was based on the idea that, by entering into negotiations, the parties undertook duties to each other even before the contract was concluded. Although this idea does not reflect the Roman law, it has been influential both in Germany and in other countries, where it has evi­dently met a perceived need. It has been observed that: ‘the impact of Jhering's doctrine, both in Germany and abroad, shows the practical need for and legiti­macy of (non-delictual) liability for culpa in contrahendo'.^[2010]

If such a doctrine as culpa in contrahendo is recognised, it is necessary to set clear limits to it in order to balance parties' legitimate expectations with the freedom to withdraw from negotiations. However, if this balance is properly achieved, the doctrine of culpa in contrahendo fulfils a useful function in cases where a nego­tiating party leads another on, causing that person to incur expense or pass up other opportunities, allows negotiations to proceed to an advanced stage and then withdraws from negotiations without good reason. Viewed in this way, culpa in contrahendo as a legal idea can be seen as part of a more general development of a duty of good faith owed between contracting parties.^[2011] When Jhering was developing his ideas on culpa in contrahendo, however, he was doing so at a time when the impact of continental legal scholarship on Scots thinking was relatively weak.^[2012] It is no doubt because of this that culpa in contrahendo has never been seen as forming part of Scots law.^{[2013] [2014] Take, for example, W S Karoulias SA v Drambuie Liqueur Co Ltd (No 2)N}

In that case, the pursuers were wine and spirit distributors based in Greece. They had been the distributors of the defenders' products in Greece since at least 1977, on the basis of written agreements renewed every few years. In 2001, the defenders initiated negotiations for renewal of the agreement, which was due to expire in 2003. In January 2003, the defenders emailed the pursuers a final draft agreement for their approval, indicating that, once the pursuers had approved it, the defenders would send them two copies for signing. The pursuers replied approving the terms of the draft agreement, and requested that the copies be sent for signing. The copies were not sent, and the defenders appear then to have begun dragging their feet on finalising the deal, failing to respond to com­munications and then eventually indicating that they wanted to alter some of the terms. As late as 2 June 2003, however, they were assuring the pursuers that their commitment to the pursuers as their distributors was ‘absolute’.^[2015] They gave this assurance even though in fact they had been in discussions with a potential alter­native distributor since at least April of that year. On 11June 2003, the defenders gave notice terminating the current agreement, and moved their business to the alternative provider. The Lord Ordinary expressed sympathy:

The defender, no doubt, strung the pursuer along from 5 February and relied on the fact that the agreement had not been executed to explore the possibility of replacing the pursuer... as the distributor in Greece. The defender could be seen to have exploited the longstanding, amicable and successful commercial relation­ship between the parties for its own ends. The terms of Mr Jeffray’s email of 2 June 2003 to the effect that ‘our commitment to Karoulias and more particularly to you is absolute’ were somewhat cynical, if not downright misleading...^[2016]

Nonetheless, the pursuers were denied a remedy. No argument on culpa in contra­hendo was made. In the current state of Scots law it would have been difficult — per­haps impossible — to make such an argument with any chance of success. Rather, the pursuers’ argument was that a contract had been concluded in February 2003 even without the agreement being signed. Nonetheless, it is impossible to be very impressed with the defenders’ conduct which, on the face of it, seems destructive of the trust that is essential to efficient commerce. It is perhaps unfortunate, there­fore, that the pursuers were unable to get a remedy here.^[2017]

(4) Extrinsic Grounds of Challenge

A contract might also be challengeable for reasons extrinsic to the contract itself.

(a) Coercion (Metus)

If a person had been coerced by force or the threat of force into making a contract, that contract could not be enforced. For full detail of this matter, see Chapter 24.^{[2018] [2019] For now, it is enough to note the difference in operation of this depending on whether the contract was stricti iuris or bonaefidei8 In a bonaefidei contract, the good faith clause in the formula allowed the judge to take coercion into account. With stricti iuris contracts, however, a special defence (the exceptio metus) had to be pled.}

(b) Deceit (Dolus)

As with coercion, deceit is dealt with in more detail in Chapter 24.^[2020] The essence of deceit as a defence to an action for enforcement of a contract is that the pursuer should not be allowed to enforce the contract, because he or she used trickery or dishonesty to induce the defender to enter into it. In the same way as with coercion, in the case of a bonae fidei contract the judge could take this into account on the basis of the good faith clause in the formula. In a stricti iuris con­tract, however, a special defence (the exceptio doli) was needed.

(c) Illegality and Immorality

Illegal and immoral agreements were invalid and unenforceable. It was consid­ered to be the praetor's duty to refuse actions on such agreements.^[2021] What counts as immoral is, of course, to a significant extent culturally dependent: what we would consider immoral is not always going to be what the Romans would con­sider immoral, and vice versa.

(d) Impossibility

‘There is no obligation to do the impossible', says Celsus.^[2022] Impossibility may be either factual, where what has been agreed is impossible as a matter of fact, or legal, where what has been agreed is something that is not possible in law. Take two examples given by Gaius.^[2023] A sale of property that is not subject to private ownership^[2024] is an example of legal impossibility.^[2025] By contrast, an agreement to sell a slave who, unknown to the parties, has died is an example of factual impos­sibility. Other examples of factual impossibility would include a contract for sale of a ‘hippocentaur', as such an animal does not exist,^[2026] or a condition in a contract requiring a party to touch the sky.^[2027] The treatment of these differed somewhat. An obligation to do something that was factually impossible was simply void. Gaius says the same of obligations to do things that are legally impossible. However, the position seems to have been more precisely that that was the case only when the parties were aware of the problem.^[2028] If, by contrast, I agreed to buy from you land that was, unbeknownst to me, in fact incapable of being owned, the agreement could of course not be implemented. However, it would be valid to the extent that I could claim damages from you for breach of contract when you failed to convey the land to me.^[2029]

The discussion in the previous paragraph is concerned with impossibility that exists at the time the contract is made. A contract may, however, be initially possible to perform and then become impossible because of some supervening event. As long as this happened without fault on the part of either party, this normally had the effect that the contract was discharged, with both parties freed of any further obligations under it.^[2030] In contracts of sale, though, a different rule was applied, based on the concept of risk.^[2031]

Impossibility was judged objectively. It was not a question of what was pos­sible for the specific person subject to the obligation. Rather, it was a question of what was possible in principle. For example, a condition in a contract that depended on a party being elected consul was valid even if that person had no realistic prospect of achieving that office. Equally, it was not a case of impos­sibility where a person contracted to sell something he or she did not own.^[2032] For example, if I agreed to sell you my neighbour’s house, it would be no objection to the validity of the contract that the house did not belong to me. Of course, unless I first acquired ownership from the neighbour, I could not transfer ownership to you. That, though, did not mean that the contract was void: after all, it is not the contract that makes the buyer owner, but rather the act of transfer itself. Quite the contrary: when I fail to give you ownership, you will expect to be able to sue me for breaching our contract, and that will only be possible if there is in fact a contract between us. You only have that remedy because there is a contract. There were, though, some borderline cases of impossibility. Take, for example, a promise by a dying man to build a tenement building. This was held by the clas­sical jurists to be void on the grounds of impossibility, if the man did not have enough time to build it.Justinian, however, decided that the dying man actually intended to bind his heirs in those circumstances.^[2033]

(5) Suspensive and Resolutive Conditions

A contract could be made subject to a condition (condicio). This had the effect either that the obligation to perform under the contract did not come into exis­tence until the occurrence of some later, uncertain event, or else that the contract would lapse on that event. These kinds of condition are known, respectively, as suspensive and resolutive conditions.^[2034]

The difference between these was as follows. Where a contract was subject to a resolutive condition, the obligations under it came into existence immediately, but fell if the condition was not met. With a suspensive condition, by contrast, the rights and obligations under the contract were suspended and did not become due unless and until the condition was met. Care is needed here. This should not be understood as meaning that the contract itself did not come into existence until the condition was met. That is not the case: the contract itself came into existence immediately, and the parties were fully bound by it in the meantime. For example, suppose that I contracted to sell you my house, subject to a suspen­sive condition. The presence of that suspensive condition would not mean that I was free to sell to someone else. On the contrary, I would be in breach of our contract if I did.^[2035] What the suspensive condition means, rather, is that we are neither of us entitled to benefit under the contract until the condition is met. I am not entitled to payment; you are not entitled to get ownership of the house. It is only when the condition is met that we can enforce those entitlements against each other. At this point, the contract is said to have been ‘perfected’. A contract subject to a suspensive condition was only perfected when that condition was met. By contrast, a contract subject to a resolutive condition was perfected imme­diately. Thus, someone who has bought land subject to a resolutive condition can begin usucapio immediately and is entitled to the fruits; equally, the purchaser bears the risk of accidental damage to the property.^[2036] With a suspensive condi­tion, those consequences would not follow.

It was not always clear whether the condition was suspensive or resolutive. It depended on the intentions of the parties, and no doubt they would often fail to express themselves clearly on that point. Take, for example, the condition in diem addictio. This was an agreement to sell to the particular buyer, unless a better offer was received by a particular date.^[2037] Ulpian has this to say:

When land is sold with a condition in diem addictio, there is a question whether the sale is perfect but subject to a resolutive condition, or whether it is subject to a suspensive condition. And really it seems to me to depend on what the parties intended. If it was intended that, on a better offer being received, the deal would be off, this is a sale subject to a resolutive condition. If, on the other hand, it was intended that the sale should become perfect unless a better offer was received, it is a sale subject to a suspensive condition.^[2038]

Fortunately, there were commonly used conditions where the position was rather clearer. A lex commissoria, for example, was a condition providing for forfeiture of a purchaser’s rights if payment was not made in full by a specified date, at the option of the seller.^[2039] The presumption was that the lex commissoria was a reso­lutive condition. Again, a pactum displicentiae was a condition in a sale of goods making it conditional on the buyer’s approval of the goods.^[2040] Ulpian tells us that it was ‘settled’ that this was a resolutive condition.^{[2041] [2042] Ulpian’s view on this has been referred to by the Scottish courts. In Brown v Marr,106 the Lord Justice-Clerk accepted Ulpian’s view as correct for Scots law, against the authority of Bell, although he ultimately held that a decision on the point was not necessary for that particular case.[2043]}

From conditions, we must distinguish contractual terms providing for per­formance on a particular date (dies).^[2044] In this case, the obligations arising under the contract were binding immediately and unconditionally, but could not be enforced until the specified date. Because of this, early performance was effective and, for instance, a payment made before the due date could not be recovered.^[2045]

(6) Implement of an Invalid Contract

If, for whatever reason, a contract was invalid, it would follow from that fact that the contract would not be enforceable. Suppose that I make an agreement with you that is illegal. If you attempt to compel me to comply with the agreement, you will be unsuccessful. That, however, does not answer the question of what happens if, regardless of the contract’s invalidity, we carry out the agreement anyway. Perhaps I have transferred property to you in breach of some legal rule, for example. The issues raised here are considered in Chapters 11 (transfer of ownership)^[2046] and 25 (quasi-contract).^[2047]