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Contractlaw

This document discusses the structure of contract law in Roman and medieval times. It explains that under Roman law, contracts were divided into different categories depending on how they were formed - through consent, delivery of an object, or completion of a formality. Certain contracts like sale or lease were considered binding upon consent, while others required delivery or a formal question/answer exchange. In medieval times, this system was largely preserved, though jurists found the Roman distinctions puzzling. The document examines debates around whether all promises should be legally enforceable or just those that fell under recognized contract types. It summarizes views on the topic from several medieval jurists.

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Contractlaw

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PART ONE

THE LAW OF OBLIGATIONS

CONTRACT LAW

I. THE STRUCTURE OF CONTRACT LAW

1. Civil Law
The Romans did not explain contract formation by abstract principles.
As has often been said, they had a law of particular contracts, not a general
law of contract.1 The rules that governed when a contract was formed
depended on the kind of contract the parties had made.
Some contracts were formed by the consent of the parties alone. They
came to be called contracts consensu or consensual contracts. They
included sale, lease, partnership, and mandate (mandatum) which was a
gratuitous agency.2
Others became binding on delivery of the object with which the con-
tract is concerned. They came to be called contracts re which literally
means “thing contracts.” (Since that sounds odd, they are sometimes called
“real contracts” even though that sounds odd, too.) They included a gra-
tuitous loan of an object for use (commodatum) or consumption (mutuum).
In a gratuitous loan for use, the borrower had to return the same object he
was lent: for example, he borrowed a horse and had to return the very same
horse. In a gratuitous loan for consumption, the borrower had to return as
much of the same kind and quality as he had borrowed but not the very
same objects: for example, he borrowed money or wine and had to give the
same amount back. The contracts re also included pledge (pignus) and the
deposit of an object (depositum) with someone who would look after it
gratuitously.3
Still other contracts became binding by completing a formality. The
most general formality was stipulatio. Originally, the parties completed
the formality by having the promisee formally ask the promisor a question

1. W.W. Buckland, Arnold McNair and 2. Inst. 3.13.22–26.

F.H. Lawson, Civil Law and Common Law 3. Inst. 3.14.
(1952), 265; Helmut Coing, Europäisches
Privatrecht 1 (1985), 398; Alan Watson, The
Law of the Ancient Romans (1970), 58.

133
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134 CONTRACT LAW

which the promisor would formally answer. The promisee would say,
“Spondesne such-and-such?” and the promisor would answer, “Spondeo
such-and-such” (“Do you promise . . . ?” answered by “I do promise . . . ”).
In time, it became customary to state in a document that a stipulatio had
been made. According to Justinian’s legislation, such a document raised a
presumption that could only be overcome by showing the parties had not
been in the same town the day of its execution. The oral formality was thus
replaced for practical purposes by a written formality. In medieval and
early modern times, the accepted way to complete the formality, and the
only safe way, was to go before a notary, who was not a person like the
American notary public but a member of the legal profession.4
A gift above a certain amount required a special formality called
insinuatio. The gift had to be registered with a court.
Contracts outside these recognized types came to be called “innomin-
ate” (nameless). Suppose the parties trade a horse for a mule. The contract
is not a sale since money is not given in return. It is not a stipulatio since
the parties did not make a formal question and answer. Originally, such a
contract was unenforceable although, if one party performed, he could
demand his performance back if the other party refused to perform.
Later, provided that he had performed, he was given a choice: to demand
back his own performance or to require the other party to perform. But he
could not enforce the agreement if he had not performed. This rule was
summarized by saying “ex nudo pacto actio non oritur”: no action arises on
a bare agreement or “naked pact.”5
This system was preserved by the medieval jurists. It sounds compli-
cated, but actually it may have functioned reasonably well. Parties to a sale
or lease usually wish to lock in the advantage of a certain price or rent. A
partner or an agent needs to know an agreement is binding so he can
conduct business on the basis of it. But in other transactions, the parties’
need to bind themselves in advance is less clear. In any event, in Roman
times, if they wished to be bound, they could easily make a stipulatio. The
notarial formality in the Middle Ages was more cumbrous than the original
oral question and answer.6 But according to the fourteenth century jurist
Bartolus, the unenforceability of innominate contracts had few practical
consequences.7 In the sixteenth century, Luis de Molina repeated Bartolus’
remark.8 Presumably they meant that important transactions such as an
exchange of parcels of land would be notarized anyway.
Nevertheless, the medieval jurists found the Roman distinctions
among contracts puzzling. The medieval canon lawyers recognized that

4. Reinhard Zimmermann, The Law of formality of Justinian required the help of

Obligations: Roman Foundations of the professionals: the tabelliones. Hence the need
Civilian Tradition (1990), 547. to extend the range of enforceable contracts.
5. See generally, W.W. Buckland, Manual Zimmermann, Law of Obligations, 547–8.
of Roman Private Law (1953), 247–71; 7. Bartolus de Saxoferrato, Commentaria
Max Kaser, Das Römische Privatrecht (1971), Corpus Iuris Civilis in Omnia quae extant
534–7. opera (1577), to C. 4.6.2.
6. Zimmermann argues that because of its 8. Ludovicus Molina, De iustitia et iure
technical requirements, even the written tractatus (1614), disp. 255.

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THE STRUCTURE OF CONTRACT LAW 135

breaking a promise was wrongful. They allowed the promisee an action on

a broken promise before a canon law court.9 The civil lawyers did not
disagree in principle. By conﬂating a Roman text that said all contracts
require consent10 with others that spoke of a ius gentium (a law “estab-
lished among all men by natural reason”),11 they concluded that consent to
any contract creates an obligation under the ius gentium although not one
that the civil law would enforce.12 Thus, the medieval civilians found
themselves denying that all promises were legally enforceable while agree-
ing with the canonists that promises should be kept,13 just as the ancient
Romans themselves refused to enforce all promises even though they
placed a high moral value on promise-keeping.
Still, it seemed odd to them that not all promises were legally enforce-
able. In the late thirteenth century, Hostiensis quipped that the point of
the Roman distinctions among contracts was to ﬁll law books until scholars
grew tired of spending money uselessly.14 His contemporary Jacobus de
Ravanis said:

If I agree that you give me ten for my horse there is an action on the
agreement. But if I agree that you give me your ass for my horse there
is no action on the agreement. If a layman were to ask the reason for
the difference it could not be given for it is merely positive law. And if
you ask why the law was so established, the reason can be said to be
that the contract of sale is more frequent than that of barter.15
Bartolus and Baldus tried to ﬁnd a better reason although the one they
found would not seem persuasive to us. They said that the contracts such
as sale which are binding by consent take their “name” from an act the
party performs by agreeing. I can sell you my house today by so agreeing
even if I do not put you in possession until next month. Contracts such as
deposit are not binding on consent because they take their name from an
act a party performs by delivering. I cannot say I am depositing an object
with you unless I am actually depositing it right now.16 Baldus not only
accepted this explanation but concluded that innominate contracts were
unenforceable even in canon law.17 This strange explanation may have

9. Jules Roussier, Le Fondement de Annali di storia del diritto 1 (1957), 13–42,

l’obligation contractuelle dans le droit 34–7.
classique de l’église (Paris, 1933), 20–94, 14. Hostiensis, Summa to X. 1.25 no. 3
177–216. (1537), (“Quae sunt divisiones pactorum ut
10. Dig. 2.14.1.3. quid mebranes occupabit: nisi ut scholares
11. Inst. 1.2.1; Dig. 1.1.9. expensis inutilis fatigent.”).
12. E.g., Accursius, Glossa Ordinaria 15. Iacobus de Ravanis, Lectura Super
(1581), to I.3.4 pr. to necessitate; Iacobus de Codice (published under the name of Petrus
Ravanis, Super Institutionibus Commentaria de Bellapertica, 1519), to C. 4.64.3
(published under the name of Bartolus de (photographic reproduction, Opera Iuridica
Saxoferrato in Omnia quae extant opera Rariora 1, 1967) (on the authorship, see
(1615), to I.3.14.1 nos. 3, 9) (on the authorship Meijers, Etudes, 72–7).
see Eduard Meijers, Etudes d’histoire du droit, 16. Bartolus, Commentaria to Dig. 2.14.7
III, Le droit romain au moyen âge (1959), 68–9); no. 2.
Petrus de Bellapertica, Lectura Institutionum 17. Baldus de Ubalis, Commentaria
(1536), to I.1.2.1 nos. 30–1. Corpus Iuris Civilis to C. 2.3.27.
13. Guido Astuti, “I principii fondamentali
die contratti nella storia del diritto italiano,”

seemed persuasive to Bartolus and Baldus because it was coaxed out of the
word “name” which appeared in their Roman texts. Their usual method
was to explain Roman texts in terms of other Roman texts rather than to
look for theoretical or philosophical explanations.
From the sixteenth to the eighteenth century, as jurists took a more
philosophical approach to law, the Roman system ceased to command
respect and was eventually abolished. As with torts, the starting point
for the late scholastics of the sixteenth and early seventeenth century
was the philosophy of Aristotle. He had described transactions such as
sale and lease as acts of “voluntary commutative justice.” The parties
exchanged resources voluntarily. Commutative justice required that the
value of what each party gave equaled that of what he received. In contrast,
in acts of “involuntary commutative justice” one party took or injured
another’s resources. Equality was restored by requiring him to pay their
value.18 In another passage in the Ethics, Aristotle discussed the virtue of
“liberality”: the liberal person disposed of his money wisely, giving “to the
right people the right amounts and at the right time.”19 Thomas Aquinas
put these ideas together: when one person transferred a thing to another,
either it was an act of commutative justice that required an equivalent or it
was an act of liberality. The late scholastics concluded that a party might
enter voluntarily into either of two basic types of arrangements, a gratuit-
ous contract in which he enriched the other party at his own expense, or an
onerous contract in which he exchanged his own performance for one of
equivalent value. Following them, Grotius and Pufendorf, the seven-
teenth-century founders of the northern natural law school, developed
elaborate schemes of classification to show how the contracts familiar in
Roman law can be fitted into these two grand categories.20 The French
jurists Domat and Pothier explained that these are the two causes or
reasons for making a binding promise.21
For these jurists, this classification meant more than the tautology
that a party either does or does not receive back something in return for
what he gives. In a gratuitous contract, the donor must actually intend to
benefit the other party, and if he does not, the contract is not a gratuitous
contract whatever the document to which the parties subscribed may
say.22 In an onerous contract, a party must receive not simply a counter-
performance, but one of equivalent value. These jurists thought that the
rules that govern the parties’ obligations should depend on which sort of

18. Aristotle, Nicomachean Ethics V.iv 42. Actually, the ﬁrst jurist to describe these
1130b. two causes or causae was Baldus. It can be
19. Thomas Aquinas, Summa theologiae shown that he was drawing on Aristotle.
at II–II, Q. 61, a. 3. James Gordley, The Philosophical Origins
20. Hugo Grotius, De iure belli ac pacis of Modern Contract Doctrine (1991), 49–57.
libri tres (1646), II, xii, 1–7; Samuel 22. Thus according to Grotius: “Nor is it
Pufendorf, De iure naturae ac gentium libri enough for anyone to say that what the
octo (1688), V.ii.8–10. other party has promised more than
21. Jean Domat, Les Loix civiles dans equality is to be regarded as a gift. For
leur ordre naturel (2nd edn., 1713), liv. 1, such is not the intention of the contracting
tit. 1, § 1, nos. 5–6; § 5, no. 13; Robert parties, and is not to be presumed so, except
Pothier, Traité des obligations, in Oeuvres it appear.” Grotius, De iure belli ac pacis II.
de Pothier 2 (Bugnet, ed., 2nd edn., 1861), § xii.11.1.

agreement they had entered into. The rules should ensure, so far as prac-
ticable, that in the case of an exchange, each party receives an equivalent,
and in the case of a gratuitous contract, that the donor behaves sensibly.23
This classification cut across the Roman categories. Sale, lease, and
mandate were all contracts consensu but the first two were onerous and the
third was gratuitous. Mandate and gratuitous loan for use and for con-
sumption are all gratuitous but the first is a contract consensu and the
others are contracts re. Sale, lease, and barter are all onerous contracts but
the first two are nominate contracts consensu and the third is innominate.
Once the new classification was accepted, it seemed that the Roman cat-
egories were mere matters of Roman positive law.
The late scholastics consequently asked when, in principle, a contract
should be enforceable. Aristotle and Aquinas had described promise-keep-
ing as similar to truth-telling. One who keeps promises is faithful in deed
as one who tells the truth is faithful in word.24 But did it follow that, as
a matter of justice, all promises should be enforced? In the case of a
gratuitous promise, however faithless the promisor may have been, the
disappointed promisee may be no poorer. Therefore, according to the
sixteenth-century theologian and philosopher Cajetan, when the promise
was gratuitous, the promisee could not demand that it be enforced as a
matter of commutative justice. Nevertheless, if he had suffered damages by
changing his position, then he could recover the amount of his damage.25 A
similar position was defended by the French jurist Connanus.26
Had this view prevailed, continental civil law might have antici-
pated the American doctrine of promissory reliance. It was rejected,
however, by Soto, Molina, and Lessius in the sixteenth century and by
Grotius and Pufendorf in the seventeenth.27 They pointed out that
executory promises to exchange were binding even though no one had
become poorer. Gifts were acts of liberality, but they could not be
revoked after delivery. They concluded that, in principle, promises of
gifts should be binding as long as the promisor intended to transfer a
right to the object to the promisee.
They did not object, however, to the Roman requirement that one who
promised to give away property must complete a formality. That was to
ensure deliberation so that the promisor would behave sensibly. This
requirement survived during the natural law era as did certain traditional
exceptions to it: for example, even without the formality, courts would

23. For an argument that these theologiae (1698), to II–II, Q. 88, a. 1; Q.

considerations can explain the way 113, a. 1.
American courts apply such doctrines as 26. Connanus, Commentariorum iuris
consideration, promissory reliance, waiver, civilis libri 10 (1724), I.6.v.1.
and offer and acceptance, see James 27. Domenicus Soto, De iustitia et iure
Gordley, “Enforcing Promises,” California libri decem (1553), lib. 8, q. 2, a. 1;
Law Review 83 (1995), 547. Ludovicus Molina, De iustitia et iure
24. Aristotle, Nicomachean Ethics IV.vii tractatus (1614), disp. 262; Leonardus
1127a–1127b; Thomas Aquinas, Summa Lessius, De iustitia et iure, ceterisque
theologiae II–II, Q. 88, a. 3; Q. 110, a. 3, ad. 5. virtutibus cardinalis (1628), lib. 2, cap. 18,
25. Cajetan (Tomasso de Vio), dub. 2; Grotius, De iure belli ac pacis II.xi.1.5;
Commentaria to Thomas Aquinas, Summa Pufendorf, De iure naturae ac gentium II.v.9.

enforce promises to charitable causes (ad causas pias),28 to people on

account of their marriage (ad nuptias vel propter nuptias),29 or to someone
who had conferred a benefit on the promisor, for example, by rescuing him
from robbers (donatio remuneratoria).30
When the promisor made a gratuitous promise but not one to give
away property, the late scholastics could not see why the promise should
not be binding right away, without any need for delivery. The promisor
might be able to perform without making himself any poorer, and so there
wasn’t the same need to ensure deliberation. In a gratuitous loan for use or
consumption, he might be loaning something that he did not need for a
while. In a deposit, he might be able to look after the other party’s goods
without any cost to himself. In any event, the late scholastics thought that,
in principle, these gratuitous contracts were binding on consent if the
promisor intended to be bound. But they said that he should be able to
demand his goods back if he found that he needed them himself even if he
had promised that the promisee could keep them for a longer time.31 The
Roman rule seems to have been that he had to let the promisee keep them
for as long as he had promised.32
The late scholastics and the northern natural lawyers had been dis-
cussing when promises were binding in principle, or as they put it, as a
matter of natural law. They acknowledged that the Roman law was differ-
ent. Often, they invented pragmatic justifications for these deviations: for
example, the Romans wished to avoid a flood of litigation. Nevertheless,
their work undermined the Roman system by providing a coherent, philo-
sophically grounded account of which promises should be enforced.
Eventually, the Roman distinctions ceased to be part of continental posi-
tive law. They were abolished by statute in a few places such as Castile.33
Elsewhere, beginning in the sixteenth century, jurists simply declared that
the custom of courts was not to follow this rule.34 By the eighteenth century
this view had become universal.35 The Roman system had disappeared.
Nanz has shown that the first jurist to mention this custom was
Wesenbeck who miscited earlier jurists who had not mentioned it.36

28. Molina, De iustitia et iure disp. 279 Lauterbach, Collegii theoretico-pratici (1744),
no. 2; Lessius, De iustitia et iure lib. 2, cap. to Dig. 2.14 no. 68; Johannes Wissenbach,
18, dub. 13, no. 102. Exercitationum ad l. pandectarum libros
29. Molina, De iustitia et iure disp. 279 (1661), lib. 2, disp. 9 no. 35; Arnoldus Vinnius,
no. 7. In quatuor libros institutionum imperialium
30. Molina, De iustitia et iure disp. 279 commentariius academicus et forensis (1726),
no. 6. to I.3.14 no. 11. See Burkhard Struvius,
31. Molina, De iustitia et iure disp. 294, Syntagma iurisprudentiae secundum ordinem
nos. 8–10; Lessius, De iustitia et iure lib. 2, pandectarium coccinatum (1692), to Dig. 2.14
cap. 27, dub. 5. no. 32 (arguing that some agreements still
32. Dig. 13.6.17.3 (“[A]fter he has made would not be enforced when the parties did
the loan, not only decency but the obligation not so intend).
undertaken between lender and borrower 35. Zimmermann, Law of Obligations,
prevent his ﬁxing time limits and claiming 539–40.
the object back in disregard of the times 36. Matthaeus Wesenbeck, In pandectas
agreed. . . ”). iuris civilis et codicis iustinianei libros viii
33. Molina, De iustitia et iure disps. 257–8. commentaria (1597), col. 189 to Dig. 2.14.
34. Johannes Voet, Commentarius ad Klaus-Peter Nanz, Die Entstehung des
pandectas (1698), to Dig. 2.14 no. 9; Wolfgang allgemeinen Vertragsbegriff im 16. bis 18.

Later jurists cited Wesenbeck. To start a major legal reform by a miscita-

tion is a bit like starting a landslide with a pebble. It only works if some-
thing is almost ready to fall by its own weight. Wesenbeck and his
successors would not have been so seemingly careless had they wished to
reach a different conclusion. Wesenbeck explained why he favored the
conclusion he did reach: by the natural law, all promises should be
enforced.37
Nevertheless, even though naked pacts were now enforceable, the rule
that promises of gifts required a formality was preserved. Jurists con-
tinued to give the same explanation as Molina and Lessius: the rule
encouraged deliberation.38 Eventually, such a requirement passed into
the modern French and German Civil Codes, although the formality
became subscribing to the promise before a notary.

French Civil Code

A R T I C L E 893
A liberality is an act by which a person disposes gratuitously
of all or part of his goods or his rights for the beneﬁt of another
person.
An act of liberality can only be done by a gift inter vivos or a testament.
A RTICLE 931
All gifts inter vivos must be made before notaries in the ordinary form
of a contract and an original copy shall remain with the notary; otherwise
the gift is void.

German Civil Code

§ 516 CONCEPT (OF A GIFT)
A gift is a disposition by which one person enriches another out of his
own property if both parties agree that the disposition is made
gratuitously.
§ 518 FORM
Notarial authentication is required for the validity of a contract by
which a performance is promised as a gift . . .
By and large, however, the Codes did not preserve traditional excep-
tions to the requirement for gifts to charities, to people about to marry, and
to someone who had previously done a service for the promisor. One
exception is a German provision.

Jahrhundert (1985), 85. See Italo Birocchi, 37. Wesenbeck, Commentaria col. 189 to
“La questione dei patti nella dottrina Dig. 2.14.
tedesca dell’Usus modernus,” in Toward a 38. Molina, De iustitia et iure disp. 278
General Law of Contract (John Barton, ed., no. 5; Lessius, De iustitia et iure lib. 2, cap.
1990), 197–213, 146–55. 18, nos. 2, 8.

§ 1624 ENDOWMENT (AUSSTATTUNG) FROM THE PARENTS’ ASSETS

(1) What a child is to be given by the father or mother on account of
marriage or obtaining an independent position in life, for founding or
preserving the establishment of the position in life (endowment), even
when there is no obligation to do so, only counts as a gift to the extent
that the endowment exceeds the amount that is appropriate under the
circumstances, and in particular, the ﬁnancial situation of the father or
mother.
In any event, when the required formality is completed, a promise of
gift is enforceable although in France and Germany, gifts can be revoked
for gross ingratitude,39 and in Germany, if the donor becomes unable to
support himself or to fulﬁll his legal duty to support others.40
Similarly, in France and Germany, the parties can bind themselves in
advance of delivery to make a gratuitous loan, to care for another’s goods,
or to give a pledge. But in the case of gratuitous loans, even if the lender
agreed the borrower can keep the object until a certain date, he can
demand it back earlier if he needs it.

French Civil Code

A RTI CLE 1888
The lender [in a loan for use] cannot take back the object loaned before
the date agreed, or, if there was no agreement, before the object has served
the use for which it was borrowed.

39. French Civil Code art. 955: An inter § 528 Requiring return because of
vivos gift may be revoked for need: After the gift has been
ingratitude only in the following cases: bestowed, the donor can require that
1. If the donee attempts to take the life of the donee return the gift in accord-
the donor; ance with the provisions that govern
2. If the donee has been cruel to him, restitution of unjust enrichment if
wrongs him unlawfully, or seriously the donor is not in a position to
harms him; maintain himself reasonably or to
3. If the donee has refused him support fulﬁll his legal duty to maintain his
[in case of need]. relatives, his spouse or his former
spouse. The donee may avoid return-
German Civil Code ing it by payment of the amount
required for maintenance . . .
§ 530 Revocation of gift: A gift may be
revoked if the donee is guilty of gross § 529 Barring of the claim for return:
ingratitude on account of serious mis- The claim for return of the gift is barred
conduct toward the donor or a near if the donee has brought about his pov-
relative of his . . . erty intentionally or by gross negli-
gence or if ten years have elapsed
40. German Civil Code
since the gift was bestowed.
§ 519 Defense of need: The donor is The same rule applies if the donee
entitled to refuse to perform a promise is not in a position to return the gift,
of gift insofar as he is not in position to having regard to his other obliga-
fulﬁll his promise when, taking into tions, without endangering the main-
account his other obligations, he cannot tenance appropriate to his own
do so without endangering his own status in life or his legal duty to
maintenance or his legal duties to maintain others.
maintain others.

A R T I C L E 1889
Nevertheless, if during this period or before the need of the borrower is
at an end, the judge can require the borrower to return the object if the
lender has a pressing and unforeseen need for it.

German Civil Code

§ 605 RIGHT TO ABROGATE
The lender can abrogate [a loan for use]:
(1). when he needs the object loaned because of circumstances that
were unforeseeable . . .
Thus the structure of modern civil law looks much as it did in the
natural law era even though, by the nineteenth century, the Aristotelian
ideas that originally inspired it no longer seemed to make sense. Jurists
were developing “will theories” of contract: contract was an expression of
the will of the parties, and the job of contract law was simply to enforce
their will. The requirement that a contract must have a causa or cause had
passed into the French Civil Code. But in the nineteenth century, it seemed
to be a tautology: the party’s motive for contracting was either to get
something or not to get something. Thus the nineteenth-century French
found it hard to see how a contract could fail to have a cause.41 Sometimes
they explained a contract without a cause as one without a “legally sufﬁ-
cient motive,”42 one made by mistake,43 one concerning an object that was
non-existent44 or which the buyer already owned.45 But if that was all the
doctrine of cause meant, it was hard to see why there should be such a
doctrine rather than simply a doctrine of mistake. Similarly, the nine-
teenth-century German jurists had no use for the doctrine as traditionally
understood. It did not appear in the German Civil Code.

2. Common Law
As mentioned earlier, before the nineteenth century, the common
lawyers organized their thinking, not in terms of tort and contract, but in
terms of the traditional forms of action. By the eighteenth century, a
disappointed promisee could sue in one of two forms of action: covenant
or assumpsit. He could recover in covenant only if the promise had been
made under seal, a formality originally performed by making an impres-
sion in wax on the document containing the promise. He could recover in
assumpsit if the promise had “consideration.”

41. Charles Aubry and Charles Rau, edn., 1824–37), § 166. See François Laurent,
Cours de droit civil français 4 (4th edn., Principles de droit civil français 15 (3rd edn.,
1869–71), § 345 n. 7; A.M. Demante and E. 1869–78), §§ 110–11.
Colmet de Santerre, Cours analytique de 42. Aubry and Rau, Cours 4: § 345.
Code Civil 5 (2nd edn., 1883), § 47; Charles 43. Toullier, Droit civil 6: § 168.
Demolombe, Cours de Code Napoléon 24 44. Demolombe, Cours 24: § 357.
(1854–82), § 357; Charles Toullier, Le Droit 45. Léobon Larombière, Théorie et
civil français suivant l’order du Code 5 (4th pratique des obligations 1 (1857), 273–5.

There is famous and inconclusive controversy about whether the com-

mon law courts originally borrowed the idea that a promise needs consid-
eration from the civil law idea of a causa of an onerous contract.1 However
that may have been, the common law courts found consideration, not only
for promises to exchange, but for other promises that were not exchanges or
bargains in the normal sense: for example, promises to give money to
prospective sons-in-law and a variety of gratuitous loans and bailments.2
In Coggs v. Bernard, defendant had negligently broken open and spilled
the contents of some of plaintiff’s casks of brandy while moving them from
one place to another. The court held that there was consideration for his
promise to look after them even though he had not been paid: “the owner’s
trusting him with the goods is a sufficient consideration.”3 Actually, it is
misleading to compare causa and consideration since the doctrines were
devised for different purposes. The continental doctrine identified the
reasons why, in principle or theory, a promise should be enforced. The
common law doctrine was a pragmatic tool for limiting the enforceability
of promises. In the common law, for centuries, “consideration” was not a
term one could define. Promises were enforceable in those cases in which
courts had said there was “consideration” because it seemed sensible to
enforce them.
The search for a definition of “contract” and “consideration” began in
the late eighteenth and early nineteenth centuries when common lawyers
began to write treatises. Following continental authors, the treatise
writers defined “contract” in terms of promise, engagement, agreement,
or assent.4 And, often citing continental authors, they identified “consider-
ation” with the causa of an onerous contract.5 As Simpson has said, the
early nineteenth-century treatise writers regarded consideration as a local
version of the doctrine of causa.6 At first, the treatise writers did not
explain the cases in which promises had been held to have consideration
although they were not exchanges in any normal sense.
The common lawyers thus gave their contract law a shape like that of
the civil law. Promises to make gifts were enforceable only with a formality
although in common law the formality required was a seal. Promises to
bargain or exchange were enforceable without a formality.

1. A.W.B. Simpson, A History of the Contracts Not Under Seal (3rd edn., 1851), 1;
Common Law of Contract (1975), 316–405. Theophilus Parsons, The Law of Contracts 1
2. Ibid. 416–52. (4th edn., 1860), *6; S. Martin Leake, The
3. (1703) 92 Eng. Rep. 107 (K.B.). Elements of the Law of Contracts (1867), 7–8.
4. William Blackstone, Commentaries on 5. Blackstone, Commentaries 2, *444–6;
the Laws of England 2 (14th edn., 1803), John J. Powell, Essay Upon the Law of
*442; Samuel Comyn, A Treatise on the Law Contracts and Agreements 1 (1790), 331;
Relative to Contracts and Agreements Not William Taylor, A Treatise on the
Under Seal (1809), I *2; John Newland, A Differences Between the Laws of England
Treatise on Contracts Within the and Scotland Relating to Contracts (1849)
Jurisdiction of Courts of Equity (1821), 1; 16; W.W. Story, Law of Contracts, 431, 431
Joseph D. Chitty, A Practical Treatise on n. 1; Comyn, Contracts and Agreements, 1:
the Law of Contracts Not Under Seal (1826), *8; Kent, Commentaries, 2: *630.
3; James Kent, Commentaries on American 6. A.W.B. Simpson, “Innovation in
Law 2 (13th edn., 1884), *450; William Nineteenth Century Contract Law,” Law
Wentworth Story, A Treatise on the Law of Quarterly Review 91 (1975), 247 at 262.

At ﬁrst, the nineteenth-century common lawyers explained consider-

ation as the natural lawyers had explained the causa of a contract of
exchange. They said the reason or sole motive of each party was to receive
an equivalent. Christopher Columbus Langdell even claimed that “[a]s
every consideration is in theory equal to the promise in value, so it is in
theory the promisor’s sole inducement to make the promise.”7 He acknow-
ledged that this definition did not fit the common law cases, but the reason,
he said, was that the law shut its eyes to certain discrepancies.
As on the continent, in the nineteenth century, these expressions no
longer seemed to make sense. Oliver Wendell Holmes pointed out that a
party might have many motives for contracting: “A man may promise to
paint a picture for five hundred dollars, while his chief motive may be a
desire for fame.”8 Sir Frederick Pollock quoted Thomas Hobbes: “[T]he
value of all things contracted for, is measured by the appetite of the
contractors, and therefore the just value, is that which they be contented
to give.”9
Consequently, just as, on the continent, the doctrine of causa either
disappeared or was no longer understood in the same way, so, in England
and the United States, the requirement of consideration was reformulated.
Pollock managed to define bargain so as to accommodate the common law
cases without using concepts like equivalence that had become mysterious.
At the same time, he managed to fit most of the cases in which English
courts had said there was consideration. According to Pollock, whatever “a
man chooses to bargain for must be conclusively taken to be of some value
to him.”10 That was so even if the man himself had received nothing,
consideration having moved to a third party. The rule that a court will
not “enter into an inquiry as to the adequacy of consideration” is reached
“by a deduction” from this principle.11 Therefore, to say the promisor
entered into a bargain simply means he was induced to give his promise
by some change in the position of the promisee.12 A variation of Pollock’s
formula was adopted in the United State by Holmes.13
Modern authorities still explain consideration in terms of “bargain”14
or “reciprocity.”15 Like Pollock, however, they define bargain in terms of
something, of whatever value, sought by the promisor which induces him to
promise.16 But that does not mean that the only promises that lack

7. Christopher Columbus Langdell, A 14–15. Holmes had received a manuscript of

Summary of the Law of Contracts (1880), the ﬁrst edition of Pollock’s treatise (Letter
78–9. from Pollock to Holmes, Dec. 16, 1875, in
8. Oliver Wendell Holmes Jr., The ibid. 276) which contained the core of
Common Law (1881), 293. Pollock’s theory. Pollock, Principles of
9. Sir Frederick Pollock, Principles of Contract (1st edn., 1876), 150–1.
Contract (4th edn., 1888), 172. 14. Restatement (Second) of Contracts
10. Pollock, Principles of Contract (10th §§ 17, 71 (1981).
edn., 1936), 172. 15. G.H. Treitel, The Law of Contract
11. Ibid. 172. (9th edn., 1995), 63.
12. Ibid. 164. 16. Restatement (Second) of Contracts
13. Holmes, Common Law, 293–4; § 71 (1981) (“A performance or return
Letter from Holmes to Pollock, June 17, promise is bargained for if it is sought
1880 in Mark de Wolfe Howe (ed.), The by the promisor in exchange for his
Holmes-Pollock Letters 1 (2nd edn., 1961), promise . . . .”); Treitel, Law of Contract,

consideration are those to give gifts or do favors in any ordinary sense.

Suppose, for example, that someone promises to hold an offer open (as in
Dickenson v. Dodds, below). If he receives nothing in return for this com-
mitment, there is no consideration. Suppose, that after the parties con-
tract, one agrees to pay the other more or to accept less. If the other party
gives nothing in return beyond what he was already under contract to give,
again there is no consideration.
Today, Anglo-American jurists are less inclined to apply the doctrine
formalistically and more inclined to ask whether any useful purpose is
served by refusing to enforce a promise. When the promise is a gift or favor,
the purpose may be the same that civil law systems achieve by other
means: to encourage a person to act deliberately. When a promise is
made in a business context, the purpose presumably is a different one. In
the case of a promise to hold an offer open or to pay more or accept less than
originally agreed, the purpose seems to be to prevent one party from taking
unfair advantage of another. But if that is so, the doctrine of consideration
is a blunt instrument since not all such promises are unfair.
Melvin Eisenberg has concluded that in such cases we no longer need a
doctrine of consideration. American courts now can review the fairness of a
contract directly by applying a doctrine called “unconscionability.”
Others have tried to modify the traditional doctrine of consideration.
In the United States, the Uniform Commercial Code, which governs the
sale of goods and has been adopted in virtually every state, provides that
among merchants, a written promise to hold an offer to sell goods open for a
reasonable time does not require consideration.17 The British Law
Commission has recommended providing by statute that a firm offer is to
be binding if it is made in the course of business and is expressed to be
irrevocable for a definite period which is not to exceed six years.18
Similarly, under the Uniform Commercial Code, consideration is
no longer required for promises to take less or give more than initially
agreed in a sale of goods.19 The Second Restatement of Contracts
recommends a different approach: consideration is not required if the
modification is fair because of a change of circumstances or enforcing
the promise is fair because the promisee changed his position in reli-
ance on it.20 In England, the traditional doctrine was changed in
Williams v. Roffey Bros. & Nicholls (Contractors) Ltd.21 A contractor

68 (“The consideration for a promise detriment to the promisee, although he

(unless it is nominal or invented) is requires that consideration move from
always a motive for promising . . .”). But the promisee. Law of Contract, 77–8. The
while Pollock had said that the promise number of cases in which these variants
must be made to the promisee in order to would produce a different result is rather
induce him to change his legal position, small, and, indeed, the precise meaning of
the Second Restatement provides that them is not very clear.
“[t]he performance or return promise 17. U.C.C. § 2–205.
may be given to the promisor or to some 18. Working Paper 60 (1975).
other person. It may be given by the 19. U.C.C. § 2–209.
promisee or by some other person.” 20. Restatement (Second) of Contracts §
According to Treitel, consideration can 89 (1981).
be either a beneﬁt to the promisor or a 21. [1991] 1 Q.B. 1.

promised extra money to a subcontractor for completing the perform-

ance to which he had already agreed. He did so because his own
surveyor recognized that the amount originally promised was too low,
and because he was afraid that if the subcontractor had financial
difficulties, he would not be able to complete the work on time. The
subcontractor had not threatened that unless paid more he would not
perform. Traditionally, the promise of extra payments would have been
unenforceable. But the court held that the “practical benefit” that the
contractor received would count as consideration.
Another escape route from the rigidities of the doctrine of consid-
eration has been to hold that a promise without consideration can
still have legal effects if the promisee changes his position in
reliance on it. This doctrine, called promissory estoppel or promissory
reliance, has been taken further in the United States than in
England. In the United States, the promisor is liable to the promisee
who relies.

Restatement (Second) of Contracts

§ 90 PROMISE REASONABLY INDUCING ACTION OR FORBEARANCE

(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 such action or forbearance is binding if injustice
can be avoided only by enforcement of the promise. The remedy
granted for breach may be limited as justice requires.
(2) A charitable subscription or a marriage settlement is binding under
Subsection (1) without proof that the promise induced action or
forbearance.
The last sentence of Subsection (1) was added in the Second
Restatement to allow courts to award a promisee his reliance damages –
compensation for the amount that he had been hurt by relying on the
promise – rather than his expectation damages – the amount necessary
to put him where he would have been had the promise been kept.
Subsection (2) was added in the Second Restatement to reﬂect the
way in which courts had actually been applying the doctrine of prom-
issory estoppel. Before the rise of the doctrine of promissory estoppel,
courts in the United States (though not in England) had continued to
say there is consideration for promises to prospective children-in-law
and had sometimes found consideration for promises to a charity: for
example, in naming a fund after the donor. Finding consideration in
such cases seemed a bit ﬁctitious. After the First Restatement, courts
began applying the doctrine of promissory reliance instead. But they
did not demand proof of reliance: proof that the couple would not have
married otherwise, or that the charity really changed its position
because of the promise. Subsection (2) makes it clear that the promisee
does not have to provide such proof.

A doctrine of promissory reliance has also been accepted in England,

but there it is much more limited. There, the doctrine protects a person who
relies on a promise so as to excuse his performance of a prior obligation. But
it does not create a new obligation to perform. As it is sometimes said, the
doctrine can be used as a shield but not as a sword. For example, in Central
London Property Trust Ltd. v. High Trees House Ltd,22 the landlords had
rented a block of ﬂats on a ninety-nine year lease. In 1940, they agreed to
take a lower rent because war-time conditions made it harder to ﬁnd
tenants. According to Lord Denning, they would not be able to recover
the full rent originally agreed because of the reliance of the defendants.
In a case like this, the doctrine is a shield which prevents the plaintiff from
successfully suing on the defendant’s original promise. In contrast, in
Combe v. Combe,23 during divorce proceedings, a husband promised to
pay his wife £100 per year, and she relied on that promise by not asking
the court for maintenance. She was not able to use the doctrine of promis-
sory reliance as a sword, to enforce the promise.

3. Chinese Law
The Republic of China
The Nationalist (Kuomingtang) government of China promulgated the
Civil Code of the Republic of China (ROC) in 1929, which was modeled on
the German Civil Code and included ﬁve books: general principles, obliga-
tions, property, family, and successions. This Civil Code is still in use in
Taiwan.
The German Civil Code was chosen partly because it was thought to be
the most sophisticated of Western civil codes, and partly because it had
served as a model in Japan, which seemed to be successful both in
Westernizing its law and modernizing its economy.
The Civil Code of the ROC had some features which, as we will
see, are distinctive of the German Civil Code. Free revocation of an
offer is by and large the default rule among major jurisdictions with
the exception of German law, which binds the offeror to the offer until
it is rejected. This view was adopted by the ROC Civil Code, which
provides that an offer is irrevocable until it is rejected.1 Like the
German Civil Code, that of the ROC incorporated what became an
overarching principle of good faith (Treu und Glauben).2 This principle
was adopted by the Contract Law of the People’s Republic of China in
1999.3 As in German law, liability for breach of contract was deemed to
be based on fault, not strict liability.4 Relief was given for impossibility
only when the party to perform was not at fault.5 Another German
feature was the rule that entitled the non-breaching party to

22. [1951] 2 K.B. 215. 3. See Contract Law of People’s Republic

23. [1947] KB 130. of China (1999), art. 6.
1. Arts. 154, 155 Civil Code of Republic of 4. ROC Civil Code, art. 220.
China (1929). 5. Ibid. arts. 225, 226.
2. Ibid. art. 219.

performance,6 giving him the option of either demanding performance

or receiving damages.7

The People’s Republic of China

Under the socialist law that preceded the reforms of the past decades,
transactions between individuals were deemed illegal but could not be
regulated since the law did not allow transactions between private parties.
Outside the shadow economy, the only transactional relationships between
the state and private parties were the procurement of products from the
state and supply of commodities to individuals.
The institution of contract was a tool to ensure the implementation of
state plans.8 Contracting connected state enterprises systematically and
helped to clarify and determine the content of state plans.9 Since no private
interest was involved, all the contracting parties were simply executing
orders from the state. Therefore, the contracting parties were to collabor-
ate and supervise each other throughout the performance of contract to
carry out the state’s agenda.10 Any deviation of the state economic plan or
directive would result in the nullity of the contract.
The rules applicable to such contracts were mostly procedural and did
not originate from a doctrinal basis that lawyers are familiar with. For
example, in the 1950s, the only written law that dealt with contracts was
the eleven-article Provisional Methods on Contractual Agreement made
between Government Agencies, State Enterprises, and Cooperatives
(“Provisional Methods”). Under this law, contracts could only be entered
into by state-owned enterprises (SOEs), government agencies or cooperatives,
in writing, and registered at the People’s Banks (the central bank of China)11
if the payment could not be processed immediately. Contracts, upon conclu-
sion, had to be filed with the appropriate regional government and its eco-
nomic commission, and also filed in the record of the department of the
Treasury.12 All bank loans required a guarantor for the borrowing party.
An agency of the government was the default guarantor and under the duty
to supervise the enforcement of the contract.13 Compulsory dispute resolution
mechanisms were to be employed before a contract dispute could be adjudi-
cated by a court. Disputes regarding non-performance or breach of contract
first had to be submitted to a higher governmental authority for mediation
since all businesses were owned by the state, and operated in the same way as
a government agency. If both parties were from the same province, their
disputes had to be submitted to the higher level government’s economic
commission.14 If the parties were from different provinces, the disputes had
to be submitted to the economic commission under the central government.15

6. Ibid. art. 227. 10. Hao Jiang, “Freedom of Contract

7. Ibid. art. 220. under State Supervision,” Geo. Mason J.
8. Pitman B. Potter, The Economic Int’l Com. L. 7 (2016), 202, 220.
Contract Law of China, Legitimation 11. Provisional Methods, arts. 1–2.
and Autonomy in the PRC (Seattle, 12. Ibid. art. 2.
1992), 26. 13. Ibid. art. 6.
9. Ibid. at 27. 14. Ibid. art. 10.
15. Ibid.

A suit could only be filed in court when mediation by higher authority could
not solve the disputes.16
Still, due to the lack of incentive of SOE managers to perform the
contract, contracts were not rigorously enforced. As it had been observed
by Pitman Potter,
Enterprise budgets were fixed and were generally unaffected by the
nonfulfillment of contracts. Enterprise managers bore very little
responsibility for losses caused by nonperformance of contracts, since
such losses were generally made up by the state, either through an
adjustment of the aggrieved party’s planned production quota or by
directly absorbing the deficit suffered by the aggrieved party.17
Therefore, the remedy for late delivery would probably “take the form
of an apology and a promise to deliver as soon as possible.”18
At the end of the 1970s, reforms were instituted to develop a private
economy without privatizing the SOEs. The Economic Contract Law (ECL)
was enacted in 1981 to introduce contract doctrines into the law. The ECL
was a compromise between the planned economy and the market economy,
between public administrative law and private law. Rights and interests of
the contracting parties were finally recognized. The parties’ wills were
respected when they did not conflict with laws, public policies and state
economic plans. Violation of state economic plans would result in the
nullity of a contract. The notion of voidable contracts did not exist: any
defect in contracting would result in absolute nullity. Contracting activ-
ities were closely monitored by the state: the forms that a contract must
take and the contents and terms that must be included were stipulated in
the ECL.
In 1999, a Western inspired Contract Law was adopted as a hallmark of
China’s transition from a pure planned economy into a socialist market
economy. For the first time, principles such as freedom of contract and
good faith were introduced. Contractual autonomy was increased by
detailed doctrines such as offer and acceptance, relative nullity, and a non-
breaching party’s options to choose between specific performance and dam-
ages, which appeared for the first time since 1949.
Courts soon learnt to respect freedom of contract. Indeed, had this
principle not been respected at all, the reform in China would have been
pointless. On account of this principle, courts are reluctant to interfere
with the terms of a contract which have been set by the parties. In China,
however, given the absence of a competitive market and the state’s inabil-
ity to monitor every single contractual transaction carried out by SOE
managers, it is inevitable that freedom of contract will be abused in the
sale of state assets, privatization of smaller SOEs, and many bidding
procedures. SOE managers have an incentive to deal with their relatives,

16. Ibid. 18. Ibid. 42.

17. Pitman B. Potter, The Economic
Contract Law of China, Legitimation and
Autonomy in the PRC (Seattle, 1992), 27.

and with the people who bribed them most heavily or to transfer state
assets into their own hands at lower than the market value. Though all
such conduct is punishable by criminal law, contracts entered into by these
managers are not absolutely null. They should not be in principle. Even
though SOE managers committed crimes in contracting, the SOE might
still have business or policy reasons to adhere to the contract. However,
according to both the decisions of the Supreme Court19 and the State
Assets Law,20 transactions that concern either the sales of small sized
SOEs21 or state assets, will automatically be declared null if there was a
malicious conspiracy that harms the state interest. Still, out of respect for
freedom of contract, courts do not examine whether the contracts that
result from corruption, bribery, failure to comply with valuation methods
prescribed by law, and conspiracy are tantamount to stripping state assets.
The passivity of judicial practice, in a sense, encourages the stripping of
state assets.
Thus there is a danger of abuse when SOE managers are allowed the
same contractual autonomy in disposing of state assets that courts allow in
the West. Freedom of contract can lose its value if Chinese law protects
only external formalism by enforcing the terms set forth in a contract when
SOE decision-makers do not have to bear the negative consequences of
contracting. If a party does not have to bear these consequences, it will not
always look out for the best interest of the enterprise. When the state has to
bear the negative consequences of the SOE’s disposing of state assets, the
price of a contract and its fairness matter. The will expressed by a contract-
ing party to dispose of state assets should be invalid if the sole motive for
the transaction was to strip state assets. It is one thing to allow private
investors to decide whether the prices of their contracts appear advanta-
geous to them. It is another to allow SOE managers to have the same level
of freedom. Applying freedom of contract to SOEs to its full extent encour-
ages the stripping of state assets. Denying it fully will make commercial
dealings impossible in the Chinese society. Freedom of contract should be
the default norm, but its abuse can only be avoided if courts review the
substantive terms of a contract when the circumstances warrant doing so.
Conversely, sometimes state interference with contractual autonomy
allows an SOE to renege on a bad bargain. A condition is put in the contract
that depends solely on the state’s will or whim. If the state were a party to
the contract, such a condition would be a potestative condition, that is, one
that allows the validity of a contract to be determined by one of the parties
at that party’s discretion. Such a condition would make a contract null.
However, technically, the state is not a party to the contract though it has a
controlling equity interest in the contracting party, and it is ﬁnancially

19. 最高人民法院关于审理与企业改制相 of the People’s Republic of China]

关的民事纠纷若干问题的规定 [Supreme (promulgated by the Standing Comm. Nat’l
Court Rules on various issues regarding People’s Cong., Oct. 28, 2008, effective May
civil disputes in restructuring of state- 1, 2009), art. 72.
owned enterprises]. 21. In China, privatization of SOEs only
20. See 中华人民共和国企业国有资产法 extends to small and medium SOEs.
[Law on State-owned Assets in Enterprises

affected by its own administrative decisions made at its unbridled discre-

tion. In cases that involve asset stripping, courts have not acted paternal-
istically enough. They have shown too much respect for the freedom of
contract. In contrast, however, in these cases courts have been overly
paternalistic. To preserve the value of state assets, they have allowed
SOEs to renege on a bargain solely because it is more profitable to do so.
Consequently, a contract no longer serves the purpose of allowing the
parties to allocate the risk of future price changes. One party is allowed
to speculate at the other party’s expense.
Contract law became part of Chinese Civil Code in 2020. Much more
than a mere integration of existing contract law, the Code integrated
contract law systematically into the civil law framework, and codified
certain rules established in the cases and judicial interpretations to fill
the doctrinal gaps in the statutory laws. Moreover, the Code also further
legitimizes the state’s role to enforce production orders to provide help in
major crises such as Covid-19.
Contract is considered a subcategory of civil juristic acts in German-
inspired civil law systems including China. There have been inconsisten-
cies and contradictory rules over the validity of contracts and civil juristic
acts. Voidability that is due to the same vitiating factors may nevertheless
differ depending on the existence of state interest. For example, under the
1986 General Principles of Civil Law, vitiating factors such as fraud,
duress, and mistake will render a civil juristic act void.22 In Contract
Law, the concept of relative nullity was first introduced to give the
aggrieved party the option to keep the contract alive.23 Vitiating factors
will then make a contract only voidable, which contradicts the General
Principles of Civil Law. Moreover, even within the Code of Contract Law,
there are tensions between Article 52-1 and Article 54. Fraud and duress
would render a contract merely voidable under Article 54 but the contract
will be void and null if fraud and duress harmed a state interest. As I have
shown elsewhere,24 state interest is not public interest but more likely the
financial interest of state-owned enterprises, which only adds to the doctri-
nal uncertainties.
The Civil Code streamlined the rules concerning validity and elimin-
ated the differences in the treatment of contracts and civil juristic acts.
Now there is only one set of rules that deals with the validity of civil juristic
acts and it applies to contracts. According to the Civil Code, illegality, sham
transactions, and violation of good morals will render a civil juristic act
void and null.25 Victims of fraud, duress, mistake and obvious unfairness
have the option to avoid the civil juristic act by a claim before the court or
arbitration institution.26 Moreover, as the Civil Code emphasizes the equal
protection of public and private interests, the Code no longer has special
rules that afford state interest greater protection. At least in its form,

22. General Principles of Civil Law, art. State Interest in the Chinese Contract Law,”
58. J. Civ. L. Stud. 7 (2014), 147.
23. Contract Law, art. 54. 25. Civil Code, arts. 143–6.
24. See generally Hao Jiang, “Enlarged 26. Civil Code, arts. 147–51.
State Power to Declare Nullity: The Hidden

Chinese codification of private law has moved towards a body of law that
does not subscribe to a particular political ideology and that levels the
playing field between state and private enterprises.
Certain legal vacuums are being filled in the Civil Code. There is a
category of properly formed contracts that would not have legal effect until
appropriate state approval is obtained. Such contracts are called effect-to-
be-determined contracts. A prime example of this is the Sino-foreign joint
venture agreements. Under Chinese law, a joint venture agreement that
involves a foreign party needs to be approved by state authority. As a
result, a contract will have no legal effect until such a procedure is com-
pleted. In such contracts there will normally be a clause that assigns the
domestic party the obligations of obtaining such approval. The domestic
party that has second thoughts would technically be unable to default on
their contractual obligations since there is not yet a contract. Previously,
this issue could only be resolved by case law. In a well-known 2009
Supreme Court case, the court held that parties are still bound by the
contractual obligations to seek approval; such terms are binding even
though the contract itself is not yet effective.27 The rule has become
Article 502 of the Civil Code. According to Article 502-2, a party can sue
for breach of contract if the duty to seek approval is breached by the other
party even though the contract is not yet effective because of the breach.
Change of circumstances is a doctrine that excuses contractual per-
formance when performance will not serve the purpose of the contract or
will be excessively expensive. Chinese law first adopted the doctrine
through the Supreme Court’s judicial interpretation in 2009. The Civil
Code formally adopts two articles in dealing with change of circumstances.
The first resembles section 313 of the German Civil Code in which relief
is given if the basis of the transaction is destroyed because the performance
became excessively expensive due to the occurrence of a non-commercial
risk.28 The second article excuses the duty to perform but not liability for
damages when the purpose of the contract is frustrated. As in German law,
the non-breaching party is always entitled to demand performance.
Sometimes, the non-breaching party will demand performance when the
performance has become pointless to both parties. In the Feng Yumei
case,29 the plaintiff demanded a 22 square meter store she purchased
from the developer of a mall when the developer had rebranded the whole
mall (6000 square meters) for a different line of business and the store she
purchased could no longer exist. The developer was willing to pay damages
but Feng Yumei insisted on performance. The court held that performance
can be excused and damages awarded. Even though the plaintiff is, in
principle, entitled to performance, requiring it will result in an obviously
unfair outcome. The Code, based on this case, adopted this common law-
inspired doctrine of frustration of purpose. Still, this new doctrine does not
function in the same way as in common law. In common law, frustration of

27. 广东仙源与广州中大等公司的股权转 29. 冯玉梅诉新宇公司商品房买卖合同纠

让纠纷案 (2009)民申字第1068号[Xianyuan v. 纷（2004）宁民四终字第470号 [Feng Yumei
Zhongda, (2009) Min Shen Zi No. 1068]. v. Xinyu Corp. [(2004) Nin Min Si Zhong Zi
28. Chinese Civil Code, art. 533. No. 470].

purpose would result in the termination of contract and the non-perform-

ing party will no longer be required to pay damages. Here, Article 580-2
only operates to excuse a party from a demand for specific performance but
not the liability to pay damages.
The new law creates a unique scenario: when a performance becomes
excessively expensive, the adversely affected party will have two options:
he could seek to terminate the contract under Article 533 or, if that fails, he
could ask to be excused from performing the contract and pay damages
instead. Clear standards will need to be established that distinguish these
situations.
This major codification came at a time when China is engaged in the
fight against the novel coronavirus. The Chinese Civil Code adopted a
provision that is similar to the Defense Production Act in the US, and
which requires the appropriate private parties to accept state production
orders when a need arises for disaster relief or disease prevention
purposes.30
In forty years, Chinese contract law has transformed from a simple
tool to document transactions that implemented state economic plans
where private interest was considered illegitimate to a systematic codified
law that predominantly protects security of transactions and treats private
and state interests indistinguishably. It remains to be seen whether the
evolving pro-transaction attitude reflected in the Code will ease the ten-
sions between state and private interests.

II. VOLUNTARY COMMITMENT

1. The Moment at which a Commitment Is Binding
In comparing the rules described in this section, consider whether the
offeree who mails an acceptance before receiving a revocation of an offer
can hold the offeror to the contract (a) if the offeror receives his acceptance,
and (b) if he does not, for example, because it is lost in the mail. Consider
whether the offeror who has sent a revocation should be bound in these
situations.

Common Law
Adams v. Lindsell, (1818) 1 Barn. & Adl. 681 (K.B.)
“The defendants, who were wool dealers in St. Ives, wrote to the
plaintiffs, who were wool manufacturers in Bromsgrove, Worcester: ‘We
now offer you eight hundred tods of wether ﬂeeces, of a good fair quality of
our country wool, at 35s. 6d. per tod, to be delivered at Leicester, and to be
paid for by two months’ bill in two months, and to be weighed up by your
agent within fourteen days, receiving your answer in course of post.’

30. Chinese Civil Code, art. 494.

This letter was misdirected by the defendants, to Bromsgrove,

Leicestershire, in consequence of which it was not received by the plaintiffs
in Worcestershire till 7 p.m. on Friday, September 5th. On that evening the
plaintiffs wrote an answer, agreeing to accept the wool on the terms pro-
posed. The course of the post between St. Ives and Bromsgrove is through
London, and consequently this answer was not received by the defendants
till Tuesday, September 9th. On Monday, September 8th, the defendants not
having, as they expected, received an answer on Sunday, September 7th
(which in case their letter had not been misdirected would have been in the
usual course of the post), sold the wool in question to another person.” . . .
The defendants argued: “Till the plaintiffs’ answer was actually received
there could be no binding contract between the parties; and before then the
defendants had retracted their offer by selling the wool to other persons.” But
the court said that “if that were so, no contract could ever be completed by the
post. For if the defendants were not bound by their offer when accepted by the
plaintiffs till the answer was received, then the plaintiffs ought not to be
bound till after they had received the notiﬁcation that the defendants had
received their answer and assented to it. And so it might go on ad inﬁnitum.
The defendants must be considered in law as making, during every instant of
the time their letter was travelling, the same identical offer to the plaintiffs,
and then the contract is completed by the acceptance of it by the latter. Then
as to the delay in notifying the acceptance, that arises entirely from the
mistake of the defendants, and it therefore must be taken as against them
that the plaintiffs’ answer was received in course of post.”

Restatement (Second) of Contracts

§ 63 TIME WHEN ACCEPTANCE TAKES EFFECT
Unless the offer provides otherwise,
(a). an acceptance made in a manner and by a medium invited by an
offer is operative and completes the manifestation of mutual assent as soon
as put out of the offeree’s possession, without regard to whether it ever
reaches the offeror . . . .

Dickinson v. Dodds, [1876] 2 Ch. Div. 463 (C.A.)

“On Wednesday, the 10th of June, 1874, the defendant John Dodds
signed and delivered to the plaintiff, George Dickinson, a memorandum, of
which the material part was as follows:
I hereby agree to sell to Mr. George Dickinson the whole of the dwell-
inghouses, garden ground, stabling, and outbuildings thereto belong-
ing, situate at Croft, belonging to me, for the sum of £800. As witness
my hand this tenth day of June, 1874.
[Signed] J. Dodds.
In the afternoon of the Thursday [June 11], the plaintiff was informed
by a Mr. Berry that Dodds had been offering or agreeing to sell the property

to Thomas Allan, the other defendant. Thereupon the plaintiff, at about

half past seven in the evening, went to the house of Mrs. Burgess, the
mother-in-law of Dodds, where he was then staying, and left with her a
formal acceptance in writing of the offer to sell the property. According to
the evidence of Mrs. Burgess this document never in fact reached Dodds,
she having forgotten to give it to him.
On the following (Friday) morning, at about seven o’clock, Berry, who
was acting as agent for Dickinson, found Dodds at the Darlington railway
station, and handed to him a duplicate of the acceptance by Dickinson, and
explained to Dodds its purport. He replied that it was too late, as he had
sold the property. A few minutes later Dickinson himself found Dodds
entering a railway carriage, and handed him another duplicate of the
notice of acceptance, but Dodds declined to receive it, saying: ‘You are too
late. I have sold the property.’” . . .
The court said: “The document, though beginning ‘I hereby agree
to sell,’ was nothing but an offer, and was only intended to be an offer,
for the plaintiff himself tells us that he required time to consider
whether he would enter into an agreement or not. Unless both parties
had then agreed, there was no concluded agreement then made; it was
in effect and substance only an offer to sell. The plaintiff, being minded
not to complete the bargain at that time, added this memorandum:
‘This offer to be left over until Friday, 9 o’clock a.m. 12th June, 1874.’
That shows it was only an offer. There was no consideration given for
the undertaking or promise, to whatever extent it may be considered
binding, to keep the property unsold until 9 o’clock on Friday morning;
but apparently Dickinson was of opinion, and probably Dodds was of
the same opinion, that he (Dodds) was bound by that promise, and
could not in any way withdraw from it, or retract it, until 9 o’clock on
Friday morning, and this probably explains a good deal of what after-
wards took place. But it is clear settled law, on one of the clearest
principles of law, that this promise, being a mere nudum pactum, was
not binding, and that at any moment before a complete acceptance by
Dickinson of the offer, Dodds was as free as Dickinson himself.
Well, that being the state of things, it is said that the only mode in
which Dodds could assert that freedom was by actually and distinctly
saying to Dickinson, ‘Now I withdraw my offer.’ It appears to me that
there is neither principle nor authority for the proposition that there
must be an express and actual withdrawal of the offer, or what is called a
retraction. It must, to constitute a contract, appear that the two minds
were at one, at the same moment of time, that is, that there was an offer
continuing up to the time of the acceptance. If there was not such a
continuing offer, then the acceptance comes to nothing. Of course it may
well be that the one man is bound in some way or other to let the other man
know that his mind with regard to the offer has been changed; but in this
case, beyond all question, the plaintiff knew that Dodds was no longer
minded to sell the property to him as plainly and clearly as if Dodds had
told him in so many words, ‘I withdraw the offer.’ This is evident from the
plaintiff’s own statements in the bill.”

Restatement (Second) of Contracts

§ 25 OPTION CONTRACTS
An option contract is a promise which meets the requirements for the
formation of a contract and limits the promisor’s power to revoke an offer.
§ 87 O P TIO N C ONT RACT
(1). An offer is binding as an option contract if it
(a). is in writing and signed by the offeror, recites a purported
consideration for the making of the offer, and proposes an
exchange on fair terms within a reasonable time; or
(b). is made irrevocable by statute.
(2). An offer which the offeror should reasonably expect to induce
action or forbearance of a substantial character on the part of
the offeree before acceptance and which does induce such action
or such forbearance is binding as an option contract to the extent
necessary to prevent injustice.

Uniform Commercial Code

§ 2.205 FIRM OFFERS
An offer by a merchant to buy or sell goods in a signed writing which by
its terms gives 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 reason-
able time, but in no event may such period of revocability exceed three
months; but any such term of assurance on a form supplied by the offeree
must be separately signed by the offeror.
Note. As mentioned earlier, the Uniform Commercial Code has
been enacted in virtually all American states. Article 2 governs the
sale of goods.

German Law

German Civil Code

§ 145 BINDING FORCE OF AN OFFER
One who has offered to conclude a contract with another is bound by
that offer unless he states that he is not bound.
§ 146 THE LAPSE OF AN OFFER
The offer lapses if the offeror is refused or if he is not given an accept-
ance within due time according to §§ 147–49.
§ 147 TIME TO ACCEPT
An offer made to a person who is present can only be accepted immedi-
ately. That is so as well when an offer is made by one person to another by
telephone.
An offer made to a person who is absent can be accepted only within the
time that an answer would be expected under ordinary circumstances.

French Law
French Civil Code
ARTICLE 1115
An offer may be withdrawn freely as long as it has not reached the
person to whom it was addressed.
ARTICLE 1116
An offer may not be withdrawn before the expiry of any period fixed by
the offeror or, if no such period has been fixed, the end of a reasonable
period. The withdrawal of an offer in contravention of this prohibition
prevents the contract being concluded. The person who thus withdraws
an offer incurs extra-contractual liability under the conditions set out by
the general law, and has no obligation to compensate the loss of profits
which were expected from the contract.
ARTICLE 1117
An offer lapses on the expiry of the period fixed by the offeror or, if no
period is fixed, at the end of a reasonable period. It also lapses in the case of
the incapacity or death of the offeror.
ARTICLE 1118
An acceptance is the manifestation of the will of the offeree to be bound
on the terms of the offer. As long as the acceptance has not reached the
offeror, it may be withdrawn freely provided that the withdrawal reaches
the offeror before the acceptance. An acceptance which does not conform to
the offer has no effect, apart from constituting a new offer.

Chinese Law

Chinese Civil Code

A R T I C L E 476
An offer may be revoked except for the following circumstances:
(1). if it expressly indicates that is irrevocable, whether by stating a
ﬁxed time for acceptance or otherwise.
(2). if the offeree has reason to regard the offer as irrevocable, and has
begun to prepare to perform the contract.

ARTICLE 477
Revocation of an offer made in person during a conversation must
be communicated before the offeree accepts the offer; revocation of an
offer not made during a conversation must reach the offeree before he
accepts . . .
ARTICLE 478
An offer ceases to be effective under the following circumstances:
(1). a notice of rejection of the offer reaches the offeror;
(2). the offeror revokes the offer according to law;

(3). offer expires before being accepted;

(4). the offeree materially modiﬁes the terms of the offer . . .

A RTICLE 483
A contract is formed when an acceptance is effective except as other-
wise prescribed by law or by agreement between the parties . . .
A RTICLE 486
An acceptance dispatched by the offeree after expiration of the period
for acceptance constitutes a new offer, unless the offeror timely advises the
offeree that the acceptance is valid.
A RTICLE 487
Where an acceptance dispatched within the period of acceptance in a
fashion that would reach the offeror in time but reached offeree after the
expiration date due to other reasons, the acceptance is still effective unless
the offeror advises the offeree in a timely manner that the acceptance is not
acceptable beyond the expiration date.

The Draft Common Frame of Reference

Two “Commissions on European Contract Law,” sponsored by funds from
the Commission of the European Union, and under the direction of Ole
Lando, drafted a set of “Principles of European Contract Law.” The Second
Commission, which met from 1992–96, continued the work of the First, which
met from 1980–90. Their “Principles” have not been enacted as law. They
were intended to serve the following purposes: “to serve as a foundation for
European legislation,” to govern a contract in the event of “express adoption
by the parties,” to provide “a modern formulation of the lex mercatoria or law
merchant,” and to serve as “a model for the judicial and legislative develop-
ment of contract law” and “a basis for harmonization.” (Ole Lando and Hugh
Beale, eds., Principles of European Contract Law (2000), xxiii–xxiv.)
In 2001, the European Commission issued a Communication relating
to contract law, and, in 2003, an Action Plan. In response to this plan, a
project was launched funded by the European Commission, which pro-
duced a Draft Common Frame of Reference (DCFR) published in 2007.
Its provisions on contract law were based on the Lando “Principles.” Some
see the DCFR as a draft of what may become a civil code unifying the
private law of member states of the European Union. According to its
drafters, however, it is “[a]n academic, not a politically authorised text.”

It must be stressed that what we refer to today as the DCFR originates

in an initiative of European legal scholars. It amounts to the compres-
sion into rule form of decades of independent research and co-
operation by academics with expertise in private law, comparative
law and European Community law. The independence of . . . all the
contributors has been maintained and respected unreservedly at every
stage of our labours. That in turn has made it possible to take on board
many of the suggestions received in the course of a large number of

meetings with stakeholders and other experts throughout the contin-

ent . . . In particular, [the DCFR] does not contain a single rule or
deﬁnition or principle which has been approved or mandated by a
politically legitimated body at European or national level (save, of
course, where it coincides with existing EU or national legislation).
(Draft Common Frame of Reference, Introduction 4.)

The Draft Common Frame of Reference

ARTICLE II 4:202: REVOCATION OF OFFER

(1). An offer may be revoked if the revocation reaches the offeree

before the offeree has dispatched an acceptance or, in cases of
acceptance by conduct, before the contract has been concluded.
...
(3). However, a revocation of an offer is ineffective if:
(a). the offer indicates that it is irrevocable;
(b). the offer states a ﬁxed time for its acceptance; or
(c). it was reasonable for the offeree to rely on the offer as being
irrevocable and the offeree has acted in reliance on the offer.
ARTICLE II 4:203: REJECTION OF OFFER
When a rejection of an offer reaches the offeror, the offer lapses.
ARTICLE II 4:205: TIME OF CONCLUSION OF THE CONTRACT

(1). If an acceptance has been dispatched by the offeree the contract is

concluded when the acceptance reaches the offeror.

ARTICLE II 4:206: TIME LIMIT FOR ACCEPTANCE

(1). An acceptance of an offer is effective only if it reaches the offeror

within the time ﬁxed by the offeror.
(2). If no time has been ﬁxed by the offeror the acceptance is effective
only if it reaches the offeror within a reasonable time.

The Unidroit Principles of International Commercial Contracts

UNIDROIT is an acronym for the International Institute for the
Uniﬁcation of Private Law. It is an independent intergovernmental organ-
ization founded in 1926. At the time of the drafting of the Unidroit
Principles of International Commercial Law, the organization was com-
posed of twenty-six member states. While approved by the member states,
the Principles are not binding either as legislation or as a treaty. They have
been described by Michael Joachim Bonnell, under whose leadership they
were drafted, as “an international restatement of contract law.” The pur-
poses to be served by the Principles are described in the provisions of the
Preamble quoted below.

The Unidroit Principles of International Commercial Contracts

PREAMBLE (PURPOSE OF THE PRINCIPLES)
These Principles set forth general rules for international commer-
cial contracts.
They shall be applied when the parties have agreed that their
contract be governed by them.
They may be applied when the parties have agreed that their
contract be governed by general principles of law, the lex merca-
toria or the like.
They may provide a solution to an issue raised when it proves
impossible to establish the relevant rule of the applicable law.
They may be used to interpret or supplement international uni-
form law instruments.
They may serve as a model for national and international legislators.
ARTICLE 2.1 MANNER OF FORMATION
A contract may be concluded either by the acceptance of an offer or by
conduct of the parties that is sufﬁcient to show agreement.
ARTICLE 2.3 WITHDRAWAL OF OFFER
(1). An offer becomes effective when it reaches the offeree.
(2). An offer, even if it is irrevocable, may be withdrawn if the with-
drawal reaches the offeree before or at the same time as the offer.

ARTICLE 2.4 REVOCATION OF OFFER

(1). Until a contract is concluded an offer may be revoked if the revoca-
tion reaches the offeree before it has dispatched an acceptance.
(2). However, an offer cannot be revoked
(a). if it indicates, whether by stating a ﬁxed time for acceptance
or otherwise, that it is irrevocable; or
(b). if it was reasonable for the offeree to rely on the offer as being
irrevocable and the offeree has acted in reliance on the offer.
ARTICLE 2.5 REJECTION OF OFFER
An offer is terminated when a rejection reaches the offeror.
ARTICLE 2.6 MODE OF ACCEPTANCE
(1). A statement or other conduct of the offeree indicating assent to an
offer is an acceptance. Silence or inactivity does not in itself
amount to acceptance.
(2). An acceptance of an offer becomes effective when the indication of
assent reaches the offeror.
(3). However, if, by virtue of the offer or as a result of practices which
the parties have established between themselves or of usage, the
offeree may indicate assent by performing an act without notice to
the offeror, the acceptance is effective when the act is performed.

2. Liability before a Final Commitment Is Made

English Law
Walford v. Miles, [1992] 2 A.C. 128 (H.L.)
Lord Ackner. “The respondents owned a company, together with prem-
ises which were let to the company where it carried on a photographic
processing business. In 1986 the respondents decided to sell the business
and the premises and received an offer of £1.9 m from a third party. In the
meantime, the appellants entered into negotiations with the respondents
and on 12 March 1987 the respondents agreed in principle to sell the
business and the premises to them for £2 m and warranted that the trading
profits in the 12 months following completion would be not less than
£300,000. On 7 March it was further agreed in a telephone conversation
between the parties that if the appellants provided a comfort letter from
their bank by a specified date confirming that the bank had offered them
loan facilities to enable them to make the purchase for £2 m the respondents
‘would terminate negotiations with any third party or consideration of any
alternative with a view to concluding agreements’ with the appellants and
that even if the respondents received a satisfactory proposal from any third
party before the close of business on 20 March 1987 they ‘would not deal with
that third party and nor would [they] give further consideration to any
alternative.’ The appellants duly provided the comfort letter from their
bank in the time specified and on 25 March the respondents confirmed
that, subject to contract, they agreed to the sale of the property and the
shares in the company at a total price of £2 m. On 30 March the respondents
withdrew from the negotiations and decided to sell to the third party because
they were concerned that their staff would not get on with the appellants
and that a loss of staff would put the warranted £300,000 profit in jeopardy.
Although the cases in the United States did not speak with one voice
your Lordships’ attention was drawn to the decision of the United States
Court of Appeals, Third Circuit in Channel Home Centers Division of
Grace Retail Corp v Grossman (1986) 795 F 2d 291 as being ‘the clearest
example’ of the American cases in the appellants’ favour. That case raised
the issue whether an agreement to negotiate in good faith, if supported by
consideration, is an enforceable contract. I do not find the decision of any
assistance. While accepting that an agreement to agree is not an enforce-
able contract, the United States Court of Appeals appears to have pro-
ceeded on the basis that an agreement to negotiate in good faith is
synonymous with an agreement to use best endeavours and, as the latter
is enforceable, so is the former. This appears to me, with respect, to be an
unsustainable proposition. The reason why an agreement to negotiate, like
an agreement to agree, is unenforceable is simply because it lacks the
necessary certainty. The same does not apply to an agreement to use best
endeavours. This uncertainty is demonstrated in the instant case by the
provision which it is said has to be implied in the agreement for the
determination of the negotiations. How can a court be expected to decide
whether, subjectively, a proper reason existed for the termination of nego-
tiations? The answer suggested depends upon whether the negotiations

have been determined ‘in good faith.’ However, the concept of a duty to
carry on negotiations in good faith is inherently repugnant to the adver-
sarial position of the parties when involved in negotiations. Each party to
the negotiations is entitled to pursue his (or her) own interest, so long as he
avoids making misrepresentations. To advance that interest he must be
entitled, if he thinks it appropriate, to threaten to withdraw from further
negotiations or to withdraw in fact in the hope that the opposite party may
seek to reopen the negotiations by offering him improved terms. Mr
Naughton [the plaintiff’s attorney] of course, accepts that the agreement
upon which he relies does not contain a duty to complete the negotiations.
But that still leaves the vital question: how is a vendor ever to know that he
is entitled to withdraw from further negotiations? How is the court to police
such an ‘agreement’? A duty to negotiate in good faith is as unworkable in
practice as it is inherently inconsistent with the position of a negotiating
party. It is here that the uncertainty lies. In my judgment, while negoti-
ations are in existence either party is entitled to withdraw from these
negotiations, at any time and for any reason. There can be thus no obliga-
tion to continue to negotiate until there is a ‘proper reason’ to withdraw.
Accordingly, a bare agreement to negotiate has no legal content.”

William Lacey (Hounslow), Ltd. v. Davis, [1957] 2 All E.R. 712 (Q.B.)
“D., the owner of certain premises, which had suffered war damage,
obtained tenders [i.e., bids] from three builders, including the plaintiffs,
for the rebuilding of the premises as a shop with residential ﬂats above.
The plaintiffs’ tender, which was received in January, 1951, was the
lowest and the plaintiffs were led to believe that they would receive the
contract. At the request of D.’s agents, they then calculated the timber
and steel required for the proposed building for the purpose of obtaining
the necessary licences, and they also submitted their estimate for the
notional reconstruction of the building as it was before the war damage
and a schedule of the basic prices on which their original tender was
based, in order to enable D. to negotiate with the War Damage
Commission the amount payable to him under the War Damage Act,
1943. A licence in respect of the original plans having been refused by
the Ministry of Works, the plaintiffs were asked to submit a revised
estimate in respect of new plans, although D. did not intend to decide on
the type of house which he proposed to erect until the amount of his war
damage claim had been agreed. The plaintiffs undertook a considerable
amount of work in preparing their revised estimate, which was submitted
in December, 1951, and they also provided further particulars required by
D. for the War Damage Commission. As a result of the estimates and the
other information provided by the plaintiffs, the amount receivable by D.
from the War Damage Commission was substantially increased. After the
commission’s decision had been given in April, 1952, the plaintiffs were
asked to submit another estimate in regard to revised plans and, later, to
make still further amendments to the new estimate. After they had
complied with these requests they were informed that D. intended to

employ another builder to rebuild the premises. Subsequently D. sold the

premises instead of having them rebuilt.”
Barry, J. “On this evidence, I am quite satisfied that the whole of the
work covered by the schedule fell right outside the work which a builder, by
custom and usage, normally performs gratuitously, when invited to tender
for the erection of a building . . . The earlier estimates, as the correspond-
ence shows, were in fact used, and used for some purpose, in Mr. Davis’
negotiations with the War Damage Commission and, an apparent result of
the plaintiffs’ efforts, not only were the reconstruction plans approved, but
a much higher ‘permissible amount’ was also agreed with the War Damage
Commission. It is perhaps justifiable to surmise that these facts, especially
the reconstruction plans and the increase in the permissible amount, had
at least some influence on the price of the damaged building which Mr.
Davis obtained when it was ultimately sold by him.
The work itemised in the schedule which does not relate to estimation,
as I think, falls even more clearly outside the type of work which any builder
would be expected to do without charge when tendering for a building
contract. The plaintiffs are carrying on a business and, in normal circum-
stances, if asked to render services of this kind, the obvious inference would
be that they ought to be paid for so doing. No one could expect a business firm
to do this sort of work for nothing, and again, in normal circumstances, the
law would imply a promise to pay on the part of the person who requested
the services to be performed. Counsel for the defendants, however, submits
that no such promise can be implied, in the circumstances of the present
case. The existence, he submits, of a common expectation that a contract
would ultimately come into being, and that the plaintiffs’ services would be
rewarded by the profits of that contract, leaves no room for – and, indeed,
wholly negatives – any suggestion that the parties impliedly agreed that
these services would be paid for in any other way.
This, at first sight, is a somewhat formidable argument which, if
well founded, would wholly defeat the plaintiffs’ alternative claim. If
such were the law, it would, I think, amount to a denial of justice to
the plaintiffs in the present case, and legal propositions which have
that apparent effect must always be scrutinised with some care. In
truth, I think that counsel’s proposition is founded on too narrow a
view of the modern action for quantum meruit . . . In these quasi-
contractual cases the court will look at the true facts and ascertain
from them whether or not a promise to pay should be implied, irre-
spective of the actual views of intentions of the parties at the time
when the work was done or the services rendered . . .
I am unable to see any valid distinction between work done which was
to be paid for under the terms of a contract erroneously believed to be in
existence, and work done which was to be paid for out of the proceeds of a
contract which both parties erroneously believed was about to be made. In
neither case was the work to be done gratuitously, and in both cases the
party from whom payment was sought requested the work and obtained
the benefit of it. In neither case did the parties actually intend to pay for the
work otherwise than under the supposed contract, or as part of the total

price which would become payable when the expected contract was made.
In both cases, when the beliefs of the parties were falsiﬁed, the law implied
an obligation – and in this case I think the law should imply an obligation –
to pay a reasonable price for the services which had been obtained. I am, of
course, fully aware that in different circumstances it might be held that
work was done gratuitously merely in the hope that the building scheme
would be carried out and that the person who did the work would obtain the
contract. That, I am satisﬁed, is not the position here.”

Law in the United States

Channel Home Centers v. Grossman, 795 F.2d 291 (3rd Cir. 1986)
“This diversity case presents the question whether, under
Pennsylvania law, a property owner’s promise to a prospective tenant,
pursuant to a detailed letter of intent, to negotiate in good faith with the
prospective tenant and to withdraw the lease premises from the market-
place during the negotiation, can bind the owner for a reasonable period of
time where the prospective tenant has expended significant sums of money
in connection with the lease negotiations and preparation and where there
was evidence that the letter of intent was of significant value to the
property owner. We hold that it may . . .
In the third week of November, 1984, Tri-Star wrote to Richard
Perkowski, Director of Real Estate for Channel, informing him of the
availability of store location in Cedarbrook Mall which Tri-Star believed
Channel would be interested in leasing. Perkowski expressed some inter-
est, and met the Grossmans on November 28, 1984. After Perkowski was
given a tour of the premises, the terms of a lease were discussed. App. at
457a, 498a. Frank Grossman testified that ‘we discussed various terms,
and these terms were, some were loose, some were more or less terms.’ App.
at 364a, 496a–497a . . .
Frank Grossman [part owner of Tri-Star] then requested that Channel
execute a letter of intent that, as Grossman put it, could be shown to ‘other
people, banks or whatever.’ App. at 366a–367a . . . Apparently, Frank
Grossman was anxious to get Channel’s signature on a letter of intent so
that it could be used to help Grossman secure financing for his purchase of
the mall. App. at 366a–367a, 497a.
On December 11, 1984, in response to Grossman’s request,
Channel prepared, executed, and submitted a detailed letter of
intent setting forth a plethora of lease terms which provided, inter
alia, that:

‘[t]o induce the Tenant [Channel] to proceed with the leasing of the
Store, you [Grossman] will withdraw the Store from the rental market,
and only negotiate the above described leasing transaction to
completion.’
‘Please acknowledge your intent to proceed with the leasing of the
store under the above terms, conditions and understanding by signing

the enclosed copy of the letter and returning it to the undersigned

within ten (10) days from the date hereof.’
Frank Grossman promptly signed the letter of intent and returned it to
Channel.
On February 6, 1985, Frank Grossman notified Channel that ‘negoti-
ations terminated as of this date’ due to Channel’s failure to submit a
signed and mutually acceptable lease for the mall site within thirty days
of the December 11, 1984 letter of intent. App. at 42a. (This was the first
and only written evidence of the purported thirty-day time limit. The letter
of intent contained no such term . . .) On February 7, 1985, Mr. Good Buys
and Frank Grossman executed a lease for the Cedarbrook Mall. App. at
147a–196a. Mr. Good Buys agreed to make base-level annual rental pay-
ments which were substantially greater than those agreed to by Channel in
the December 11, 1984 letter of intent. App. at 147a. Channel’s corporate
parent, Grace, approved the terms of Channel’s proposed lease on
February 13, 1985. App. at 443a–444a . . .
It is hornbook law that evidence of preliminary negotiations or an
agreement to enter into a binding contract in the future does not alone
constitute a contract. See Goldman v. McShain, 432 Pa. 61, 68, 247
A.2d 455, 458 (j1968); Lombardo v. Gasparini Excavating Co., 385 Pa.
388, 392, 123 A.2d 663, 666 (1956); Kazanjian v. New England
Petroleum Corp., 332 Pa.Super. 1, 7, 480 A.2d 1153, 1157 (1984); see
Restatement (Second) of Contracts § 26 (1979). Appellees believe that
this doctrine settles this case, but, in so arguing, appellees misconstrue
Channel’s contract claim. Channel does not contend that the letter of
intent is binding as a lease or an agreement to enter into a lease.
Rather, it is Channel’s position that this document is enforceable as a
mutually binding obligation to negotiate in good faith. By unilaterally
terminating negotiations with Channel and precipitously entering into
a lease agreement with Mr. Good Buys, Channel argues, Grossman
acted in bad faith and breached his promise to ‘withdraw the Store
from the rental market and only negotiate the above-described leasing
transaction to completion.’
Under Pennsylvania law, the test for enforceability of an agreement is
whether both parties have manifested an intention to be bound by its terms
and whether the terms are sufficiently definite to be specifically enforced
...
Applying Pennsylvania law, then, we must ask (1) whether both par-
ties manifested an intention to be bound by the agreement; (2) whether the
terms of the agreement are sufficiently definite to be enforced; and (3)
whether there was consideration . . .
The letter of intent, signed by both parties, provides that ‘[t]o induce
the Tenant [Channel] to proceed with the leasing of the Store, you
[Grossman] will withdraw the Store from the rental market, and only
negotiate the proposed leasing transaction with Channel to completion.’
Evidence of record supports the proposition that the parties intended
this promise to be binding. After the letter of intent was executed, both

Channel and the Grossmans initiated procedures directed toward satisfac-

tion of lease contingencies. Channel directed its parent corporation to
prepare a draft lease; Channel planning representatives visited the lease
premises to obtain measurements for architectural alterations, renov-
ations, and related construction. Channel developed extensive marketing
plans; delivery schedules were prepared and material and equipment
deemed necessary for the store were purchased. The Grossmans applied
to the township zoning committee for permission to erect Channel signs at
various locations on the mall property. Channel submitted a draft lease on
January 11, 1985, and the parties, through correspondence and telephone
conversations and on-site visits, exhibited an intent to move toward a lease
as late as January 23, 1985 . . . Accordingly, the letter of intent and the
circumstances surrounding its adoption both support a finding that the
parties intended to be bound by an agreement to negotiate in good faith.
We also believe that Grossman’s promise to ‘withdraw the Store from
the rental market and only negotiate the above described leasing transac-
tion to completion,’ viewed in the context of the detailed letter of intent
(which covers most significant lease terms . . .), is sufficiently definite to be
specifically enforced, provided that Channel submitted sufficient legal
consideration in return.”

Hoffman v. Red Owl Stores, Inc., 133 N.W. 2d 267 (Wis. 1965)
“The complaint alleged that Lukowitz, as agent for Red Owl Stores,
represented to and agreed with plaintiffs that Red Owl would build a store
building in Chilton and stock it with merchandise for Hoffman to operate in
return for which plaintiffs were to put up and invest a total sum of $18,000;
that in reliance upon the above mentioned agreement and representations
plaintiffs sold their bakery building and business and their grocery store
and business; also in reliance on the agreement and representations
Hoffman purchased the building site in Chilton and rented a residence
for himself and his family in Chilton; plaintiffs’ actions in reliance on the
representations and agreement disrupted their personal and business life;
plaintiffs lost substantial amounts of income and expended large sums of
money as expenses. Plaintiffs demanded recovery of damages for the
breach of defendants’ representations and agreements . . .
The action was tried to a court and jury. The facts hereafter stated are
taken from the evidence adduced at the trial. Where there was a conﬂict in
the evidence the version favorable to plaintiffs has been accepted since the
verdict rendered was in favor of plaintiffs.
Hoffman assisted by his wife operated a bakery at Wautoma from 1956
until sale of the building late in 1961 . . . Red Owl is a Minnesota corpor-
ation having its home ofﬁce at Hopkins, Minnesota. It owns and operates a
number of grocery supermarket stores and also extends franchises to
agency stores which are owned by individuals, partnerships and corpor-
ations . . .
In November, 1959, Hoffman was desirous of expanding his operations
by establishing a grocery store and contacted a Red Owl representative by

the name of Jansen, now deceased. Numerous conversations were had in

1960 with the idea of establishing a Red Owl franchise store in Wautoma.
In September, 1960, Lukowitz succeeded Jansen as Red Owl’s representa-
tive in the negotiations. Hoffman mentioned that $18,000 was all the
capital he had available to invest and he was repeatedly assured that
this would be sufficient to set him up in business as a Red Owl Store.
About Christmastime, 1960, Hoffman thought it would be a good idea if
he bought a small grocery store in Wautoma and operated it in order that
he gain experience in the grocery business prior to operating a Red Owl
store in some larger community. On February 6, 1961, on the advice of
Lukowitz and Sykes, who had succeeded Lukowitz as Red Owl’s district
manager, Hoffman bought the inventory and fixtures of a small grocery
store in Wautoma and leased the building in which it was operated.
After three months of operating this Wautoma store, the Red Owl
representatives came in and took inventory and checked the operations
and found the store was operating at a profit. Lukowitz advised Hoffman
to sell the store to his manager, and assured him that Red Owl would find a
larger store for him elsewhere. Acting on this advice and assurance,
Hoffman sold the fixtures and inventory to his manager on June 6, 1961.
Hoffman was reluctant to sell at that time because it meant losing the
summer tourist business, but he sold on the assurance that he would be
operating in a new location by fall and that he must sell this store if he
wanted a bigger one. Before selling, Hoffman told the Red Owl representa-
tives that he had $18,000 for ‘getting set up in business’ and they assured
him that there would be no problems in establishing him in a bigger oper-
ation. The makeup of the $18,000 was not discussed; it was understood
plaintiff’s father-in-law would furnish part of it. By June 1961, the towns
for the new grocery store had been narrowed down to two, Kewaunee and
Chilton. In Kewaunee, Red Owl had an option on a building site. In Chilton,
Red Owl had nothing under option, but it did select a site to which plaintiff
obtained an option at Red Owl’s suggestion. The option stipulated a pur-
chase price of $5,000 with $1,000 to be paid on election to purchase and the
balance to be paid within 30 days. On Lukowitz’s assurance that everything
was all set plaintiff paid $1,000 down on the lot on September 15th.
On September 27, 1961, plaintiff met at Chilton with Lukowitz and
Mr. Reymund and Mr. Carlson from the home office who prepared a
projected financial statement. Part of the funds plaintiffs were to supply
as their investment in the venture were to be obtained by sale of their
Wautoma bakery building.
On the basis of this meeting Lukowitz assured Hoffman: ‘[E]very-
thing is ready to go. Get your money together and we are set.’ Shortly
after this meeting Lukowitz told plaintiffs that they would have to sell
their bakery business and bakery building, and that their retaining this
property was the only ‘hitch’ in the entire plan. On November 6, 1961,
plaintiffs sold their bakery building for $10,000. Hoffman was to retain the
bakery equipment as he contemplated using it to operate a bakery in
connection with his Red Owl store. After sale of the bakery Hoffman
obtained employment on the night shift at an Appleton bakery . . .

[Eventually, Red Owl presented Hoffmann with a statement which he

interpreted to require] ‘a total of $34,000 cash made up of $13,000 gift from
his father-in-law, $2,000 on mortgage, $8,000 on Chilton bank loan, $5,000
in cash from plaintiff, and $6,000 on the resale of the Chilton lot.’ . . .
Hoffman informed Red Owl he could not go along with this proposal, and
particularly objected to the requirement that his father-in-law sign an
agreement that his $13,000 advancement was an absolute gift. This ter-
minated the negotiations between the parties . . .
Originally the doctrine of promissory estoppel was invoked as a sub-
stitute for consideration rendering a gratuitous promise enforceable as a
contract. See Williston, Contracts (1st ed.), p. 307, sec. 139. In other words,
the acts of reliance by the promisee to his detriment provided a substitute
for consideration. If promissory estoppel were to be limited to only those
situations where the promise giving rise to the cause of action must be a
definite with respect to all details that a contract would result were the
promise supported by consideration, then the defendants’ instant promises
to Hoffman would not meet this test. However, sec. 90 of Restatement, 1
Contracts, does not impose the requirement that the promise giving rise to
the cause of action must be so comprehensive in scope as to meet the
requirements of an offer that would ripen into a contract if accepted by
the promisee. Rather the conditions imposed are:
(1). Was the promise one which the promisor should reasonably
expect to induce action or forbearance of a definite and substantial
character on the part of the promisee?
(2). Did the promise induce such action or forbearance?
(3). Can injustice be avoided only by enforcement of the promise?
We deem it would be a mistake to regard an action grounded on promissory
estoppel as the equivalent of a breach of contract action. As Dean Boyer
points out, it is desirable that fluidity in the application of the concept be
maintained. 98 University of Pennsylvania Law Review (1950), 459, at
page 497. While the first two of the above listed three requirements of
promissory estoppel present issues of fact which ordinarily will be resolved
by a jury, the third requirement, that the remedy can only be invoked
where necessary to avoid injustice, is one that involves a policy decision
by the court. Such a policy decision necessarily embraces an element of
discretion.
We conclude that injustice would result here if plaintiffs were not
granted some relief because of the failure of defendants to keep their
promises which induced plaintiffs to act to their detriment.”
Note. Courts in the United States have recognized a duty to per-
form a contract in good faith once it has been made. But they have not
recognized a duty to negotiate in good faith absent an agreement to do
so or, as in Red Owl, a promise on which the plaintiff has relied. Alan
Farnsworth claimed that American law does not need to recognize
such a duty because the plaintiff should recover only if the defendant
has deceived him during negotiations, broken an express or implied
promise made during negotiations, or enriched himself unjustly by

receiving something from the plaintiff before a contract was made.1 In

all of these cases, American courts would give relief because of deceit,
the breaking of a promise, or unjust enrichment. Ewoud Hondius, a
leading continental jurist, has said that, aside from some caveats that
do not matter here, “I would underwrite [Farnsworth’s] opinion”2 as to
when relief should be given. Farnsworth also claimed that with rare
exceptions, continental courts that recognize a duty to negotiate in
good faith actually give relief in the same circumstances as American
courts, although he acknowledged there have been exceptions. One of
them, he said, is the ﬁrst case in the next section, the decision of the
Cour de cassation of March 20, 1972. Consider whether, with this
exception, the decisions of French and German courts in the following
sections would be decided the same way in the United States, as
Farnsworth claims. If so, consider why that case is an exception.

French Law

French Civil Code

ARTICLE 1104
Contracts must be negotiated, formed and performed in good faith.
This provision is a matter of public policy.
ARTICLE 1112
The commencement, continuation and breaking-off of precontractual
negotiations are free from control. They must mandatorily satisfy the require-
ments of good faith. In case of fault committed during the negotiations, the
reparation of the resulting loss is not calculated so as to compensate the loss of
beneﬁts which were expected from the contract that was not concluded.
Note. Articles 1104 and 1112 were added to the Code by Ordonnance no.
2016–131 of February 10, 2016. Before then, courts gave relief for breaking off
contractual negotiations in bad faith under what are now Articles 1240–1.

Cour de cassation, ch. comm. et ﬁnan., March 20, 1972, Bull. civ.
1972.IV. no. 93
The court below found that the Société des éstablissements Gerteis
entered into negotiations in April 1966 with the Société établissements
Vilber-Lourmat, the sole distributor in France of machines, used for the
manufacture of cement pipes made by the American ﬁrm Hydrotile Co.
After Robert Gerteis made a trip to the United States from May 13 to 23,
1966 in order to observe the operation of these machines, the Société
Gerteis requested from the Société Vilber-Lourmat further information
before making its choice among several types of machines manufactured

1. E. Allan Farnsworth, “Precontractual 2. Ewoud Hondius, “General Report,” in

Liability and Preliminary Agreements: Fair E. Hondius, ed., Precontractual Liability
Dealing and Failed Negotiations,” Colum. L. Reports to the XIIIth Congress International
Rev. 87 (1987), 217. Academy of Comparative Law Montreal,
Canada, 18–24 August 1990 (1991), 3, 27.

by the Hydrotile company. The Société Vilber-Lourmat did not reply to this
letter. The Société Gerteis learned later that on June 4, 1966, the American
manufacturer had sent an estimate to Vilber-Lourmat which it had not
transmitted the estimate to Gerteis. On June 16, 1966, Vilber-Lourmat
signed a contract with the company Les Tuyaux Centrifugés du Rhin, a
competitor of Gerteis, for the sale for a Hydrotile machine. The contract
contained a clause obligating Vilber-Lourmat not to sell a similar machine
in an area including the east of France for twenty-four months from the
delivery of the machine ordered by the company Les Tuyaux Centrifugés.
The court below “found that Vilber-Lourmat had deliberately withheld
the final estimate of the American firm intended for Gerteis and had broken
off the negotiations it had entered into with Gerteis brutally (brutalement),
unilaterally and without a legitimate reason when they were far advanced
when Gerteis, as Vilber-Lourmat knew, had made large expenditures, and
Vilbert-Lourmat had kept Gerteis for a long time in a state of uncertainty
. . . Vilber-Lourmat therefore did not live up to the rules of good faith in
commercial relations.” It was accordingly “liable for a delict.” The Cour de
cassation held that the court below had correctly found that there had been
“an abusive breaking off of negotiations” noting that although Vilber-
Lourmat “had inquired one last time to learn Gerteis’s intentions [it] did
not furnish the slightest justification for breaking off negotiations and . . .,
in any event, such extended negotiations could not be terminated by a
simple telephone call whose occurrence was more than problematic.”
Note. As mentioned earlier, Alan Farnsworth claimed that relief should
only be given when the defendant deceived the plaintiff, made and broke a
promise, or unjustly enriched himself during negotiations. He claimed those
are the circumstances in which continental courts normally give relief
although he acknowledged that this French case was an exception.
Another case he regarded as an exception is Dutch: the decision Plas v.
Valburg, Hoge Raad, June 18, 1982, NJ 1983, 723, in which the plaintiff
construction firm submitted a proposal to the municipal authorities of a
small town to build a swimming pool. Although there was no official bidding,
its proposal was judged the best and was agreed to by the mayor and
alderman. Their decision required approval from the city council. It was
not approved because, at the initiative of one member of the city council, a
rival bid was submitted at a lower price and accepted instead. The highest
Dutch court (Hoge Raad) ruled in favor of the plaintiff, holding that the
process of negotiation is divisible into three stages: an initial one, in which
either party can break off negotiations; a middle stage, in which he can do so
only if he compensates the other party for expenses incurred; and a final
stage in which to break off negotiations at all would be a violation of good
faith, and a party who does so is responsible for what a common lawyer
would call expectation damages. He is liable, that is, to the same extent that
he would be had a final contract been signed. Rarely, if ever, however, has a
Dutch court held that negotiations had reached this final stage.

Cour d’appel, Pau, January 14, 1969, D.S. 1969.J.716

Muroiterie Fraisse was a firm that sold and installed mirrors. The
defendant invited Fraisse to the site to discuss the installation of some
mirrors in its apartment building. Muroiterie Fraisse installed mirrors in a
model apartment and was paid for doing so. After being invited back to the
site and receiving exact measurements, Fraisse submitted an estimate for
the entire job of 30,800 francs. The defendants rejected it without inform-
ing him of the offers of competing firms or giving him a chance to bid a lower
price for the job.
The Cour d’appel noted that “the Société Muroiterie Fraisse has
clearly stated . . . that it does not make a claim . . . for failure to perform
a supply contract definitively concluded between the parties but for a
fault in the negotiation stage anterior to agreement, in other words, for
a fault in contrahendo.” The court rejected this claim, observing that
while “it must be recognized, in actual fact, that in the preliminary
phase of negotiations, during which the conditions of the contemplated
contract are studied and discussed, certain obligations of rectitude and
good faith rest on the parties, these obligations clearly relate not to the
conclusion of the eventual contract but to the conduct of the negotiators
themselves . . . [H]owever, the negotiation phase is designed to permit the
eventual contracting parties to study and understand the risks and
advantages of the future contract taking into account elements which
can be, at times, imponderable and depend more upon intuition than on
formal logic . . . [C]onsequently, without seriously compromising
individual liberty and commercial security, it could not be easily admitted
that a merchant could be liable for not having dealt with a competitor; in
other words, any fault in contrahendo must be patent, beyond discus-
sion.” In this case, the court said, the fact that Muroiterie Fraisse had
installed mirrors in a model apartment “was irrelevant . . . [as] another,
entirely separate, contract was involved, which had been performed, for
which the Muroiterie Fraisse had received normal compensation and
which did not, in itself, imply any obligation for the building as a
whole.” The initial visit to the worksite “clearly had no object other than
to permit the firm to see the job to be done and to enable the owner and his
architect to establish relations with the dealer in mirrors.” “[A] business-
man as experienced as Fraisse could not help but know that no reciprocal
engagement would be entered into before presentation and acceptance of
an estimate.” The defendant “had no obligation to accept that estimate if
he found it too high; nor can one see any obligation on his part to commu-
nicate to Fraisse the offers of competitive firms with a view to entering
into discussion with Fraisse and of causing Fraisse to give a lower price in
order to obtain the job.”

Cour d’appel, Paris, December 13, 1984, Rev. trim. dr. civ. 1986. 97
In 1980, the Société Sofracima decided to make a ﬁlm based on the
novels of Isaac Bebel, brought together under the title “King Benya.”
On June 11, 1981, Mlle Isabel Adjani signed a contract hiring her as

the female lead. This contract was ultimately rescinded by the com-
pany which paid her an indemnity. Sometime later, the company took
up the project again with a new director and some new male actors. It
sent Mlle Adjani a new proposal for a contract which indicated that
the filming would start between August 15 and September 30, 1984.
The provisions that concerned her compensation were left blank. In
response, she sent them another proposal which indicated the amount
of her remuneration but not when the filming was to start. In May
1984, the company returned this proposal, signed by its legal agent,
along with a check for 140,000 francs as a first payment which was to
be made on signing the contract. She did not cash the check but
returned it to the company. The company sued her for 18 million
francs in damages claiming breach of contract and a wrongful breaking
off of negotiations. The court held that no contract had been formed
because of the “absence of essential provisions”: “in the document
drafted by the Société Sofracima, articles 3 and 4, which would nor-
mally govern the compensation of Mlle Adjani, were left blank; in the
document drafted by Mme Israel (agent of the artist) the date of
filming was not indicated . . . .” The court also found that there had
been no wrongful breaking off of negotiations: “nothing permits one to
say that Mlle Adjani led the Société Sofracima to believe with certainly
that she would give her consent and sign the contract, and it is shown
by the correspondence sent her by the directoress of the company that
the directoress had written to her several times to obtain a definitive
response – which, shows the reticence of Mlle Adjani, her refusal to
commit herself, and the absence of all the things necessary for her to
agree to the proposal.”

German Law
Reichsgericht, January 19, 1934, RGZ 143, 219
“The plaintiff claimed 64711.40 Reichsmarks for the delivery of news-
print to the H.B. Corporation in H. (“the Corporation” for short) in April,
1931. On April 21, 1933, it sought security and payment from the defend-
ant, who was the sole shareholder and manager of the Corporation.
Thereafter, it delivered more newsprint to the Corporation for 47,878.45
Reichsmarks.
The plaintiff, who has sued the defendant because it is unable to get
satisfaction from the Corporation, claims [that] on April 21, 1931, the
defendant told its agent M. that he would provide adequate security for
the Corporation’s debt out of his own assets. This statement also concerned
the future delivery of newsprint to the Corporation . . . [But adequate
security was never provided.]
The appellate court judge found:
(a). the defendant’s declaration of April 21, 1931 to the plaintiff’s
agent M. that he would provide security was too indeﬁnite, and
therefore did not legally bind the defendant . . .

(b). It cannot be shown that in promising to provide security, the

defendant . . . acted with the intention of harming the plaintiff.
Accordingly the defendant is not liable in tort.
(c). Nevertheless, the defendant negligently harmed the plaintiff by
giving him an indication which outwardly considered meant that
he agreed to provide security, thereby causing him to make a
further delivery. For in April 1931, he had among his personal
assets nothing of value that the plaintiff could have considered
sufﬁcient security. The defendant was therefore liable to the
plaintiff . . . for fault in the conclusion of a contract for payment
for the second delivery, not, however, for the earlier one . . .
The statements made [by defendant] on appeal presuppose that liabil-
ity for fault in the conclusion of a contract can only arise when the
fault of the defendant prevented a contract from arising [whereas here,
the contract did not arise because of indeﬁniteness]. That view is not
correct. The appeal cites the Kommentar von Reichsgerichtsräten, 6th
ed. to BGB § 155 no. 2 where it is said: ‘A party is liable for culpa in
contrahendo for the negative interest [that is, for the harm the other
party suffered in reliance] when he was at fault that agreement was
not reached because of a concealed disagreement . . . .’ [But] it is never
said [in this commentary] that this is the only case in which liability
can arise for fault in the conclusion of a contract . . . The following
pertinent example is given in Staudinger-Werner 9th ed., vol. II(1) to
BGB § 276 no. I 2, par. 2: ‘During contractual negotiations, one person
negligently awakens in the other an objectively unfounded hope that a
transaction will be concluded and thereby causes him in a discernable
manner to incur expenses which would be of use had the transaction
been concluded but are useless otherwise.’ The explanation means that
in such cases the needs of commerce require that the negligent party
be held liable for the harm caused: here, for the useless expense. This
liability can be traced neither to contract nor tort since a contract did
not come to exist and liability in tort could arise only under § 826 of
the Civil Code whose requirements (intention) are not met here.”

Bundesgerichtshof, February 22, 1989, JZ 1991, 199

“The first defendant published two newspapers. It was a . . . partner-
ship in which the second and third defendants were partners.
In September 1985, negotiations began between the plaintiff and the
third defendant, acting on behalf of the first defendant over plaintiff’s partici-
pation [as an investor] in the first defendant. Afterward, after a number of
conversations had been held and the plaintiff had been allowed to study the
commercial position of the first defendant, plaintiff’s manager and the third
defendant agreed, on February 3, 1986, that negotiations would take place on
the transfer to the plaintiff of both newspapers instead of the participation of
the plaintiff in the first defendant. The plaintiff needed the agreement of the
administrative board of its Swiss parent corporation. To make this decision
possible, the first defendant prepared a ‘detailed offer.’

On February 7, 1986, the plaintiff allowed the defendant to send a

draft text of the offer to be given. On March 3, 1986, after further negoti-
ations the defendant offered the plaintiff in writing the acquisition of the
rights to both newspapers for 3 million DM, sending along with it alter-
ations in the draft text.
The plaintiff’s parent corporation agreed in principle to the acquisition
of the newspapers on April 7, 1986. This was communicated to the third
defendant on April 10, 1986. On the same day, the plaintiff’s legal repre-
sentative sent a written notification of the intended acquisition to the
Bundeskartellamt (Federal Cartell Office). On April 11, 1986, after further
negotiation between the plaintiff’s manager and the third defendant, the
plaintiff sent the first defendant the draft of a purchase agreement pre-
pared by its legal representative which was sent back with comments and
alterations to the plaintiff on April 15, 1986, by the legal representative
and accountant of the first defendant.
On April 17, 1986, the plaintiff’s legal representative produced a
second draft of the contract. On April 18, 1986, negotiations took place
between plaintiff’s manager and accountant, on the one hand, and the
defendant on the other, in which agreement was reached on the most
important points concerning the conclusion of the contract. The plaintiff’s
legal representative then prepared a third draft of the contract and sent an
altered and supplemented notification to the Bundeskartellamt.
On April 28, 1986, the plaintiff informed the defendant in writing that
it accepted its offer of March 3, 1986. Nevertheless, the same day the third
defendant notified the plaintiff by telephone that a transfer of the two
newspapers could no longer be considered.”
The plaintiff brought suit for 105 773.61 DM which it claimed were
the expenses it had incurred in the course of negotiations. Included were
the expense of its economic study, accounting and legal fees, secretarial
expenses, fees for the Bundeskartellamt, office renovations and travel
expenses.
“The appellate court said of the basis for this claim that there was
no contract between the plaintiff and the first defendant. The offer of
March 3, 1986 became ineffective because of later further offers of
contract and consequently could no longer be accepted by the plaintiff’s
statement of April 28, 1986. Moreover, it had been intended that the
contract be concluded in writing, and this never occurred (§ 154(2) of
the Civil Code).
Neither was a preliminary contract concluded. The plaintiff and the
first defendant did not wish to bind themselves before all the points of the
contract had been definitely settled and a final written contract had been
drafted and signed. Nevertheless, the appellate court found that the
defendants were liable for fault in the contractual negotiations having
awakened on expectation that a contract would be concluded and then
breaking off negotiations without a sufficient ground.” The
Bundesgerichtshof disagreed with this last point and overturned the
decision.

“In principle, each party must bear the costs incurred in the expect-
ation that a contract will be concluded. The risk that a contract will not
come to be later on and that the expenses will be useless falls on each party
to the negotiations himself.
Even when the parties find themselves in long and seriously conducted
contractual negotiations, either side can object to the conclusion of a con-
tract without for that reason being liable to make compensation for fault in
contractual negotiations (BGH WM 1962, 936, 937 = BB 1962, 816 no. 1335
and WM 1977, 618, 620; Staudinger/Löwisch, BGB 12th ed., 1979, to §§
275–83 no. 54). A duty to pay compensation only exists when a partner to
the negotiations is accountable for awakening in the other party the trust –
justifiable from his point of view – that a contract will certainly come to be,
and then breaks off contractual negotiations without a sufficient reason.
(BGH WM 1962, 936; id. 1967, 1010, 1011 = NJW 1967, 2199; id. WM,
1967, 798, 799; id. NJW 1975, 1774 = BB 1975, 1128; id. WM 1977, 618;
Staudinger/Löwisch op. cit.) . . .
The ‘offer’ of March 3, 1986, when objectively evaluated, was not
sufficient to arouse this kind of trust by the plaintiff. It may be sufficient
as a rule that an offer for a fixed period of time is made (§ 148 of the Civil
Code). But the written communication to the first defendant was not an
offer within the meaning of § 145 ff. of the Civil Code which would become a
contract upon mere acceptance by the plaintiff.
The purpose of the offer as agreed in the conversation of February 3,
1986, was only to make it possible for the administrative board of the
plaintiff’s parent corporation to make a decision about whether to agree to
the intended acquisition. Accordingly, the ‘detailed offer’ contained only
those written provisions for the conclusion of the transaction on which the
defendant was willing to agree. The ‘offer’ did not deal with all the
questions on which, according to the will of the parties, provision had to
be made. It was left open who was to be the contract partner of the
defendant, the plaintiff itself or a corporation that it was to organize.
(draft contract no. 1) Further, negotiations were to concern the question
of which publishing employees were to be taken on by the plaintiff. (Id. no.
5) Also the content of a new agreement on competition was not settled. (Id.
no. 6) The ‘offer’ contained no specification of in what way the third
defendant would work for the plaintiff and how the required payments
to customers of the newspaper would be taken care of.” The court con-
cluded that the plaintiff could not recover for expenses incurred before the
conversation of April 18, 1986. As to whether it could recover for those
incurred thereafter, the court said: “It cannot be decided as yet whether
the appellate court was correct to award the plaintiff compensation for
the expenses incurred for the expenses of notification of the
Bundeskartellamt [incurred after April 18].
The appellate court maintained that, according to the credible
testimony of witness G., in the conversation on April 18, 1986, agree-
ment was reached on all essential points and consequently, because of
defendant’s conduct, the plaintiff could rely on the conclusion of a
contract.

But this finding is not enough to justify a claim for compensation for
fault in contractual negotiations. It is not sufficient that the plaintiff could
have the impression, because all the essential points were agreed upon,
that a contract would ultimately be concluded. In addition, it must be
shown that the first defendant went beyond the mere fact of agreement
and presented the conclusion of a contract as certain. An express declar-
ation is not required. But the defendant must at least have made its firm
will to conclude a contract to appear clearly. That could be accepted, for
example, if the third defendant had encouraged the plaintiff to take meas-
ures that would only be of use if a contract should arise . . . .”
Note. In 2002, the Civil Code was amended in light of the case law.
Section 311(2) of the Code now provides that duties may arise from “1. enter-
ing into contractual negotiations; 2. preparation of a contract in which one
party, in light of the transactional relation (rechtsgeschäftliche Beziehung) to
the other party, has allowed his rights, legally protected benefits (Rechtsgüter)
or interests to be affected, or entrusted them to the other party; or 3. similar
transactional relations.” What duties arise is not clear.

Chinese Law

Han Shiyuan, The Law of Contract (Beijing, 2018), 184–5

“The legal consequence of fault in contracting is primarily a liability to
compensate for the loss . . . The consequences also include continued per-
formance of pre-contractual obligations, return of unjust enrichment, viti-
ation of the contract and among others such as reduction of the price, the
right to repudiate, and an injunction.”

Compensation of the Reliance Interest

In situations where a contract did not take effect or was void, the
aggrieved party is entitled to be put back to the state he was in before
contracting, which is, in principle, reliance damage. This is the universal view.

Chinese Civil Code

A RTI CLE 7
Parties engaging in civil transactions shall abide by the principle of
honesty and credibility (good faith), uphold honesty, and honor commitments.
ARTICLE 500
When in the course of concluding a contract, a party engaged in any of
the following conduct, and thereby caused loss to the other party, it shall be
liable for damages:
(1). negotiating in bad faith under the pretext of concluding a contract;
(2). intentionally concealing a material fact relating to the conclusion
of the contract or supplying false information;
(3). any other conduct which violates the principle of good faith. (pre-
viously Article 42 of Contract Law)

King & Zone Law Firm v. Xinjiang LLC & Zou Qide, 北京君众律师事务所
与邹其德、北京信江环境工程有限公司缔约过失责任纠纷(2017) 京03民终3588
号(2017) Jing 03 Min Zhong No. 3588
Zou Qide (Zou) was the legal representative and shareholder of
Xinjiang LLC (XJ). In that capacity, he reached out to the King & Zone
Law Firm (K&Z) to discuss the provision of legal service that might be
needed for the initial public offering (IPO) of shares of Liaoyuan Xinjian
LLX (LYXJ), a company for which he was also the legal representative, and
which was owned by the same family, if not by the same person, as XJ. Zou
and the lawyers discussed the possibility of legal representation over text
messages. Zou asked the K&Z lawyers to attend a LYXJ internal coordin-
ation meeting in Shanghai concerning the potential IPO. He stated in a
text message circulated to all relevant lawyers at K&Z that “[w]e will
discuss legal representation after the meeting.” K&Z flew two lawyers to
Shanghai for the meeting. The discussion regarding legal representations
never took place, and after the meeting the negotiations between Zou and
the law firm were terminated. K&Z sued Zou and XJ for the travel costs of
RMB 2552 yuan and fees for legal services of RMB 48,000 yuan.
The trial court and the appellate court (the Third Intermediate Court
of Beijing) dismissed the claim against XJ. The negotiations concerned
whether K&Z was to represent LYXJ. XJ was not engaged in the negoti-
ation. Neither had XJ received legal services from K&Z.
The trial court dismissed the claim against Zou. The appellate court
held that Zou had engaged in conduct that violated good faith according to
Article 42(3) because he did not provide a reason for terminating the
negotiations. The appellate court was not convinced that there was enough
evidence to show that any legal services were performed, and only allowed
K&Z to recover the travel costs.
Yang Fan v. Amazon, (2017) 京民终1120号 (2017) Jing Min Zhong
No.1120
On October 29, 2014, plaintiff Yang Fan placed an order on Amazon.cn
to purchase two “ECOVACS” Robot Cleaners at the unit price of RMB 94
yuan. The market price for such a product was RMB 947 yuan. Upon
placing the order, Yang received an email from Amazon acknowledging
that the order has been received and providing an estimate of the arrival
time. It also stated that the email only served as an acknowledgement of
the receipt of the order but did not constitute an acceptance. Amazon’s
Terms of Use provided that the contract between the two parties will only
be formed upon Amazon’s confirmation of such an order.
On November 3, in an email to Yang, Amazon stated that they could
not fulfill the order because the product was out of stock. Amazon issued
the refund soon afterward.
Yang sued for RMB 1710 yuan, the difference between the market
price and the sale price and attorney’s fees.
Amazon argued that the price was mistakenly marked at RMB 94. It
denied that there was a contract between the two because of the terms in the
Terms of Use. According to the Terms, placing an order is only deemed as an

offer and only the acknowledgement email serves as an acceptance. Amazon

argued that only reliance damage, which did not exist, can be permitted:
absent a contract, expectation damage is not allowed. As an experienced
online shopper, Yang should have anticipated that it was a mechanical error
when the marked price was only one-tenth of the market price.
Yang argued that a) in the event that there was a contract, Amazon
was obligated to perform, or b) Amazon should be liable for culpa in contra-
hendo. In support of his argument, Yang alleged that such a mechanical
error has occurred from time to time since 2013 and was created intention-
ally as part of the sales promotion activities. Moreover, the reliance dam-
age shall include the opportunity lost by the consumer to purchase similar
products at the same price.
The trial court found Amazon liable for its fault in contracting under
Article 42 of Contract Law and held that it is bound to compensate Yang for
the price difference between the sale price and the market price.
The appellate court afﬁrmed the trial court decision. It held that “[t]he
contract was not effectively concluded according to Terms of Use. When a
contract fails to be concluded, it is void or voidable, and the party at fault
shall be held liable. There is a severe information asymmetry between the
online platform [Amazon] and the consumer regarding the availability of
products in stock. When products are out of stock, the platform operator has
the duty to reach out to consumers in time and prevent them from making
payment. Availability of special sale discounts is common marketing strategy
in online shopping industry. As a consumer, Yang would not be able to tell
whether the extremely low pricing was mechanical error or a real promotion
deal. It will be detrimental to the regulation of reneging and false promotion
if the online platform goes unpunished or is only liable for the loss of interest
of the payment when a transaction falls through. Yang made the purchase
based on reasonable reliance [on the information] provided by Amazon while
Amazon failed to fulﬁll its duty to manage the website properly. The unilat-
eral cancellation of the order resulted in the loss. It was not improper for the
trial court to award the price difference as the compensatory damage.”
Note. Consider whether there is a contract between the parties and
whether expectation damage is the proper remedy.
In another case, on similar facts, the court reached the same result but
held that Amazon’s Terms of Use were not binding. Chen Wei v. Amazon,
（2014）三中民终字第09383号. We will return to that case when we con-
sider the validity of unfair terms.
The Draft Common Frame of Reference
ARTICLE II. 3:301: NEGOTIATIONS CONTRARY TO GOOD FAITH AND FAIR DEALING

(1). A person is free to negotiate and is not liable for failure to reach an
agreement.
(2). A person who is engaged in negotiations has a duty to negotiate in
accordance with good faith and fair dealing and not to break off
negotiations contrary to good faith and fair dealing. This duty
may not be excluded or limited by contract.

(3). A person who is in breach of the duty is liable for any loss caused to
the other party by the breach.
(4). It is contrary to good faith and fair dealing, in particular, for a
person to enter into or continue negotiations with no real inten-
tion of reaching an agreement with the other party.

The Unidroit Principles of International Commercial Contracts

ARTICLE 2.15 NEGOTIATIONS IN BAD FAITH
(1). A party is free to negotiate and is not liable for failure to reach an
agreement.
(2). However, a party who negotiates or breaks off negotiations in bad
faith is liable for the losses caused to the other party.
(3). It is bad faith, in particular, for a party to enter into or continue
negotiations when intending not to reach an agreement with the
other party.

ARTICLE 2.16 DUTY OF CONFIDENTIALITY

Where information is given as conﬁdential by one party in the course of
negotiations, the other party is under a duty not to disclose that informa-
tion or to use it improperly for its own purposes, whether or not a contract is
subsequently concluded. Where appropriate, the remedy for breach of this
duty may include compensation based on the beneﬁt received by the other
party.

3. Mistake
In modern legal systems, the problem of when a contract is void for
mistake is often thought to involve a basic question of contract law. A
contract is formed by the consent of the parties. Can the parties truly
consent even if one or both of them is mistaken, and if so, when? The
question of the effect of mistake on consent was raised by the Roman
jurists. Nevertheless, they were not trying to discover general principles
underlying contract law. They were concerned with particular problems.
The most important passage discussing the problem – written by Ulpian –
was buried in a title of the Digest that dealt with the law of sales. It uses
some high powered philosophical terms in what seems to be a hopelessly
vague way, and resolves a number of hypothetical cases:

In contracts of sale there must be consent; the sale is invalid if there is

disagreement either as to the fact of sale (in ipsa emptione) or the price
or any other matter. If therefore I thought I was buying the Cornelian
estate and you that you were selling the Sempronian, the sale is void
on the ground that we were not at one as to the thing sold (in corpore).
. . .. Then next comes the question whether there is a good sale if there
is no mistake as to the identity of the thing (in corpore), but there is in
regard to its substance (in substantia), for example where vinegar is
sold for wine, or copper for gold, or lead or something else resembling
silver for silver. Marcellus . . . writes that there is a good contract,

because there has been agreement as to the speciﬁc thing, though

mistake as to the material (in materia). I take the same view in the
wine case, because the ousia [a Greek word meaning essence] is pretty
much the same, if the wine has just gone sour; but if it is not wine gone
sour, but was in origin a specially prepared vinegar, then it appears
that one thing has been sold for another. In the remaining cases,
however, I hold that whenever there is a mistake as to material,
there is no sale. Dig. 18.1.9.

Accursius, the thirteenth-century jurist who wrote the standard commen-

tary or Ordinary Gloss on the Digest, simply enumerated the types of
mistakes that Ulpian mentioned: errors in (1) whether there was a sale,
(2) price, (3) corpore, (4) substantia or ousia; and (5) materia.1 In early
modern times, the late scholastics and northern natural lawyers tried to
develop a theory and systematic doctrine of contract law. As noted earlier,
following Aristotle, the late scholastics thought that through contract a
party voluntarily entered into either of two basic kinds of arrangements: a
gratuitous contract in which he enriched the other party at his own
expense, or an onerous contract in which he exchanged his own perform-
ance for one of equivalent value. Since either of them had to be voluntary,
they asked when a decision truly was voluntary. Aristotle had said in the
Nicomachean Ethics that an action would be involuntary if a person was
mistaken as to what he was doing.2 That conclusion ﬁt in with his view that
a human being was an animal who acts by understanding. If he acts
without understanding what he is doing, the action cannot be one he has
chosen. For Aristotle, moreover, a thing is what it is because it has a certain
“substance,” “substantial form,” or “essence.” A human being has one
essence, a lion has another. When it loses its substantial form or essence
it is no longer what it was before – as when a tree is burned to ashes – but it
can change its “accidental form” or “accidents” while remaining the same
thing – as when a tree grows taller. The late scholastics concluded that
there was one sort of mistake that made a contract involuntary: a mistake
as to the substance or substantial form or essence of what one was doing.
By and large, the natural lawyers agreed. It became a commonplace that
error in substance voids a contract.
It was easier for the late scholastics and the natural lawyers to read
this conclusion into Roman law because mistake in substance (substantia)
and essence (ousia) were mentioned in the Roman text quoted earlier.
Indeed, medieval jurists who admired Aristotle such as Bartolus of
Saxoferrato and Baldus de Ubaldis had already read an Aristotelian mean-
ing into the Roman text quoted earlier. For Bartolus, error in substantia
meant error in substance as Aristotle had understood it. Baldus regarded
this as the basic type of error.

1. Accursius, Glossa ordinaria (1581), the slave was male but not if he knew she
to Dig. 18.1.9 to aliquo alio. Actually, he was female but mistakenly thought she was
had a sixth category as well: error in “sex.” a virgin.
That category was based on D. 18.1.11.1, 2. Nicomachean Ethics III.i 1110a–
which said that the buyer of a slave could 1111b.
void the sale if he mistakenly thought that

Of course, it was one thing to say that a contract was void for an error
in substance and another to explain what this phrase might mean. The
problem was not so hard in the case of “artifacts”: man-made things. In
Aristotelian philosophy, the essence of a thing was captured by its deﬁn-
ition, and an artifact was deﬁned in terms of the purpose for which it was
made. But what about natural things? In the following passage, Bartolus
seems to suggest that what matters is not necessarily what a biologist or a
geologist would take to be their essence:

One and the same thing is taken in different ways according to a

difference in the way it is considered, as will now be seen. A field
may be considered with regard to its matter, which is earth, and
then if a river makes a channel through it, it does not cease to be
earth, and so the earth remains something of the same kind. It can
also be considered as earth suitable for the driving (agi) of animals,
that is, earth on which animals are led and can labor, and it is from this
use that “field” (ager) receives the name which is proper to it . . . Taken
in this way, it loses its proper form [if the river makes channels
through it] . . . It is much the same with the wine. If it is made vinegar,
it is still of the same substance insofar as its matter is considered.
Properly considered, however, it is not wine but another kind of thing,
and it does not come under the name “wine.”3
Centuries later, Pufendorf was to express a similar idea: what
mattered was the “substance” of a thing as it would be considered from
the standpoint of the parties.
Explaining the Roman cases proved considerably harder. For example,
why should it matter whether the vinegar bought for wine was wine that
had accidentally soured or wine that was deliberately soured in order to
make vinegar? But Ulpian said the sale was valid in the first case but not
the second.
In any event phrases such as error in substance or essence outlasted
the popularity of Aristotelian philosophy. They found their way into the
French and German Civil Codes.

a. The Search for a Rule

French Civil Code
A RTI CLE 1130
Mistake, fraud and duress vitiate consent where they are of such a
nature that, without them, one of the parties would not have contracted or
would have contracted on substantially different terms. Their decisive
character is assessed in the light of the person and of the circumstances
in which consent was given.

3. Bartolus, Tractatus de alveo, in (ﬁeld) from ago (drive) is given by Varro, De

Omnia quae extant opera (1615), § Stricta lingua latina 34 (Cambridge edn., 1977), 32.
ratione, nos. 6–7. The derivation of ager

A R T I C L E 1131
Defects in consent are a ground of relative nullity of the contract.
A R T I C L E 1132
Mistake of law or of fact, as long as it is not inexcusable, is a ground of
nullity of the contract where it bears on the essential qualities (qualités
essentielles) of the act of performance owed or of the other contracting party.
A R T I C L E 1133
The essential qualities of the act of performance are those which have
been expressly or impliedly agreed and which the parties took into consid-
eration on contracting. Mistake is a ground of nullity whether it bears on
the act of performance of one party or of the other.
Acceptance of a risk about a quality of the act of performance rules out
mistake in relation to this quality.
A R T I C L E 1134
Mistake about the essential qualities of the other contracting party is a
ground of nullity only as regards contracts entered into on the basis of
considerations personal to the party.
A R T I C L E 1135
Mistake about mere motive, extraneous to the essential qualities of
the act of performance owed or of the other contracting party is not a
ground of nullity unless the parties have expressly made it a decisive
element of their consent. However, mistake about the motive for an act of
generosity is a ground of nullity where, but for the mistake, the donor
would not have made it.
Note. These articles were added to the Code by Ordonnance no.
2016–131 of February 10, 2016. Previously, the Code provided that
“mistake is only a cause of the invalidity of an agreement when it
concerns the substance (substance) of the thing which is its object” (art.
1110).

German Civil Code

§ 119 VOIDABILITY DUE TO ERROR
(1). One who was in error as to the content of his declaration of will or
did not wish to make a declaration of will with this content can
void the declaration when it is established that he would not have
made it with knowledge of the state of affairs and intelligent
appreciation of the case.
(2). A mistake over any characteristics of the person or thing that are
regarded as essential in ordinary dealings counts as an error in
the content of the declaration.
Similar expressions found their way into Anglo-American treatises
and cases. See Sherwood v. Walker, below (“A barren cow is substan-
tially a different creature than a breeding one”). Few if any French,
German, or American jurists have a clear idea of what an error in

“substance” or in an “essential” characteristic really means. In the

United States, the Restatement (Second) of Contracts tried to add
clarity by speaking not of a mistake in “substance” but of one in
“basic assumption.”

Restatement (Second) of Contracts

§ 152 WHEN MISTAKE OF BOTH PARTIES MAKES A CONTRACT VOIDABLE
(1). Where a mistake of both parties at the time the contract was made
as to a basic assumption on which the contract was made has a
material effect on the agreed exchange of performances, the con-
tract is voidable by the adversely affected party [unless that party
bears the risk, as described in a later section.]
Note. Whether the expression “basic assumption” adds clarity may be
judged by the ofﬁcial comments to this section:
b. Basic assumption. A mistake of both parties does not make the contract
voidable unless it is a basic assumption on which both parties made the
contract . . . [M]arket conditions and the ﬁnancial situation of the parties
are ordinarily not such assumptions . . . The parties may have had such a
“basic assumption,” even if they were not conscious of alternatives . . .
Where, for example, a party purchases an annuity on the life of another
person, it can be said that it was a basic assumption that the other person
was alive at the time, even though the parties never consciously addressed
themselves to the possibility that he was dead.
Thus we arrive at the curious rule that an assumption must be basic,
although it need not be basic even if it is of great importance to the parties,
and that the parties must have made an assumption, even if they never did
so consciously.
Chinese Civil Code
A R T I C L E 147
A civil juristic act that was based on gross misconception is subject to
rescission by people’s court or arbitration institutions at the request of the
actor.

Supreme Court of the People’s Republic of China, Opinions on

General Principles of Civil Law (1988)
A RTI CLE 71
Gross misconception can be found when an actor acted on the mis-
match between his will and the declaration of his will and caused severe
loss. Such a mismatch is due to actor’s misconception about the nature of
his conduct, the identity of the other party, kind, quality, speciﬁcation and
quantity of the object.
Note. The General Principles of Civil Law (GPCL) was enacted in 1986
as an all-embracive mini-Civil Code. It only contains 156 articles, which

cover all areas of civil law. Beyond doubt, there are doctrinal vacuums that
needed to be addressed by more detailed rules. In 1988, the Supreme Court
issued its opinions on the application of GPCL to ﬁll the gaps in the GPCL.
The section just quoted is a prime example of the work of the Opinions: it
provides a doctrinal deﬁnition on what is a mistake that can be remedied
by law.

Han Shiyuan, The Law of Contract (Beijing, 2018), 263

“Since it was ﬁrst adopted, gross misconception, as a concept, was
never limited to the narrow scenario of mistake or misunderstanding.
The concept encompasses mistake as to a party’s identity, a misunder-
standing of the nature of the civil juristic act and a mistake about the
object.”

The Draft Common Frame of Reference

A RTI CLE II. 7:201: MISTAKE
(1). A party may avoid a contract for mistake of fact or law existing
when the contract was concluded if:
(a). the party, but for the mistake, would not have concluded the
contract or would have done so only on fundamentally differ-
ent terms and the other party knew or could reasonably be
expected to have known this; and
(b). the other party
(i). caused the mistake;
(ii). caused the contract to be concluded in mistake by leav-
ing the mistaken party in error, contrary to good faith
and fair dealing, when the other party knew or could
reasonably be expected to have known of the mistake;
(iii). caused the contract to be concluded in mistake by failing to
comply with a pre-contractual information duty or a duty
to make available a means of correcting input errors; or
(iv). made the same mistake.
(2). However a party may not avoid the contract for mistake if:
(a). the mistake was inexcusable in the circumstances; or
(b). the risk of the mistake was assumed, or in the circumstances
should be borne, by that party.

The Unidroit Principles of International Commercial Contracts

ARTICLE 3.4 DEFINITION OF MISTAKE
Mistake is an erroneous assumption relating to facts or to law existing
when the contract was concluded.
ARTICLE 3.5 RELEVANT MISTAKE
(1). A party may only avoid the contract for mistake if, when the
contract was concluded, the mistake was of such importance

that a reasonable person in the same situation as the party in

error would only have concluded the contract on materially differ-
ent terms or would not have concluded it at all if the true state of
affairs had been known, and
(a). the other party made the same mistake, or caused the mis-
take, or knew or ought to have known of the mistake and it
was contrary to reasonable commercial standards of fair
dealing to leave the mistaken party in error; or
(b). the other party had not at the time of avoidance acted in
reliance on the contract.
(2). However, a party may not avoid the contract if
(a). it was grossly negligent in committing the mistake; or
(b). the mistake relates to a matter in regard to which the risk of
mistake was assumed or, having regard to the circum-
stances, should be borne by the mistaken party.

b. When Relief Is Granted

i. Mistakes in Authenticity
Leaf v. International Galleries, [1950] 2 K.B. 86
“In 1944 the defendants sold to the plaintiff for £ 85 a picture
which they represented to have been painted by J. Constable. In 1949
the plaintiff tried to sell it at Christies and was then informed that it
had not been painted by Constable.” It was found at trial that the
painting was not by Constable, but that the defendant had believed
that it was.
Denning, L.J. “There was a mistake about the quality of the subject-
matter because both parties believed the picture to be a Constable; and
that mistake was in one sense essential or fundamental. But such a mis-
take does not avoid the contract: there was no mistake at all about the
subject-matter of the sale. It was a speciﬁc picture, ‘Salisbury Cathedral.’
The parties were agreed in the same terms on the same subject-matter, and
that is sufﬁcient to make a contract [citation omitted].
There was a term in the contract as to the quality of the subject-
matter: namely as to the person by whom the picture was painted – that
it was by Constable . . . I think it is right to assume in the buyer’s favour
that this term was a condition, and that, if he had come in proper time he
could have rejected the picture; but the right to reject for breach of condi-
tion has always been limited by the rule that, once the buyer has accepted
the goods in performance of the contract, then he cannot thereafter reject
but is relegated to his claim for damages [citations omitted].
The circumstances in which a buyer is deemed to have accepted goods
in performance of the contract are set out in s. 35 of the [Sale of Goods Act,
1893], which says that the buyer is deemed to have accepted the goods,
amongst other things, ‘when, after the lapse of a reasonable time, he
retains the goods without intimating to the seller that he has rejected
them.’ In this case, the buyer took the picture into his house and,

apparently, hung it there, and five years passed before he intimated any
rejection at all . . . His remedy . . . is for damages only, a claim which he has
not brought before the court. Is it to be said that the buyer is in any better
position by relying on the representation, not as a condition, but as an
innocent misrepresentation. I agree that on a contract for the sale of goods
an innocent material misrepresentation may, in a proper case, be a ground
for rescission even after the contract has been executed [citing, inter alia,
Bell v. Lever Bros. Ltd.] . . .
Although rescission may in some cases be a proper remedy, it is to be
remembered that an innocent misrepresentation is much less potent
than a breach of condition; and a claim to rescission for innocent misrepre-
sentation must at any rate be barred when a right to reject for breach of
condition is barred.”
Smith v. Zimbalist, 38 P.2d 170 (Cal. App. 1934)
Zimbalist, an internationally known violinist, agreed to pay $8,000 for
two violins from Smith, a collector, calling one a “Stradivarius” and the
other a “Guanerius.” It turned out that the violins were not made by
Antonius Stradivarius or Josef Guanerius but were cheap imitations
worth not more than $300. Zimbalist sued successfully to avoid the con-
tract on the grounds of both mutual mistake and breach of express
warranty.
Firestone & Parson, Inc. v. Union League of Philadelphia, 672 F.
Supp. 819 (E.D. Pa. 1987)
In 1981, the Union League Club sold Firestone and Parson an oil
painting for $500,000 which was generally believed in art circles to be
by Albert Bierstadt, an American landscape painter. In 1985, some art
historians began to doubt its authenticity. In 1986, an article pub-
lished in Antiques magazine ascribed it to another artist, John Ross
Key. That view became generally accepted among experts. If it had
been painted by Key, it was worth only about $50,000. In 1988, the
Firestone & Parsons company brought suit to rescind the contract. The
court held that it could not. “[I]n the arcane world of high-priced art,
market value is affected by market perceptions; the market value of a
painting is determined by the prevailing views of the marketplace
concerning its attribution. Post-sale fluctuations in generally accepted
attributions do not necessarily establish that there was a mutual
mistake of fact at the time of the sale.”
Cour de cassation, 1e ch. civ., February 23, 1970, J.C.P. 1970.J.16347
Chalom bought two chairs described as “marquises” of the Louis XV
period at a public auction from the couple Lièvre-Aubin de la Messuzière.
After they were dismantled and scraped, they proved to be chairs of
another type – “bergères” – which had been “adroitly reconstructed with
pieces from the period of Louis XV and of the period following.” The Cour de
cassation held that the lower court was correct to annul the sale for
mistake, noting that “the sale can be declared invalid although the object
has preserved its individuality and its specific qualities.”

Cour de cassation, 1e ch. civ., March 24, 1987, J.C.P. 1989.J.21300

In 1933, before his death, Sean-André Vincent sold a painting at a
public auction entitled Le Verrou as being “attributed to Fragonard.” After
it had been recognized that the painting truly was by Fragonard, the heirs
of Vincent sued to have the sale annulled on the ground that Vincent had
been in error as to its authenticity. The Cour de cassation refused to annul
the sale. It said that the court below had found “that in 1933, in buying or in
selling a work attributed to Fragonard the contracting parties had
accepted the risk as to the authenticity of the work.”
Cour d’appel, Paris, September 23, 1988, Rev. trim. dr. civ. 1989.741
The buyer of a used car discovered that it was first sold in 1955 although
the sales catalog described it as a “Rolls Royce, 26 CV, 1954 Silver Wraith
model.” The court refused to annul the sale for error. It said that “supposing
that one has been established, an error as to the year of fabrication would not
justify annulling the contract unless the buyer proved that it concerned a
substantial characteristic of the object.” “[S]ince the matter concerns a
vehicle which is a collectors’ item, its age, attested by the year it was
made, certainly does constitute a determining criterion for the sale, [but],
nevertheless, the authenticity of a collectors’ item is subject to nuances [and]
the exactness of a date close to the date of fabrication of an old car would not
constitute a sine qua non condition of its acquisition in the opinion of
collectors as long as no change had been made that really differentiated
the vehicles of one year from those of the next, as is the case here . . . .”
Reichsgericht, February 22, 1929, RGZ 124, 115
“In the spring of 1925, Frau F. had her husband deliver two Chinese
vases to store W. to be sold on commission. This firm with the owner’s
agreement placed the vases on sale in its department for modern Chinese
and Japanese goods. On August 1, 1925, the defendant bought them there
for the price requested which was 390 Reichsmarks. He immediately sold
them in Holland at a large profit (the plaintiff claims for 1,500 Dutch
guilders). At an auction organized by the Dutch purchaser, they were
sold to the Kensington Museum in London in return for 200,000
Reichsmarks. The lawyer Dr. T. served written notice on November 19,
1925, on behalf of the interested parties – the former owner and the
commission broker – that the contract was void on account of error since
these parties were of the opinion at the time the contract was concluded
that the pieces were from the beginning of the 19th century when, in fact,
the vases were from the time of the Ming dynasty (1380–1644) in which the
Chinese empire saw its greatest flowering of art. In his notice he also
declared that the defendant was obligated to redeliver the vases or, if
that were impossible, to make compensation for their value or at least to
pay the net proceeds just described to the interested parties . . . .
The rarity which is due to the age of a thing is to be considered a
characteristic of the thing. There is no doubt that both vases had a value on
account of their rarity in this sense. Firm W. was in error concerning this
value . . .

The decision under appeal is reversed and the matter is remanded to

the lower court. In the future proceedings, the following point is to be given
attention. As the appellate court correctly observed, . . . Frau F. cannot
make a claim on the basis of an error of the commission broker if she
herself was not in error. A ﬁnding must be made on whether at the time
the contract was concluded, she or her husband, who carried on the trans-
action with Firm W., took into account the possibility that the object
originated centuries ago and had a particular value because of its rarity,
and whether, had they been aware of this possibility, the contract for sale
by commission at the price in question would not have been concluded.”
Reichsgericht, March 11, 1932, RGZ 135, 339
“On 18 January 1928, the plaintiff bought an oil painting from the
defendant, ‘Ice on Water,’ which was indicated to him as an original
painting of Jacob I. (Isaakson) van Ruysdael and accompanied by an
opinion by the late museum director B. attesting, as the parties under-
stood, that the work originated with this painter. The picture was immedi-
ately delivered and the purchase price of 15,000 Reichsmarks was paid.
The plaintiff claims that the work was done not by ‘the famous master’
Jacob I. van Ruysdael but by his ‘much less famous cousin and imitator’
Jacob S. (Solomonsson) van Ruysdael. Accordingly, on October 18, 1929, he
claimed that the contract of sale was void for mistake and demanded the
return of the purchase price with interest. Both lower courts rejected his
claim. The plaintiff’s appeal (Revision) is to be rejected on the following
grounds . . . Naturally, one cannot speak of a defect in the painting and
warranty, nor of an error and voidability in a speculative acquisition where
the seller does not give any guarantee (and it is not found that he did here)
but perhaps expressly refused to do so, and the buyer himself takes into
account that the picture can be by someone other than the designated
master, for example, a pupil, and buys it only in hopes that the opinion of
the parties will prove to be correct. In such a case it is even true that the
characteristic of the thing – its production by a certain master – is contrac-
tually presumed, be it known in commerce with a greater or lesser degree of
certainty.”
Lu v. Hu, (2011)白民初字第2694号 [(2011) Bai Min Chu Zi No. 2694]
The seller, Lu Xianfang, sued for the 1.2 million yuan that remained of
a sale price of 1.3 million yuan. The buyer, Hu Demin, purchased four
Buddhist sculptures, one jade Guanyin for 700,000 yuan and a set of three
statues of the Western Trinity [Shakyamuni Buddha, Amitabha Buddha
and Bhaisajya Guru Buddha] for 200,000 yuan apiece. The buyer refused
to pay and asked to have the contract rescinded on the ground of gross
misconception. The buyer argued that he was told by a collector friend who
was present at the sale that all the four pieces are antiques from Tang
Dynasty and Ming Dynasty. The after-sale appraisal revealed that all four
pieces were modern replicas. In addition, the material of the “jade”
Guanyin was actually marble.
The seller argued that he “never made the promise that those four
pieces were antiques.” Further, he “did not make the representation that

the jade Guanyin was made of jade. In the business of trading in collect-
ables, the custom is that items for sale are to be inspected at the time of
sale. Artwork is generally sold ‘as is.’ Once sold, items cannot be returned.
The buyer should have known better given his twenty-year experience
dealing in collectables.”
The court held that a “mistake about time of creation of artworks and
antiques is generally not a mistake that can be remedied by law.” The court
reasoned that “[i]t is the custom in the trade of artworks, antiques and
jewelries that sellers do not make declarations about qualities such as the
nature of material and the age of the items in the contract. It is for
the buyer to inspect them and to make his own judgment. Nevertheless,
the contract regarding jade Guanyin ought to be rescinded given the fact
that it was described in the contract as ‘jade Guanyin.’ During the trial, the
plaintiff declared that the statue was made of jade. It can be inferred that a
representation that the statue was made of jade must have been made by
the plaintiff during the transaction. Such a representation directly affected
[the fulfillment of] the purpose of the contract and [caused] a severe loss.
Consequently, such, gross misconception avoids the contract.”
The court allowed the partial contract with regard to the sale of
Guanyin to be rescinded but the part of the agreement concerning the
three-piece set of the Western Trinity stands.
ii. Mistakes in Suitability for a Purpose
Griffith v. Brymer, (1903) 19 T.L.R. 434 (K.B.)
At 11:00 A.M., June 24, 1902, plaintiff agreed to rent a flat from
defendant for one day to view the coronation procession of King Edward
VII, and paid £100. The parties were unaware that an hour earlier a
decision had been made to operate on the king, which made the procession
impossible. Held: the contract was void, and plaintiff is entitled to rescis-
sion: “The agreement was made on the supposition by both parties that
nothing had happened which made performance impossible. This was a
missupposition of the state of facts which went to the whole root of the
matter.”
Amalgamated Investment & Property Co. Ltd. v. John Walker & Sons,
Ltd., [1977] 1 W.L.R. 164 (C.A.)
“In July 1973, the plaintiff purchasers agreed to purchase the free-
hold of a warehouse from the defendant vendors for £1,700,000 subject to
contract. The warehouse had been advertised as being suitable for redevel-
opment and during the negotiations, the purchasers inquired whether the
property had been designated as a building of ‘special architectural or
historic interest’ and the vendors replied in the negative. On September
25, the parties signed the contract . . . The following day, September 26, the
Department of Environment wrote to the vendors informing them that the
property had been selected for inclusion in the statutory list of buildings of
‘special architectural or historic interest’ and, on September 27, the list
was signed on behalf of the Secretary of State.” Held: the contract is not
void for mistake.

Buckley, L.J. “For the application of the doctrine of mutual mistake as

a ground for setting the contract aside, it is of course necessary to show that
the mistake existed at the date of the contract; and so Mr. Balcombe
[attorney for the buyers] relies in that respect not upon the signing of the
list by the ofﬁcer who alone was authorized to sign it on behalf of the
Secretary of State, but upon the decision of Miss Price that the list should
contain the particular property with which we are concerned. That deci-
sion, although in fact it led to the signature of the list in the form in which it
was eventually signed, was merely an administrative step in the carrying
out of the operations of the branch of the ministry. It was a personal
decision on the part of Miss Price that the list should contain the particular
property with which we are concerned. But there was still the possibility
that something else might arise before the list was signed . . . The crucial
date, in my judgment, is the date when the list was signed.”
Sherwood v. Walker, 33 N.W. 919 (Mich. 1887)
“The main controversy depends upon the construction of a contract for
the sale of a cow.
The defendants . . . introduced evidence tending to show that at the
time of the alleged sale it was believed by both the plaintiff and themselves
that the cow was barren and would not breed; that she cost $850, and if not
barren would be worth from $750 to $1,000; that after the date of the letter,
and the order to Graham, the defendants were informed by said Graham
that in his judgment the cow was with calf, and therefore they instructed
him not to deliver her to plaintiff . . .
It appears from the record that both parties supposed this cow was
barren and would not breed, and she was sold by the pound for an insigniﬁ-
cant sum [$80] as compared with her real value if a breeder . . .
If there is a difference or misapprehension as to the substance of the
thing bargained for; if the thing actually delivered or received is different
in substance from the thing bargained for, and intended to be sold, then
there is no contract; but if it be only a difference in some quality or accident,
even though the mistake may have been the actuating motive to the
purchaser or seller, or both of them, yet the contract remains binding . . .
It seems to me . . . in the case made by this record, that the mistake or
misapprehension of the parties went to the whole substance of the agree-
ment. If the cow was a breeder, she was worth at least $750; if barren, she
was worth not over $80. The parties would not have made the contract of
sale except upon the understanding and belief that she was incapable of
breeding, and of no use as a cow. It is true she is now the identical animal
that they thought her to be when the contract was made; there is no
mistake as to the identity of the creature. Yet the mistake was not of the
mere quality of the animal, but went to the very nature of the thing. A
barren cow is substantially a different creature than a breeding one. There
is as much difference between them for all purposes of use as there is
between an ox and a cow that is capable of breeding and giving milk. If
the mutual mistake had simply related to the fact whether she was with
calf or not for one season, then it might have been a good sale, but the

mistake affected the substance of the whole consideration, and it must be

considered that there was no contract to sell or sale of the cow as she
actually was. The thing sold and bought had in fact no existence. She was
sold as a beef creature would be sold; she is in fact a breeding cow, and a
valuable one.”
Sherwood, J. dissenting: “I do not concur in the opinion given by my
brethren in this case . . .
[T]he buyer purchased her believing her to be of the breed represented
by the sellers, and possessing all the qualities stated, and even more. He
believed she would breed. There is no pretense that the plaintiff bought the
cow for beef, and there is nothing in the record indicating that he would have
bought her at all only that he thought she might be made to breed. Under
the foregoing facts, – and these are all that are contained in the record
material to the contract, – it is held that because it turned out that the
plaintiff was more correct in his judgment as to one quality of the cow than
the defendants, and a quality, too, which could not by any possibility be
positively known at the time by either party to exist, the contract may be
annulled by the defendants at their pleasure. I know of no law, and have not
been referred to any, which will justify any such holding, and I think the
circuit judge was right in his construction of the contract between parties.”
Lenawee County Board of Health v. Messerly, 331 N.W.2d 203
(Mich. 1982)
Carl and Nancy Pickles bought a 600 square foot tract of land from
William and Martha Messerly on which was a three unit apartment build-
ing. Shortly after, the Lenawee County Board of Health condemned the
property and obtained a permanent injunction prohibiting human habita-
tion on the grounds that the sewage system violated the sanitation code.
The sanitation system had been installed by Messerly’s predecessor in
title, and they were unaware of its condition. The Pickles agreed to pay
$25,500 for the land. Because of its condition, the land had no value at all.
The contract contained a clause which said, “Purchaser has examined the
property and agrees to accept it in its present condition.”
“We ﬁnd that the inexact and confusing distinction between mistakes
running to value and those touching the substance of the consideration
serves only as an impediment to a clear and helpful analysis for the
equitable resolution of cases in which mistake is alleged and proven.
Accordingly, the holdings of A & M Land Development Co. and Sherwood
with respect to the material or collateral nature of a mistake are limited to
the facts of those cases.
Instead, we think the better-reasoned approach is a case-by-case anal-
ysis whereby rescission is indicated when the mistaken belief relates to a
basic assumption of the parties upon which the contract is made, and which
materially affects the agreed performances of the parties [citations
omitted].
All of the parties to this contract erroneously assumed that the prop-
erty transferred by the vendors to the vendees was suitable for human
habitation and could be utilized to generate rental income. The

fundamental nature of these assumptions is indicated by the fact that their

invalidity changed the character of the property transferred, thereby frus-
trating, indeed, precluding, Mr. and Mrs. Pickles’s intended use of the real
estate . . .
Despite the signiﬁcance of the mistake made by the parties, we reverse
the Court of Appeals because we conclude that equity does not justify the
remedy sought by Mr. and Mrs. Pickles . . .
Equity suggests that, in this case, the risk should be allocated to the
purchasers . . .. While there is no express assumption in the contract by
either party of the risk of the property becoming uninhabitable, there was
indeed some agreed allocation of the risk to the vendees by the incorpor-
ation of an ‘as is’ clause into the contract . . . .”
Cour d’appel, Versailles, March 30, 1989, Rev. trim. dr. civ. 1989. 739
The couple D. contracted to buy real estate belonging to the couple B.
for a price of 645,000 francs. They claimed that they later learned that a
highway was to be built ﬁfty meters away. The court granted their request
that the sale be avoided for error “considering the discovery by the buyers,
after their commitment, of the construction project already mentioned and
the potential for noise and which manifestly changed the possibility of
normal enjoyment of a habitation given that the sale included a wooded
park.”

iii. Mistakes in Value

Kennedy v. The Panama, New Zealand, and Australian Royal Mail
Co., [1867] 2 Q.B. 580
Plaintiff was induced to buy shares of stock from defendant in
defendant company by a statement in its prospectus that it had a
contract with the government of New Zealand to carry mail. While
the company believed it had such contract, in fact it did not, since
the agent that had signed on behalf of the government had no author-
ity to do so, and the government refused to ratify the contract,
although it eventually agreed to a contract on somewhat different
terms. Plaintiff sued for rescission.
Blackburn, J. “[W]here there has been an innocent misrepresentation
or misapprehension, it does not authorize a rescission unless it is such as to
shew that there is a complete difference in substance between what was
supposed to be and what was taken, so as to constitute a failure of consid-
eration. For example, where a horse is bought under a belief that it is
sound, if the purchaser was induced to buy by a fraudulent misrepresenta-
tion as the horse’s soundness, the contract may be rescinded. If it was
induced by an honest misrepresentation as to its soundness, though it
may be clear that both vendor and purchaser thought that they were
dealing about a sound horse and were in error, yet the purchaser must
pay the whole price, unless there was a warranty . . .
The principle is well illustrated in the civil law [quoting at length
from Digest 18.1.9, reproduced above], and the answers given by the
great jurists are to the effect that if there be misapprehension as to the

substance of the thing there is no contract; but if it be only a difference

in some quality or accident, even though the misapprehension may
have been the actuating motive to the purchaser, yet the contract
remains binding . . .
[W]e do not think that [the misstatement in this case] affected the
substance of the matter, for the applicant actually got shares in the very
company for shares in which he had applied; and that company has, by
means of the invalid contract, got the benefit, and is now carrying the mails
on terms, not the same as those they supposed, but still on profitable terms
. . . .”
Bell v. Lever Brothers, Ltd., [1932] A.C. 161 (1932) (H.L.)
Lever Brothers hired the defendants to be chairman and vice chair-
man of a subsidiary for a period of years. When the subsidiary merged with
another company, and it became necessary to terminate them, Lever
Brothers agreed to pay them £20,000 and £30,000 respectively, in compen-
sation. It then discovered that they had violated their duties by secretly
speculating in cocoa, and that it would have had the right to terminate
their contracts without compensation because of this breach of duty. Held
(by a narrow margin) that the contracts for compensation are valid.
Lord Atkin. “[A] mistake [as to quality of the thing contracted for] will
not affect assent unless it is the mistake of both parties, and is as to the
existence of some quality which makes the thing without the quality
essentially different from the thing as it was believed to be . . .
[Here,] [t]he contract released is the identical contract in both cases, and
the party paying for release gets exactly what he bargains for. It seems
immaterial that he could have got the same result in another way, or that
if he had known the true facts he would not have entered into the bargain. A.
buys B.’s horse; he thinks the horse is sound and he pays the price of a sound
horse . . . A. is bound and cannot recover back the price. A. buys a picture
from B.; both A. and B. believe it to be the work of an old master, and a high
price is paid. It turns out to be a modern copy. A. has no remedy in the
absence of representation or warranty. A. agrees to take on lease or to buy
from B. an unfurnished dwelling-house. The house is in fact uninhabitable.
A. would never have entered into the bargain if he had known the fact. A. has
no remedy . . . A. buys a roadside garage business from B. abutting on a
public thoroughfare: unknown to A., but known to B., it has already been
decided to construct a bypass road which will divert substantially the whole
of the traffic from passing A.’s garage. Again, A. has no remedy.”
Cour d’appel, Riom, May 10, 1988, Rev. trim. dr. civ. 1989.740
The Société d’équipement d’Auvergne sold land for which a building
permit had been obtained to the Société H.L.M. Carpi. During construction
work, a shifting of the earth was observed. After a geological study was
made, it appeared that only twenty-two individual houses could be built
instead of the thirty-two which the Société Carpi had intended. The court
refused to annul the contract for mistake. It noted that “the sale was
concluded among companies which were professionals quite aware of

problems of land and of construction,” and “the parties stipulated [in their
contract] that the buyer ‘will take the land sold in its state as of the day he
enters into enjoyment of it without power to have any recourse or recission
against the seller for any reason whatever, and in particular, on account of
the bad state of the soil or sub-soil, digging, or excavation.’”
Jiang Yan v. Jiangsu Auction House et al., (2010)钟民初字第0274号(2010)
常民终字第1356号; (2012)苏民监字第026号; (2012) Su Min Jian Zi No. 026
Plaintiff won a public bidding for an apartment from the defendant. The
apartment was listed as one with 3600 square meters in area and the
plaintiff’s winning bid was 45.6 million yuan. She ﬁled the lawsuit to reduce
the contract price and the commissions charged by the auction house because
the actual area turned out to be only 3015.75 square meters. The district
court held that the difference of 584.24 square meters was beyond the normal
scope of error of margin and allowed the contract price and commissions to be
reduced pro rata. The appellate court overruled the trial court decision. They
did not think it was a mistake as to the quality of the house but a mistake
resulted from a mismatch between the description of the item and the item
itself. As such, plaintiff could choose to avoid the contract and receive a total
refund. Her claim to reduce the contract price, however, cannot be supported.
This decision was afﬁrmed by Jiangsu provincial high court. The high court
reasoned that “[i]t would be unfair to other potential bidders to simply reduce
the contract price pro rata because it is impossible to ascertain the actual
bidding price simply by calculating the area. The proper bidding price could
only be ascertained through a new auction.”

III. FAIRNESS
1. Fairness of the Price Term
a. Origins
Civil Law
Classical Roman law did not require that a price be fair.1 As one text
said, in a sale: “it is permitted by nature for one party to buy for less and
other to sell for more, and thus each is allowed to outwit the other.”2 In the
late empire, however, a text attributed to Diocletian, but possibly added by
Justinian, gave a remedy to one who sold land for less than half the “just
price.” The buyer had either to rescind the transaction or to make up the
difference between the price paid and the “just price.”3 At a very early date,
the medieval jurists interpreted this text to apply to buyers as well as
sellers and to parties to analogous contracts.4 So they created a generalized

1. Reinhard Zimmermann, The Law of Wurzeln der Anfechtung wegen laesio

Obligations: Roman Foundations of the enormis,” Zeitschrift der Savigny-Stiftung
Civilian Tradition (1990), 255–6. für Rechtsgeschichte, Rom. Abt. 98 (1981),
2. Dig. 19.2.22.3. See also Dig. 4.4.16.4. 147–61.
3. C. 4.44.2; C. 4.44.8. See Zimmermann, 4. The Brachylogus, written at the
Law of Obligations, 259–61; Hackl, “Zu dem beginning of the twelfth century, does not

remedy for a very unfair price – for what came to be called laesio enormis,
literally, a very large hurt.
They identiﬁed the just price with the price for which goods were sold
commonly, a price that differed from day to day and region to region.5 As
Accursius noted, one who sold an object for less than half the amount he
paid for it might not be entitled to relief since “it could be . . . that when the
sale of the object to him occurred, it was worth more than when he now
sells.”6 They had no theory to explain why the market price was fair.
Again, an explanation was developed by the late scholastics in the
sixteenth century based on the ideas of Aristotle and Thomas Aquinas.
Commutative justice preserved the distribution of wealth among citizens.
In the case of “voluntary commutative justice,” the parties exchanged
resources of equal value so that neither was enriched.7 According to
Thomas Aquinas, this principle explained the remedy for laesio enormis.
While in principle, every deviation from the just price was wrong, relief was
given only for large deviations because the law cannot remedy every evil.8
The late scholastics adopted this explanation. For the most part, the
northern natural lawyers of the seventeenth and eighteenth century fol-
lowed them. At least, they usually explained the remedy by saying that
exchange required equality, even those who felt little or no allegiance to
Aristotelian philosophy.
Like the medieval jurists, they identiﬁed the just price that preserved
equality with the market price.9 Soto, Molina, and Lessius explained in the
sixteenth century, and Grotius and Pufendorf in the seventeenth, that if no
price is set by public authority, the just price is the price for which goods
are commonly traded as long as there are no monopolies. Therefore the just
price varies from day to day and region to region. It depends, not only on
the cost of production, but also on the need for the goods and on their
scarcity.10 As Odd Langholm has noted, the late scholastics were hardly

speak of land but of objects sold. 8. Ibid. a. 3.

Brachylogus (1743) III.xiii.8. Dissensiones 9. John Noonan, The Scholastic
dominorum of the early thirteenth century Analysis of Usury (1957), 82–8; Raymond de
reports a dispute in which all participants Roover, “The Concept of the Just Price
take it for granted that the buyer as well Theory and Economic Policy,” J. Economic
as the seller has a remedy. The dispute is History 18 (1958), 418–34; Ambrosetti,
over whether to be entitled to the remedy “Diritto privato ed economia nella seconda
the buyer must have paid twice or one and scolastica,” in La seconda scolastica nella
a half times the just price. The formazione del diritto privato moderno
participants are said to be Placentinus (Paolo Grossi, ed., 1973), 23–52, 28.
and Albericus, who wrote in the twelfth 10. Domenicus Soto, De iustitia et iure
century, and Martinus, a student of libri decem (1553), lib. 6, q. 2, a. 3;
Irnerius. Hugolinus de Presbyteris, Ludovicus Molina, De iustitia et iure
Diversitates sive dissensiones dominorum tractatus (1614), disp. 348; Leonardus
super toto corpore iure civilis (ed. Haenel, Lessius, De iustitia et iure, ceterisque
1834), § 253. virtutibus cardinalis (1628), lib. 2, cap. 21,
5. Accursius, Glossa ordinaria (1581), dub. 4; Hugo Grotius, De iure belli ac pacis
to Dig. 13.4.3 to varia. libri tres (1646), II.xii.14; Samuel Pufendorf,
6. Accursius, Glossa ordinaria to C. De iustitia naturae ac gentium (1688), V.i.6.
4.44.4 to autoritate iudicis. See Paulo Cappellini, Schemi contrattuali e
7. Aristotle, Nichomachean Ethics V.iii cultura teologicogiuridico nella seconda
1131a; Thomas Aquinas, Summa theologiae scolastica: verso una teoria generale (thesis,
II-II, Q. 61, a. 2–3. Univ. Firenze, 1978/ 79), 184–96.

being original since all three factors had been mentioned continually in
medieval commentaries to Aristotle’s Ethics.11 For that matter, all three
had been mentioned, albeit cryptically, by Aquinas.12 The writers in this
tradition did not, as some scholars once imagined, identify the just price
with the cost of production.13 They thought, then, that an exchange at the
market price preserved equality even though they knew that the seller
would sometimes recover more or less than his costs. They may have
thought such a price was as equal as possible given that prices must
ﬂuctuate to take account of need and scarcity. Any inequalities caused by
the market price had to be tolerated. In contrast, one did not need to
tolerate inequalities which arose when, as Lessius put it, one party took
advantage of another’s “ignorance” or “necessity” to sell to him for more
than the market price or to buy from him for less.14 Also, the seller who lost
if market prices had fallen could just as easily have gained if they had
risen. Thus that transaction would be equal in the sense that a bet is fair
when each party has an equal risk of gain and loss. As Soto said, a
merchant must suffer a loss if “bad fortune buffets him, for example,
because an unexpected abundance of goods mounts up,” and conversely,
if “fortune smiles on him” he may keep the gain “for as the business of
buying and selling is subject to fortuitous events of many kinds, merchants
ought to bear risks at their own expense, and on the other hand, they may
wait for good fortune.”15 In the seventeenth and eighteenth centuries, the
French, Dutch, and German jurists who wrote about positive law
explained the remedy available in their countries by saying, like the
natural lawyers, that a contract must be made at a just price. They did
not change positive law. German and Dutch jurists said, like the medieval
jurists, that the buyer as well as the seller could receive a remedy, as could
the parties to similar types of contracts.16 French jurists preserved a
traditional French rule which, like the original Roman text, limited relief
to the seller of land.17 Nevertheless, though they continued to repeat the

11. Odd Langholm, Price and Value in 15. Soto, De iustitia et iure lib. 6, q. 2, a. 3.
the Aristotelian Tradition (1979), 61–143. 16. Heinrich Coccejus, Ius civile
12. Thomas Aquinas, In decem libros controversum (1766), to Dig. 18.5, q. 7, 16;
Ethicorum Aristotelis ad Nicomachum Wolfgang Lauterbach, Collegii theoretico-
Expositio (A. Pirotta, ed., 1934), lib. 5, lec. 9 pratici (1744), to Dig. 18.5 §§ 23–24;
(mentioning labor and expenses and Burkhard Struvius, Syntagma academicus
indigentia or need); Summa theologiae II-II, q. et forensis (1692), Exerc. XXIII ad lib. 18,
77 a. 3 ad 4 (permitting a sale at famine prices). tit. 1, §§ 85, 92; Johannes Voet,
13. E.g., Hagenauer, Das “justum Commentarius ad pandectas (1698), to Dig.
pretium” bei Thomas Aquinas (1931). 18.1 §§ 7, 13; Iohannes Westenberg,
Hagenauer was following still earlier scholars Principia iuris secundum ordinem
who distinguished the “subjective” factors of digestorum seu pandectorum (4th edn.,
need and scarcity from the “objective” factors 1764), to Dig. 18.1 §§ 12–13.
of labor and expenses, and believed that 17. Robert Pothier, Traité des obligations,
Thomas had emphasized the latter. E.g., in Oeuvres de Pothier 2 (Bugnet, ed., 2nd edn.,
Kaulla, Die geschichtliche Entwicklung der 1861), §§ 38–39; Claude de Ferrière,
modernen Werttheorien (1906), 53; Schreiber, Dictionnaire de droit et de pratique (nouv.
Die volkswirtschaftlichen Anschauungen der edn., 1769), II, v. “lézion d’outre moité de
Scholastik seit Thomas von Aquin (1913), 120. juste prix,” 135, 137; Honoré Lacombe de
14. Lessius, De iustitia et iure lib. 2, cap. Prezel, Dictionnaire portatif de jurisprudence
21, dub. 4; Soto, De iustitia et iure lib. 6, q. 3, et de pratique (1763), II, v. “lézion,” 430.
a. 1.

natural law principle, it is not clear how much of the natural law theory
most French, Dutch, and German jurists understood. Usually, they did not
explain the remedy except to say that a price should be just. Occasionally,
they said that exchange requires equality.18 In the late eighteenth and
early nineteenth century, some jurists were becoming sceptical about
whether one could ever say that a price was unjust. It seemed to them to
involve mystical notions about economic value. The eighteenth-century
jurist Christian Thomasius argued that to speak of a just price was to
imagine that value is an intrinsic property of things, like their color. But
value depends “on the mere judgment of men.”19 This argument impressed
Suarez20 who drafted a code for Prussian law, the Allgemeines Landrecht,
which was enacted in 1794. This Code eliminated relief for an unjust price
“in and of itself”21 although it said that error would be “presumed” when a
buyer paid twice the normal price.22
In France, when the Civil Code was drafted, this argument persuaded
Berlier that the traditional remedy should be abolished.23 But he was in
the minority. Article 1674 gave a remedy only to the seller of land, as had
the original Roman text and traditional French law. The article required,
however, that the seller receive less than ﬁve-twelfths its value rather than
less than half.
The reason relief was limited to the seller of land was not scepticism
about the principle of equality in exchange. Portalis, Cambacérès, and
Tronchet all said that an exchange or commutative contract requires
equality.24 Napoleon acknowledged that “[t]here is not a contract of sale
when one does not receive the equivalent of what one gives.”25 The limita-
tion on relief was explained pragmatically: land was more important than
other things sold;26 its price is more stable;27 the buyer is less likely than
the seller to be the victim of necessity28 or mistake29 and more likely to seek
to avoid the transaction because his plans had changed.30
With the rise of the will theories of contract, however, arguments like
those of Thomasius and Berlier seemed unanswerable. The terms of a
contract could have no other source than the will of the parties. Most
nineteenth-century French treatise writers doubted that a remedy should

18. E.g., Pothier, Traité des obligations, 21. Hottenhauer, ed., Allgemeines Land-
§ 33; Lauterbach, Collegii to Dig. 18.1, § 37; recht für die Preussischen Staaten von 1794 1
Struvius, Synallagma Exerc. XXIII to Dig. (1970), § 58.
18, tit. 1 § 19 (citing Aristotle). 22. Ibid. § 59.
19. Christian Thomasius, “De aequitate 23. P.A. Fenet, ed., Recueil complet des
cerebrina legis II. Cod. de rescind. vendit. et travaux préparatoires du Code Civil 14
eius usu practico” cap. II, § 14, printed as (1836), 36.
Dissertatio LXXIII in Thomasius, 24. Ibid. 43, 46–7, 130–1 (Portalis); ibid.
Dissertationum Academicarum varii 43 (Cambacérès); ibid. 63 (Tronchet).
inprimis iuridici argumenti (1777), III, 43. 25. Ibid. 58.
See Klaus Luig, “Der gerechte Preis in der 26. Ibid. 57–8 (Bonaparte).
Rechtstheorie und Rechtspraxis von 27. Ibid. 49, 140–1 (Portalis).
Christian Thomasius (1655–1728),” in 28. Ibid. 145 (Portalis), 75 (Tronchet),
Diritto e potere nella storia europea: Scritti 177 (Faure). Portalis had originally wished
in onore di Bruno Paradisi 2 (1982), 775. to give the buyer a remedy but was outvoted.
20. Koch, ed., Allgemeines Landrecht für Ibid. 76.
die Preussischen Staaten 1 (7th edn., 1978), § 29. Ibid. 75 (Ségur).
58 n. 8. 30. Ibid. 77 (Bonaparte).

be given at all. Demolombe argued that value was “subjective,” “variable

and relative.”31 Laurent observed that things worth one amount “from a
commercial point of view” might be worth quite a different amount to the
parties because of their “needs, tastes and passions.”32 Jurists more sym-
pathetic to the remedy defended it without invoking a principle of equality
in exchange. Duranton, Colmet de Santerre, and Marcadé claimed that
disparity in the price constituted evidence of fraud, mistake, duress, or a
sort of moral constraint.33 Glasson thought that, although relief violated
the “principle of freedom of contract,” it was justiﬁed for reasons of
“humanity.”34
Nineteenth-century German jurists were also sceptical. In Germany,
relief for an unjust price was abolished by statute in Bavaria in 1861,35 in
Saxony in 1863,36 and in commercial matters by the Allgemeines
Handelsgesetzbuch of 1861.37 Defending this step, Endemann argued,
like Thomasius, that value was relative.38
The Roman text remained in force where it had not been replaced by
statute. But German jurists regarded the remedy as an exception to the
normal rules of contract law. The basic principle – “rooted in the law of
sale” according to Windscheid,39 “lying in the nature of things” according to
Vangerow40 – was to be found in the other Roman text that said each party
could outwit the other.41 Relief for unfairness was an exception to the
principle that contracts are binding.42 German jurists usually explained
that relief was an exception based upon equity43 and argued how large the
exception was. Some wished to limit relief to sellers of land on the ground
that relief was given by way of exception;44 others wished to extend relief to
buyers of land and parties to other kinds of contracts because to do so would

31. Charles Demolombe, Cours de Code 37. Allgemeines deutsches Handelsge-

Napoléon 24 (1854–82), § 194. setzbuch, art. 286.
32. François Laurent, Principes de droit 38. Endemann, Handbuch des deutschen
civil français 15 (3rd edn., 1867–78), § 485. Handels See und Wechselrechts 2 (1882), §
33. Alexandre Duranton, Cours de droit 261.III.
civil français suivant le Code civil 10 (3rd 39. Bernhard Windscheid, Lehrbuch des
edn., 1834–37), § 200–01; A.M. Demante Pandektenrechts 2 (7th edn., 1891), § 396
and E. Colmet de Santerre, Cours n. 2.
analytique du Code civil 5 (2nd edn., 1883), 40. Karl Vangerow, Leitfaden für
§ 28 bis. (by Colmet de Santerre); Victor Pandekten-Vorlesungen 3 (Marburg, 1847),
Marcadé, Explication théorique et pratique § 611 n. 1.
du Code Napoléon (5th edn., 1859), 357–8. 41. Dig. 19.2.22.3.
34. Glasson, Eléments du droit français 42. Rudolph Holzschuher, Theorie und
considéré dans ses rapports avec le droit Casuistik des gemeinen Civilrechts 3 (1864),
naturel et l’economie politique (2nd edn. 729–30.
1884), 550, 553. 43. Vangerow, Leitfaden, 3: § 611 n. 1;
35. Landtagsabschiedes of Nov. 10, Wächter, Pandekten, 2 (Leipzig, 1881) §
1861 § 282.4 [1861–62] Gesetzblatt, 207; Windscheid, Lehrbuch, 2: § 396 n. 2.
quoted in Danzer, Das Bayerische 44. Holzschuher, Theorie, 3: 729–30;
Landrecht (Codex Maximilianeus Vangerow, Leitfaden, 3, § 611; Wächter,
Bavaricus Civilis) vom Jahre 1756 in Pandekten, 2, § 207. Some said the exception
seiner heutigen Geltung (1894), 229–30. should be limited to sellers because it was
Until then, the remedy for an unjust meant to protect those in need, and sellers
price had been preserved in the Codex who accepted a low price would be more
Maximilianeus Bavaricus Civilis IV iii §§ likely to be needy than buyers who paid a
19–22 (enacted in 1756). high one. Georg Friedrich Puchta, Pandekten
36. Bürgerliches Gesetzbuch für des (2nd edn., 1844), § 364; F. von Keller,
Königreich Sachsen § 864. Pandekten (1861), 333.

be equally equitable.45 Everyone agreed, however, that they were dealing

with an exceptional kind of relief that departed from the normal principles
of contract law. The initial drafts of the German Civil Code abolished the
traditional remedy. In the ﬁnal draft, however, § 138(2) was added which,
as we will see, voids a transaction in which one person exploits certain
enumerated weakness of another to obtain a “striking disproportion” in the
value of the performances exchanged.46 The rule seemed to be a fair one
even though no one had a theory of why a “striking disproportion” should
matter.

Common Law
Traditionally, a promise was enforceable in assumpsit whether the
consideration given in return was adequate or not. Courts of equity, how-
ever, could give relief if a bargain was so harsh as to be “unconscionable.”
Nevertheless, the common law courts had not rejected the principle of
equality in exchange. Nor had the courts of equity accepted it.
As A.W.B. Simpson observed,47 the judges who fashioned the rule
against examining the adequacy of consideration were not facing the problem
of what to do about hard bargains. They were deciding what promises to
enforce. As we have seen, they found consideration for certain gratuitous
arrangements such as gifts to prospective sons-in-law and gratuitous loans
and bailments.48 To demand that consideration be equal would have pre-
vented the judges from achieving the goal of enforcing certain promises for
which the consideration was not a recompense. For example, in Sturlyn v.
Albany,49 the court said that “when a thing is done, be it never so small, this is
a sufﬁcient consideration to ground an action.” These words were often quoted
in later cases. As Simpson has pointed out, however, Sturlyn had nothing to
do with enforcing a hard bargain.50 The plaintiff had leased to a third party
who then granted his estate to the defendant. The plaintiff demanded rent
from the defendant who promised to pay if the plaintiff would show him a
deed proving the rent was due. The showing of the deed was said to be
consideration.
Conversely, the courts of equity gave relief from hard bargains without
espousing the principle that each party to an exchange should receive
something equal in value to what he gave. It is hard to ﬁnd even a passing
reference to such a principle in the seventeenth- and eighteenth-century
court opinions or the arguments of counsel. Instead, there is general talk

45. E.g., J. Seuffert, Praktisches July 29, 1976, BGBl 1976 I 2034, 2038
Pandektenrecht 2 (3rd edn., 1852), § 272. (art. 3).
46. The weaknesses were originally 47. A.W.B. Simpson, A History of the
“necessity, indiscretion or inexperience.” In Common Law of Contract: The Rise of the
1976, to make them harmonize with Action of Assumpsit (1975), 445–9.
Criminal Code (Strafgesetzbuch) § 302(a), 48. Ibid. 416–52.
the phrase was changed to “distressed 49. Sturlyn v. Albany, Cro. Eliz. 67, 78
situation, inexperience, lack of judgmental Eng. Rep. 327 (Q.B. 1587).
ability, or grave weakness of will.” Law of 50. Simpson, History, 447.

about whether a bargain is “unreasonable,”51 “unjust,”52 “unequitable and

unconscientious,”53 “hard and unequal,”54 or entered into for “inadequate”
or “grossly inadequate” consideration,55 or through “imposition.”56
Moreover, before 1750, nearly all the cases in which courts of equity gave
relief concerned either necessitous heirs who sold their inheritance at a low
price or else the repercussions of the South Sea Bubble.57 In helping heirs,
they seem to have been concerned, not about equality in exchange, but
about the squandering of family estates.58 In assisting victims of the South
Sea Bubble, they were not helping those who paid more than the market
price but those who bought when the market price of land was high due to
the high price of South Sea company stock.59 Thus giving relief may
actually have contradicted the natural lawyers’ position that the just
price is the market price.
In the nineteenth century, however, Anglo-American jurists, like their
continental brethren, claimed that, in principle, there could be no relief for
an unfair price. They said that the reason the common law courts would not
examine the adequacy of consideration was because, in principle, the
fairness of an exchange did not matter. Their arguments were like those
made on the continent. According to Joseph and W.W. Story, Chitty,
Metcalf, and Addison to give relief would raise imponderable questions
about value.60 Pollock, as noted earlier, addressed the subject by quoting
part of Hobbes’ remark that “the value of all things contracted for is

51. Earl of Arglasse v. Muschamp, 1 251, 26 Eng. Rep. 555 (1741) (relief denied
Vern. 237, 238–9; 23 Eng. Rep. 438, 439 when plaintiff bought lottery tickets from
(1684); Earl of Chesterfield v. Jannsen, 2 defendant); How v. Waldon & Edwards, 2
Ves. Sen. 125, 130, 28 Eng. Rep. 82, 85 Ves. Sen. 516, 28 Eng. Rep. 330 (1754) (relief
(1750–51) (argument for plaintiff). given to sailor who sold in advance and for a
52. Earl of Chesterfield v. Jannsen, 2 small sum the right to the prize money where
Ves. Sen. 125, 130, 28 Eng. Rep. 82, 85 “inadequateness of value” was combined with
(1750–51) (argument for plaintiff). a risk of obtaining the money that had been so
53. Chesterfield v. Jannsen, 2 Ves. Sen. “greatly misrepresented” as to constitute
125, 155, 28 Eng. Rep. 82, 100 (1750–51). “gross fraud”).
54. Kien v. Stukeley, 1 Bro. 191, 192, 1 58. As the court mentions in Johnson,
Eng. Rep. 506, 507 (H.L. 1722) (argument for Ex’r of Hill v. Nott, 1 Vern. 271, 272, 23
defendant). Eng. Rep. 464, 465 (1684); Twistleton v.
55. Gwynne v. Heaton, 1 Bro. C.C. 1, 6, 28 Griffith, 1 P. Wms. 310, 311, 24 Eng. Rep.
Eng. Rep. 949, 951 (1778). 403, 404 (1716); Earl of Chesterfield v.
56. Earl of Chesterfield v. Jannsen, 2 Janssen, 2 Ves. Sen. 125, 144–45, 28 Eng.
Ves. Sen. 125, 145, 152, 156, 28 Eng. Rep. Rep. 82, 93–4 (1750–51).
82, 94, 98, 100 (1750–51); Nichols v. 59. As mentioned in Kien v. Stukeley, 1
Gould, 2 Ves. Sen. 422, 423, 28 Eng. Bro. 191, 192, 11 Eng. Rep. 506, 507 (H.L.
Rep. 270, 270 (1752). 1722); Savile v. Savile, 1 P. Wms. 745, 746–7,
57. See A.W.B. Simpson, “The Horwitz 24 Eng. Rep. 596 (1721).
Thesis and the History of Contracts,” U. Chi. 60. Joseph Story, Commentaries on
L. Rev. 46 (1979), 533–601, 562–6. A few cases Equity, Jurisprudence as Administered in
involved neither necessitous heirs nor the England and America 1 (14th edn., 1918),
South Sea Bubble. Even in these cases, 437–8; William Wetmore Story, A Treatise
however, the courts did not endorse a on the Law of Contracts Not Under Seal
principle of equality in exchange. Osmond v. (3rd edn., 1851), 437–8; Theoron Metcalf,
Fitzroy & Duke of Cleveland, 3 P. Wms. 129, Principles of the Law of Contracts as
24 Eng. Rep. 997 (1731) (bond given servant Applied by the Courts of New York (1878),
by lord during his minority set aside for 163.
breach of trust); Willis v. Jernegan, 2 Atk.

measured by the appetite of the contractors . . . .”61 Moreover, to give relief

would be to interfere with the decision of the parties themselves.62
The jurists then explained away the doctrine of unconscionability
by giving it a new rationale. As Simpson notes, a disparity in price
came to be considered as “evidence of fraud, not as an independent
substantive ground, and not as constituting hardship.”63 While the
fraud theory never swept the ﬁeld,64 it found its way into many
treatises beginning with the early one by Powell in 1790.65 Indeed,
Joseph Story, William Wetmore Story, and Metcalf66 argued that the
fraud theory must be correct since questions of value are imponder-
able. Courts of equity nevertheless continued to give relief, perhaps
as generously as they would have if the theory had not changed.67
The jurists also claimed that the reason the common law courts
would not examine the adequacy of consideration was because, in prin-
ciple, the fairness of an exchange did not matter. Their arguments were
like those made on the continent. According to Joseph and W.W. Story,
Chitty, Metcalf, and Addison to give relief would raise imponderable
questions about value.68 Pollock, as noted earlier, addressed the subject
by quoting part of Hobbes’ remark that “the value of all things con-
tracted for is measured by the appetite of the contractors . . . .”69
Moreover, to give relief would be to interfere with the decision of the
parties themselves.70
As we will see, however, in the last half of the twentieth century, the
doctrine of unconscionability has seen a renaissance. Section 2–302 of the
Uniform Commercial Code allows a judge to remedy “unconscionable”
contracts without any distinction between law and equity. Section 208 of

61. Sir Frederick Pollock, Principles of Bishop, Law of Contracts, 18–19; Hammon,
Contract (4th edn., 1888), 172. General Principles of the Law of Contract,
62. J. Story, Commentaries 1: 337; W.W. 694–5; Metcalf, Law of Contract, 163;
Story, Law of Contracts, 435; Joseph Chitty, Newland, Treatise on Contracts, 358–9; J.
A Practical Treatise on the Law of Contracts Story, Commentaries 1: 341; W. W. Story,
Not Under Seal (1826), 7; Metcalf, Law of Law of Contracts, 437–8.
Contracts, 163; Charles Addison, A Treatise 66. J. Story, Commentaries 1: 399; W.W.
on the Law of Contracts (11th edn., 1911), 12; Story, Law of Contracts, 437–8; Metcalf, Law
S. Martin Leake, The Elements of the Law of of Contracts, 163.
Contracts (London, 1867), 311–12; Bishop, 67. James Gordley, “Equality in
Law of Contracts, 18; John Newland, A Exchange,” Calif. L. Rev. 69 (1981), 1587 at
Treatise on Contracts within the 1650–5.
Jurisdiction of Courts of Equity (1821), 357; 68. J. Story, Commentaries 1: 339; W.W.
Louis Hammon, The General Principles of Story, Law of Contracts, 435; Chitty, Law of
the Law of Contract (1912), 692. Contracts, 12.
63. Simpson, “Horwitz Thesis”, 569. 69. Sir Frederick Pollock, Principles of
64. See, e.g., Theophilus Parsons, The Contract (4th edn., London, 1888), 172.
Law of Contracts 1 (4th edn., 1860), *362– 70. J. Story, Commentaries 1: 337; W.
63; John Norton Pomeroy, A Treatise on the W. Story, Law of Contracts, 435; Chitty,
Speciﬁc Performance of Contracts as it is Law of Contracts, 7; Metcalf, Law of
Enforced by Courts of Equitable Contracts, 163; Addison, Law of
Jurisdiction in the United States of America Contracts, 12; Leake, Law of Contracts,
(2nd edn., 1897), 274–5. 311–12; Bishop, Law of Contracts, 18;
65. John J. Powell, Essay upon the Law Newland, Treatise on Contracts, 357;
of Contracts and Agreements 2 (1790), 157–8; Hammon, Law of Contract, 692.

the Second Restatement of Contracts contains a similar provision applic-

able to contracts in general.

b. Modern Law
English Law
Cresswell v. Potter, [1978] 1 W.L.R. 255 (Ch.)
While plaintiff and defendant were married, plaintiff had a half inter-
est in the house in which they lived. She had contributed, indirectly at least
£65 and perhaps £200 toward its purchase price. It was bought for £1,500 of
which £1,200 was raised by a mortgage. The plaintiff left the defendant
after admitting to adultery. The defendant obtained an uncontested
divorce, evidence of plaintiff’s adultery having been obtained by Thomas
Olyott, an “inquiry agent.” The plaintiff signed a “release” of her rights in
the house presented to her by Olyott. She claimed that she did not read it
but thought it would enable the defendant to sell the house without affect-
ing her rights in it. Later, he sold it for £3,350. Plaintiff sued to set aside the
release. Held, for plaintiff.
Megarry J. “I think I can go straight to the well-known case of Fry v.
Lane (1888) 40 Ch.D. 312 . . . The judge[in that case] laid down three
requirements. What has to be considered is, first, whether the plaintiff is
poor and ignorant; second, whether the sale was at a considerable under-
value; and third, whether the vendor had independent advice. I am not, of
course, suggesting that these are the only circumstances which will suffice;
thus there may be circumstances of oppression or abuse of confidence
which will invoke the aid of equity. But in the present case only these
three requirements are in point . . .
I think that the plaintiff may fairly be described as falling within
whatever is the modern equivalent of ‘poor and ignorant.’ Eighty years
ago, when Fry v. Lane was decided, social conditions were very differ-
ent from those which exist today. I do not, however, think that the
principle has changed, even though the euphemisms of the 20th cen-
tury may require the word ‘poor’ to be replaced by ‘a member of the
lower income group’ or the like, and the word ‘ignorant’ by ‘less highly
educated.’ The plaintiff has been a van driver for a tobacconist, and is
a Post Office telephonist. The evidence of her means is slender. The
defendant told me that the plaintiff probably had a little saved, but not
much; and there was evidence that her earnings were about the same
as the defendant’s, and that these were those of a carpenter. The
plaintiff also has a legal aid certificate.
In those circumstances I think the plaintiff may properly be described
as ‘poor’ in the sense used in Fry v. Lane, where it was applied to a
laundryman who, in 1888, was earning £1 a week. In this context, as in
others, I do not think that ‘poverty’ is confined to destitution. Further,
although no doubt it requires considerable alertness and skill to be a
good telephonist, I think that a telephonist can properly be described as
‘ignorant’ in the context of property transactions in general and the

execution of conveyancing documents in particular. I have seen and heard

the plaintiff giving evidence, and I have reached the conclusion that she
satisfies the requirements of the first head.
The second question is whether the sale was at a ‘considerable under-
value.’ Slate Hall cost £1,500, £1,200 of the price being provided by the
mortgage . . . If Slate Hall was worth no more than it cost, she was giving up
her half share in an equity worth £30 . . . In fact, as is now known, within a
little over two years the property fetched £3,350, so that at the time in
question the plaintiff’s share of the equity may have been worth appre-
ciably more than £150 . . .
As for independent advice, from first to last there is no suggestion that
the plaintiff had any.”
Note. Notice that relief in this case was given in Chancery, the
court which developed the doctrine of “unconscionability” in England
and was traditionally the only one to concern itself with the fairness of
a bargain.

Law in the United States

Uniform Commercial Code
§ 2–302 UNCONSCIONABLE CONTRACT OR CLAUSE
(1). If the court as a matter of law ﬁnds the contract or any clause of
the contract to have been unconscionable at the time it was made
the court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it
may so limit the application of any unconscionable clause to avoid
any unconscionable result.
(2). When it is claimed or appears to the court that the contract or any
clause thereof may be unconscionable the parties shall be afforded
a reasonable opportunity to present evidence as to its commercial
setting, purpose and effect to aid the court in making the
determination.

Restatement (Second) of Contracts

§ 208. UNCONSCIONABLE CONTRACT OR TERM
If a contract or term thereof is unconscionable at the time the contract
is made a court may refuse to enforce the contract, or may enforce the
remainder of the contract without the unconscionable term, or may so limit
the application of any unconscionable term as to avoid any unconscionable
result.

Toker v. Westerman, 274 A.2d 78 (N.J. Super. 1970)

“On November 7, 1966 plaintiff’s assignor, People’s Foods of New
Jersey, sold a refrigerator-freezer to defendant under a retail installment
contract. The cash price for the unit was $899.98. With sales tax, group life

insurance and time price differential the total amount was $1,229.76, to be
paid in 36 monthly installments of $34.16 each.
Defendants made payments over a period of time, but resist payment
of the balance in the sum of $573.89, claiming that the unit was so greatly
over-priced as to make the contract unenforceable under N.J.S. 12A:2–302
...
At the trial defendant presented an appliance dealer who had
inspected the refrigerator-freezer in question. He stated that the same
had a capacity of approximately 18 cubic feet, was not frost-free, and,
with no special features, was known in the trade as a stripped unit. He
estimated the reasonable retail price at the time of sale as between $350
and $400. He testified that the most expensive refrigerator-freezer of
comparable size, with such additional features as butter temperature
control and frost-free operation, at that time sold for $500 . . .
It is apparent that the court should not allow the statutory provision in
question [U.C.C. 2–302] to be used as a manipulative tool to allow a
purchaser to avoid the consequences of a bargain which he later finds to
be unfavorable. Suffice it to say that in the instant case the court finds as
shocking, and therefore unconscionable, the sale of goods for approxi-
mately 2½ times their reasonable retail value. This is particularly so
where, as here, the sale was made by a door-to-door salesman for a dealer
who therefore would have less overhead expense than a dealer maintaining
a store or showroom. In addition, it appeared that defendants during the
course of the payments they made to plaintiff were obliged to seek welfare
assistance.”

Carboni v. Arrospide, 2 Cal. App. 4th 76 (1991)

“In this case we consider whether a secured note providing for interest
at a rate of 200 percent per annum is unconscionable. In the circumstances
presented here, we conclude that it is . . .
The evidence at trial established that on July 27, 1988, George
Arrospide, Jr., signed a $4,000 note and deed of trust on behalf of his father,
Jorge Arrospide, Sr., as his attorney in fact. The note was made in favor of
Michael Carboni, a licensed real estate broker. It carried an interest rate of
200 percent per annum, was due in three months . . . The parties originally
intended the note would be paid off in a single lump sum payment of $6,000
after three months. However, over the next four months, Carboni con-
tinued to make cash advances to Jorge Sr. which were secured by the
original note and deed of trust. By November 25, 1988, the principal
amount of the note had ballooned to $99,346, all of which was carried at
an interest rate of 200 percent per annum. At the time of trial in March of
1990, the principal and accumulated interest amounted to nearly
$390,000.
The testimony was sharply divided concerning the purpose for the
loan. Carboni testiﬁed that the money was advanced directly to George
Jr. to be used to refurbish residential property which he intended to resell
at a proﬁt. The Arrospides, on the other hand, claimed the money was used

for Jorge Sr.’s ‘personal obligations’ – primarily to pay medical expenses for
his ailing parents who lived in Peru. George Jr. testified that his father was
under ‘emotional duress’ because of these personal obligations, and that he
obtained the loan at his father’s specific instruction . . .
The leading California case on unconscionability generally follows
Professor Williston’s analysis of the issue. In A & M Produce Co. v. FMC
Corp. [(1982) 135 Cal.App.3d 473, 476 (1982)] the court recognized that
unconscionability has both a ‘procedural’ and a ‘substantive’ aspect. The
procedural aspect is manifested by (1) ‘oppression,’ which refers to an
inequality of bargaining power resulting in no meaningful choice for the
weaker party, or (2) ‘surprise,’ which occurs when the supposedly agreed-
upon terms are hidden in a prolix document.
‘Substantive’ unconscionability, on the other hand, refers to an overly
harsh allocation of risks or costs which is not justified by the circumstances
under which the contract was made. [citation omitted] Presumably, both
procedural and substantive unconscionability must be present before a
contract or clause will be held unenforceable. However, there is a sliding
scale relationship between the two concepts: the greater the degree of
substantive unconscionability, the less the degree of procedural uncon-
scionability that is required to annul the contract or clause. [citations
omitted] . . .
We have little trouble concluding that an interest rate of 200 percent
on a secured $99,000 loan is substantively unconscionable; i.e., that it
imposes a cost on the borrower which is overly harsh and was not justified
by the circumstances in which the contract was made . . .
[A]ccording to Carboni’s own testimony, the interest rate (200 percent)
was approximately 10 times the rate then prevailing in the credit market
for similar loans . . . Carboni contends the high interest rate was justified
because no other charges were made for the loan (such as points and
documentation fees) and, if it had been paid off as scheduled, the loan
would have actually been cheaper than the alternatives available to the
Arrospides. Carboni’s own testimony again undermines his argument.
Carboni claimed the Arrospides could have obtained a $4,000 loan secured
by a third deed of trust for 10 points ($400) at 18 to 21 percent interest
(approximately $200 for 3 months) plus costs for document preparation,
title insurance and ‘so forth.’ Thus the entire cost for a three-month ‘con-
ventional’ loan would have been $600 plus unspecified costs for document
fees and title insurance. As it was, at 200 percent interest, Jorge Sr. would
have paid $2,000 to borrow $4,000 for three months. In these circum-
stances, we doubt whether the loan obtained was cheaper than more
conventional financing.
In any event, Carboni’s argument ignores the fact that the principal
amount of the note ballooned over the next four months to more than
$99,000, and that the due date was extended (at least implicitly) beyond
three months. Carboni voluntarily transformed a $4,000 note into a
$99,000 line of credit. His argument simply cannot justify a 200 percent

rate on the amount ultimately borrowed ($99,000) for an unspeciﬁed term

...
[T]he procedural aspect of unconscionability refers to an absence of
meaningful choice on the part of one of the parties . . . [W]e believe there
was an inequality of bargaining power which effectively robbed Jorge Sr. of
any meaningful choice.
Viewing the evidence in the light most favorable to the judgment, we
must presume Jorge Sr. was acting under emotional distress when he
borrowed the funds to pay his parents’ medical expenses. Most important,
it appears Jorge Sr. had attempted unsuccessfully to secure a loan from
other sources. The ‘Agreement’ signed by the parties in connection with the
loan states that ‘Owner acknowledges and agrees that Lender’s charges for
the loan are costly, but Owner has tried unsuccessfully to obtain a loan
from other sources and now feels that making this loan is the best way for
Owner to make the payments on his bills and obligations.’ Thus, it appears
that Jorge Sr. had unequal bargaining power because he was unable to
obtain a loan from other sources. Consequently, Carboni was able to offer
him credit on a ‘take it or leave it’ basis. This effectively deprived Jorge Sr.
and his son of any meaningful choice, since they had no alternative for
obtaining credit.”
Note. The court seems to be saying that the contract is “substantively”
unconscionable because the borrower could have obtained credit at a lower
rate and “procedurally” unconscionable because he could not. Consider
whether this decision is correct if, given his credit status, the borrower
could not have obtained credit at a lower rate.

German Law
German Civil Code
§ 138 TRANSACTION CONTRARY TO GOOD MORALS
(1). A legal transaction that violates good morals (gute Sitten) is void.
(2). A legal transaction is also void when a person takes advantage of
the distressed situation, inexperience, lack of judgmental ability,
or grave weakness of will of another to obtain the grant or promise
of ﬁnancial advantages for himself or a third party that are obvi-
ously disproportionate to the performance given in return.
Note on the Term “usury”. In the Middle Ages, “usury” meant taking
any interest on a loan. In modern English, it means taking excessive
interest. In modern German, “usury” (Wucher) means taking excessive
advantage. So § 138(2) is said to be a remedy for “usury” even though
that sounds a bit odd in English.
Note on Door-to-door Sales. Section 312 of the German Civil Code
now provides that if a consumer enters into a contract of exchange with
someone who has come to his home or his place of work he has the right to
cancel it. According to § 355, he must do so within two weeks. He can cancel
for any reason or no reason, not simply if the price is unfair.

Reichsgericht, October 14, 1921, RGZ 103, 35

“The defendant leased certain property from the plaintiff in March
1918. In April 1918 the defendant sought to withdraw from the contract
and to have it set aside for error and for fraud, and also argued that it was
void under § 138 of the Civil Code. The plaintiff brought an action to
establish that the lease was valid. Judgments below and on appeal were
for the plaintiff. The defendant’s appeal [Revision] was successful . . .
The court of appeal . . . was in error in holding that § 138 of the Civil
Code was not applicable. The court only concerned itself with the objection
of usury under the second paragraph of § 138. In view of the factual
situation, as it was established, and the claims of the defendant, which
are backed by evidence, even this result is legally doubtful. The lease,
which generally puts the burdens predominantly on the lessee (see §§ 1,
4, 6) contains especially oppressive provisions in §§ 5, 7, and 8. Under § 5
the lessor has the right to restrict the lessee’s use to one-half of the leased
property. In this event the yearly payment is to be reduced from 650 to 350
Reichsmarks, but no refund is to be made on the lump-sum payment of
8,000 Reichsmarks made at the commencement of the lease regardless of
the year of the lease in which this occurs. The court of appeal recognized
that this provision was particularly oppressive for the defendant but con-
sidered that it should refuse, even for the situation thus envisaged, to
recognize a gross disproportion in the rent and the other obligations
assumed by the defendant. The court of appeal relied here upon its own
evaluation, but did not even say what it would consider to be the normal
rent. The defendant asserted, relying upon experts, that the normal rent
would be 500 Reichsmarks, thus without regard to § 5, only one-third of the
yearly rent paid under the lease that the court of appeal set at 1594
Reichsmarks. Although the court of appeal is free to call its own experts
or to decide on the basis of its own knowledge, it must make a finding on
this point. Under § 7 the lessor is given the right to require the lessee to
give up the premises at once in the event that the rent is not paid on time or
other duties under the lease are not properly performed by the lessee. The
lessee, however, remains liable for the future rent and the lump-sum
payment of 8,000 Reichsmarks is lost, also without any distinction as to
when this took place. Under § 8, the lessor’s heirs, in the event of her death,
have the right to terminate the lease. If this termination occurs within the
first three years of the lease, half of the 81,000 Reichsmark payment will be
returned. The disproportion that emerges from all of these provisions
taken together cannot be justified by the interests of the lessee upon
which the court of appeal relied. There is no evidence that the lessee was
in special difficulties at the time the lease was concluded, but the fact that
the lessee entered so easily upon such an unusually burdensome contract
indicates indiscretion, that is to say, a failure to understand the conse-
quences of acts due to indifference or to a lack of sufficient reflection. The
defendant has offered proof that she was, in general, inexperienced in
business matters and that the plaintiff knew this. Therefore, it is not
necessary to have further evidence taken as to the factual situation nor
to consider the case again under § 138(2) of the Civil Code as the lease is

void under the facts as found under § 138(1), which the court of appeal did
not consider. The courts, to be sure, have usually drawn the conclusion as
to § 138(2) that standing alone, a disproportion between performance and
counter-performance, even if very large, cannot justify the applying the
general principle of § 138(1). Nevertheless, other circumstances, either
alone or in combination with such a disproportion, may cause a transaction
to appear as immoral and, therefore, void under § 138(1). That is so with § 7
of the contract which provides that every defect in performance not only
made the lessee lose the right to continued use of the property, while the
rent still had to be paid, but also results in the loss of the entire 8,000
Reichsmark payment. Particularly objectionable is the intention, which
ﬁnds expression in various provisions of the contract, including § 7, to
retain the 8000 Reichsmark down payment, if at all possible, without
giving any performance in return . . .. The contract is therefore void under
§ 138(1). The complaint is rejected and the plaintiff ordered to repay the
8,000 Reichsmarks with interest.”

Reichsgericht, March 31, 1936, RGZ 150, 1

“The Fifth Civil Senate of the Reichsgericht . . . brought the following
question before the Great Senate for Civil Matters of the Reichsgericht:
According to the judicial decisions interpreting § 138 of the Civil Code . . ., is
it to be maintained that:
A transaction in which performance and counterperformance are
strikingly disproportionate is invalid when either all of the elements
of usury (§ 138, par. 2) are present, or some additional circumstance is
added to the disproportion which, taken together with the dispropor-
tion, makes the contract contrary to good mores given the entire form
of the contract as shown by the combination of its content, motive, and
purpose, and hence as shown by the combination of objective and
subjective criteria (§ 138, par. 1) or, in the alternative, can a transac-
tion be held invalid under § 138, par. 1 of the Civil Code when the mere
presence of a striking disproportion is proven without the addition of
an additional circumstance and without consideration of the character
of the party interested in the transaction, and thus when the transac-
tion is considered in a purely objective manner . . . ?
The Great Senate for Civil Matters of the Reichsgericht answered the
question in the following manner:

A juristic act (Rechtsgeschäft) in which performance and counterper-

formance are strikingly disproportionate but in which the remaining
elements of usury (§ 138, par. 2) are not present is invalid under § 138,
par. 1 when, in addition to the disproportion, the party claiming the
disproportionate advantage exhibits such a character that the juristic
act, given its content, motive, and purpose, offends healthy national
and popular feeling (gesunde Volksempﬁndungen). Under some cir-
cumstances, such a character may be inferred from the dis-proportion.
When one party, through malice or gross negligence, ignores the fact

that the other has consented to hard terms to escape a difficult situ-
ation, this consideration can, in conjunction with the disproportion,
make the juristic act invalid . . .
[T]he judicial decisions of the Reichsgericht indicate that when all the
elements of usury are not present, the transaction is to be declared invalid
if, in addition to the magnitude of what is promised, some other circum-
stance is also present which, taken in conjunction with the disproportion,
makes the juristic act appear contrary to good morals, given the entire form
of the juristic act as shown by the combination of its content, motive, and
purpose. As a rule, the party who will be harmed if the transaction is
declared to be invalid must have been aware of the factual circumstances
which make his action appear offensive to proper conduct, although he
need not have been aware that his action offended good morals. The
Reichsgericht has abandoned the narrower view . . . that transactions in
which a disproportion is present between performance and counterperfor-
mance . . . is sufficient of itself to prove the invalidity of the transaction on
the basis of § 138, par. 1, without the conjunction of any additional circum-
stances, and in particular without consideration of the character of the
party interested in the transaction, and thus by a purely objective evalu-
ation . . .
The Great Senate for Civil Matters . . . considers a legal transac-
tion in which performance is strikingly disproportionate to counter-
performance, but in which the remaining characteristics of usury are
absent, to be invalid under § 138, par. 1 of the Civil Code if, in addition
to the disproportion, the party claiming the disproportionate advan-
tage exhibits such a character that the juristic act, given its content,
motive, and purpose, offends the healthy national and popular feeling
(gesunde Volksempfindungen).
The following considerations lead it to this conclusion.
The concept of an ‘offense to good morals,’ as contained in §§ 138 and
826 of the Civil Code must, by its nature, receive its content from the
feelings of the people dominant since the revolution: from the National
Socialist world view (Weltanschauung). Section 138, with its content com-
pleted in this way, is also applicable to juristic acts of the earlier period in
which all matters have not yet been finally settled. If a contract is offensive
to good morals, according to the viewpoint that is now determinative, then
no legal protection can be granted to it by a German court.
The whole of the content of § 138 shows that a disproportion alone does
not lead to the invalidity of a legal transaction. For, if the presence of a
disproportion were a sufficient factual circumstance for invalidity, it would
be pointless for paragraph 2 to add particular requirements for invalidity
which look to the external and internal factual situation of the parties. The
mention of additional elements necessary for invalidity demonstrates that
the factual circumstance of a disproportion, taken alone, cannot lead to
invalidity. For the provisions of paragraph 1 to be applied, more ought to be
present than simply the disproportion which is one of the elements of usury
of paragraph 2. For paragraph 1 to apply, some other circumstance must be

added in the place of the elements of exploitation which are not present, a
circumstance which, together with the disproportion, gives the transaction
the mark of an offense to good morals.
Such an interpretation of the statute is internally correct because it
corresponds to the general concept of an ‘offense to good morals.’ A proper
view of the morality of an action requires that the total form of the action be
examined, and not that single factual circumstances be treated in isolation
and separation from each other. When the question arises of whether a
transaction is to be countenanced or not, all circumstances must be taken
into account which constitute the transaction and give it color. Otherwise
an incomplete picture would be created. Now it is precisely the character of
the interested party and his motive and purpose that contribute to giving
an individuality to each individual transaction. Participation in a legal
transaction which offends good morals stigmatizes the party who seeks a
profit from it in a manner consistent with healthy national and popular
feelings and exposes him to the contempt of honest national comrades. The
judge must take these legitimate feelings into account. He can only take
the responsibility for exposing a party to contempt by rendering a decision
when that party has truly deserved it, when the party himself is to blame.
This is only the case when the character which the party has displayed is
reprehensible and worthy of reproach. Moreover, in evaluating a contract,
proceeding from these considerations of a general nature, one must look
beyond the content of the contract which indicates a disproportion to the
motives of the interested party and the purpose he pursued; one must
accordingly ask the question whether the legal transaction, given its entire
form as determined in this way, offends healthy national and popular
feeling, or, to use the expression of the Motive [the drafter’s explanation]
of the Civil Code (vol. 2, p. 727), whether it offends the sense of decency of
all fair and right-thinking persons.
A transaction which leaves the channels of lawful fair exchange in
which both parties’ interests are correctly reflected will only come into
being where wholly particular and irregular circumstances are present
which trick the weaker party into entering such an unfair contract.
Whoever in commercial life knowingly uses the weaker position of another
to obtain an excessive profit displays impermissible self-interestedness
and thereby acts reprehensibly. However, one also offends healthy
national and popular feeling when he maliciously or through grossly negli-
gent indiscretion ignores the fact that the other party is consenting to
harsh conditions only because of the difficulties of his situation. One who
will not see and who obtains advantages in this way which are not justified
by the state of affairs must resign himself to being treated as one who acts
knowingly.
The judge initially has to decide, in adjudicating such a disputed case,
whether a striking disproportion between performance and counterperfor-
mance is present and to what extent this is the case. The degree of this
disproportion is an important source of knowledge about the character of
the party accepting the advantage. It can be so large that it forcefully
suggests the conclusion of the contract through knowing or grossly

negligent use of some factual circumstance impinging on the other con-

tracting party.
The contemporary conception of social and commercial life moves in a
particularly sharp manner against a self-interest of an individual national
comrade which is disadvantageous to the whole; it prosecutes the struggle
against such a mental attitude with all means at its command, in the area
of criminal law as in that of civil law. This conception provides correct
interpretation and application of the statutes, even as they are set forth.
For in this way all cases of this type are to be understood, cases which in
their entire form conflict with healthy national and popular feeling and
with the interests of the national popular community. Moreover, a proof
limited to the objective content of the contract, which did not consider the
character of the interested parties and particularly that of the party seek-
ing the advantage, would not only contradict the existing law of § 138, but
would also be incorrect by reason of its incompleteness and a false applica-
tion of the general concept of proper conduct.
For commercial life, the careful and prudent conduct which is an
essential condition for the welfare of the national whole, and the security
of commercial legal transactions is imperatively required. Pertaining to
this security is, in the first place, fidelity to contracts. Accordingly, the
invalidity of a contract which has been concluded ought to be declared only
with care and circumspection. Thus, judicial decisions concerning the
application of § 138 have with good reason been disposed to grant such
requests only after careful proof of the totality of circumstances of the
individual transaction, circumstances pertaining both to persons and to
things. The decisions have been wary of following the path of “laesio
enormis” (rescission of sale for disproportion of more than half) of Roman
general law, a path expressly abandoned by the legislator of the Civil Code
as well (Motive, vol. 2, p. 321). Moreover, an effective device in the struggle
against reprehensible self-interestedness is indicated by the consideration
that not only knowing exploitation of the other contracting party, but also
malicious or grossly negligent ignorance of the existence of a critical situ-
ation by the contracting party who enjoys the advantage may, in conjunc-
tion with the disproportion, lead to the invalidity of the legal transaction.”
Note. As mentioned earlier, judges during the Third Reich would
sometimes use terms drawn from Nazi ideology which showed their alle-
giance to the regime and which may or may not have had anything to do
with their decision. One of them was gesunde Volksempfindungen trans-
lated here as “healthy national and popular feeling.” According to § 2 of the
Criminal Code of 1935 (Strafgesetzbuch), a person was punishable if he
“commits an act which either the statute declares to be punishable or
which deserves punishment according to the basic principles of a criminal
statute or according to healthy national and popular feeling.” In his com-
mentary on this section, Schönke explained that “[h]ealthy national and
popular feeling means the natural feeling for law of all fair and right
thinking national comrades (Volksgenossen).” (Adolf Schönke,
Strafgesetzbuch für das deutsche Reich Kommentar (1944), p. 23, to § 2.)
After the allied victory, the Control Council of the Allies which

administered Germany promulgated a law prohibiting punishment of acts

on the grounds that they violated gesunde Volksempﬁndungen. (Military
Government – Germany, United States Zone, Law no. 1, Ordinance No. 7,
art. 4, Oct. 18, 1946, in Leon Friedman, The Law of War, A Documentary
History 1 (1972), 913.)
Today, however, the Nazi terminology appears superﬂuous to the
principle at stake. German courts continue to give relief under § 138(1) of
the Civil Code when a party not only took a disproportionate advantage but
exhibited a “reprehensible character” by so doing as in the next case.
Consider what, if anything the requirement of immoral behavior adds to
the requirement that he must have taken a disproportionate advantage.

Bundesgerichtshof, November 9, 1961, BB 1962, 156

“The conclusion of a contract of loan for over 20,000 DM provided the
lender with an ‘agreed profit’ of 750 DM per month. This profit was, in
reality, an interest rate on the loan of 45 percent annually. Because of the
amount of the agreed interest rate, a striking disproportion did exist
between performance and counter-performance. However, an offense to
good morals and hence the invalidity of the contract under § 138 par. 1 of
the Civil Code can only be found where, in addition to the objective dispro-
portion of the two performances, the reprehensible character of the lender
at the conclusion of the contract can be established . . .
A high rate of interest going beyond all reasonable measure itself
clearly indicates that the defendant has a character that merits disap-
proval. An interest charge of 45 percent should be condemned . . .
because an acceptance of it has an unhealthy influence on the capital
market and also creates the danger of causing the financial collapse of
the debtor, which actually occurred in this case soon after the conclu-
sion of the contract. The question of whether an interest rate of 45
percent can accordingly make a contract of loan invalid by itself need
not be answered. In this contract, the parties agreed not only to the
high interest charge, but also to security for the loan which was high
to an entirely uncustomary degree: in addition to a note for the entire
sum borrowed, payment of which was guaranteed by his wife, it
included the conveyance for security of the debt of a small store and
six oil paintings. One who offers security of this amount can always
obtain credit at the normal bank rate of interest and does not need to
pay a 45 percent interest charge. Thus it was forcibly brought to the
attention of the defendant that only wholly particular circumstances
could have induced the general debtor (the borrower) to conclude a
contract of loan on such terms. Either the general debtor must have
been in a difficult position which prevented him from obtaining credit
on normal terms, or the transaction for which he needed credit must
have been so dubious that a credit institution would not finance it . . .
If these considerations – whether relating to the entire economic
position of the general debtor (the borrower) or to the nature of his trans-
action – which come forcibly to one’s attention, were unknown to the

defendant, then they were carelessly ignored, his sole concern was to
procure himself a wholly uncustomary profit on his money. The contract
of loan must be held to offend good morals because of this heedless struggle
for profit. That the general debtor himself offered this interest rate and
security does not affect this result. Neither can the defendant make the
objection that it was necessary for the general debtor, because of his diffi-
cult economic position or the type of transaction he intended, to accept a
loan on such harsh terms.” [citations omitted]
Note. According to the court, the borrower could have received normal
credit terms elsewhere because he could offer as security a small store and
six oil paintings. It does not discuss the value of the store, or the borrower’s
equity in it, or the value of the paintings. It does not explain why a person
who could have obtained credit on normal terms and seems to have had
none of the weaknesses mentioned in § 138(2) would have agreed to the
terms so onerous if he could get normal terms elsewhere. Consider what a
court should do if he could not have received normal terms because of his
poor credit status. See Carboni v. Arrospide, above.

French Law
French Civil Code
ARTICLE 1106
A contract is synallagmatic where the parties undertake reciprocal
obligations in favour of each other. It is unilateral where one or more
persons undertake obligations in favour of one or more others without
there being any reciprocal obligation on the part of the latter.
A RTI CLE 1168
In synallagmatic contracts, a lack of equivalence in the acts of per-
formance of the parties is not a ground of nullity of the contract, unless
legislation provides otherwise.
A RTI CLE 1674
If the seller receives less than ﬁve-twelfths of the value of immovable
property, he can have the sale set aside even if he has expressly renounced
this right in the contract and stated that he was making a gift of the excess
value.
A RTI CLE 1681
In the event that an action in rescission is permitted, the buyer has the
choice either to return the object and recover the price which he paid, or
keep the estate and pay the rest of the just price, deducting one-tenth of the
total price.
Note. Articles 1674 and 1681 were contained in the Code as it was
originally enacted. As noted earlier, these texts preserved the remedy
given by older French law and by the Roman text C. 4.44.2, which spoke
only of a remedy for sellers of land. Special statutes have given a remedy to
buyers of fertilizer, seeds, and fodder who pay a quarter more than their

value;1 victims of sea2 or aviation accidents3 who pay an unfair amount for
rescue or salvage; and those who sell artistic or literary property for less
than five-twelfths its value.4
French courts have also given relief for mistake, fraud, and duress
when prices are disproportionately high or low. In the cases below, they did
so although, according to the Civil Code, as it was then, relief for mistake
was to be given for an error in substance of an object (art. 1110), relief for
fraud for “an artifice such that the other party clearly would not have
entered into it had it not been employed” (art. 1116), and relief for duress
when a “reasonable person” would “fear that his body or fortune is exposed
to a considerable and present harm” (art. 1113). The provisions governing
mistake, fraud, and duress were modified by Ordonnance no. 2016–131 of
February 10, 2016 by the following articles.

French Civil Code

A R T I C L E 1136
A mistake as to value is not a ground of nullity where, in the absence of
a mistake about the essential qualities of the act of performance, a con-
tracting party makes only an inaccurate valuation of it.
A R T I C L E 1137
Fraud is an act of a party in obtaining the consent of the other by
scheming or lies. The intentional concealment by one party of information,
where he knows its decisive character for the other party, is also fraud.
A R T I C L E 1140
There is duress where one party contracts under the inﬂuence of a
constraint which makes him fear that his person or his wealth, or those of
his near relatives, might be exposed to considerable harm.
A R T I C L E 1141
A threat of legal action does not constitute duress, except where the
legal process is deﬂected from its proper purpose or where it is invoked or
exercised in order to obtain a manifestly excessive advantage.
A R T I C L E 1142
Duress is a ground of nullity regardless of whether it has been applied
by the other party or by a third party.
A R T I C L E 1143
There is also duress where one contracting party exploits the other’s
state of dependence and obtains an undertaking to which the latter would

1. Law of July 8, 1907, D.P. 1908.IV.173, 3. Law of May 31, 1925, art. 57, 1925 D.
as amended by Law of July 8, 1937, D.P. P.IV.41, 45, current version in Civil Aviation
1938.IV.168. Code (Code de l’aviation civile) art. L. 142–1,
2. Law of April 29, 1916, art. 7, D.P. Decree of March 31, 1967, D.S.L. 1967.184.
1919.IV.IV. 285, current version Law of 4. Law of March 11, 1957, art. 33, D.L.
July 7, 1967, art. 15, D.S.L. 1967.258. 1957.102, 104.

not have agreed in the absence of such constraint, and gains from it a
manifestly excessive advantage.
Note. Under the new Article 1136, “[a] mistake as to value is not a
ground of nullity where, in the absence of a mistake about the essential
qualities of the act of performance . . . .” Under the new Article 1143,
“[t]here is also duress” when one party “exploits the other’s state of depend-
ence” and “gains from it a manifestly excessive advantage.” In reading the
following cases, consider whether the courts were giving relief for mistake,
fraud, and duress, as these terms were originally deﬁned by the Code, or
whether they were doing so because the price was unfair. Consider
whether a court should give relief in these cases after the amendments to
the Code.

Cour de cassation, ch. req., April 27, 1887, D. 1888.I.263

On September 22, 1886, Fleischer, captain of the steamship Rolf,
whose ship was stuck in the sands of the Bay of the Seine, was about to
lose both his ship and cargo. He agreed to pay 18,000 francs for the
services of a tug boat, which was the amount that the captain of the tug
ﬁxed as the value of salvage. He only escaped a total loss by agreeing to
this amount. The Tribunal de commerce of Rouen held that Fleischer only
had to pay 4,190 francs for the services he had received. The Cour de
cassation upheld that decision. It said that according to “article 1108 of
the Civil Code the consent of the person who obligates himself is an
essential condition for the validity of an agreement; as, when the consent
is not free, when it is only given because of fear inspired by a considerable
and present evil to which the promisor’s person or fortune is exposed, the
contract concluded in these circumstances is infected with a defect that
renders it voidable . . . .’ The decision under appeal ﬁnds that the captain
of the Rolf only agreed to the contract now in litigation in order to save his
ship, which otherwise would have very shortly foundered and have been
lost . . . [He] was compelled to enter into the agreement forced upon him by
the abuse of his desperate situation only after having vainly argued with
the captain of the Arbeillei . . . .”

Cour de cassation, ch. req., January 27, 1919, S. 1920.I.198

“Whereas gratuitous payments made between living persons or by
testament must be the free expression of the donor’s own independent
will; as it is the task of the courts to invalidate such gratuities when the
donor’s consent was extorted by force; whereas in the judgment under
appeal it was found as a fact that Antoine Duvoisin, a paralyzed old man,
weakened by illness, conﬁned to bed, and abandoned by the members of his
family, was at the mercy of Mr. and Mrs. Vigneron, his métayers [tenants of
a farm who pay rent in kind], and that the threat they made not to continue
their services to him unless he consented to give them his goods was of a
kind to inspire such a fear in him that he found it impossible to resist their
demand; as proof of constraint can also be found in the fact that, according
to the decision under review, Antoine Duvoisin answered the notary who

was drawing up the contract and had asked if he consented, by saying ‘I

must’ (Il le faut bien); as the decision under review also found that the
pressure applied by the Vignerons was made more apparent by a series of
later actions in which Antoine Duvoisin made gifts to his métayers to
assure himself of their services” the decision of the lower court invalidating
the gratuitous payments is upheld.

Cour d’appel of Douai, June 2, 1930, Jurisprudence de la Cour

d’Appel de Douai 82, 183
“Lawniezak has taken an appeal from the decision of the court of
d’Avesnes . . . which ordered him to pay the sum of 60,000 francs to
Hautmont for damages on account of an accident for which Lawniezak
was adjudged liable . . . He demands this decision be modified, claiming
that Hautmont, in a contract dated July 3, 1930 and signed by the parties,
declared him to be discharged from the consequences of the accident, this
being pursuant to a settlement which set 1,500 francs as the amount
receivable by the said Hautmont for all damages . . .
[J]udicial decisions have consistently affirmed that fraud can be estab-
lished by all methods of proof including presumptions . . . [I]n this case, this
proof has been made by clear, weighty, and consistent presumptions . . .
[T]he contract itself contains the proof of the fraudulent maneuvers by
means of which it was obtained by the Caisse d’Assurances Mutuelles . . .
[I]t is certain that Hautmont, without taking leave of his senses, would not
have given up for 1,500 francs the benefits of a judgment which entitle him
to 60,000 francs in damages when Lamy, in a contract which appears in his
files, had bound himself to advance all his expenses and to claim nothing in
return if the case were lost . . . [I]t is evident that the insurer took advan-
tage of the state of depression of Hautmont – a state established by experts
appointed by the court without the need even arising to turn to the even
more conclusive opinion of Dr. Rouges de Fursac, whose authority is incon-
testable – in order to extort a waiver of rights by inspiring the spurious fear
in him of fees which in any event he would not have had to pay . . . .”

Cour d’appel, Paris, January 22, 1953, J.C.P. 1953.II.7435

S. sold three seventeenth-century paintings of the Dutch and Flemish
schools to Delvaux for 250,000 francs each. At trial, experts valued the
paintings at 40,000 francs, 45,000 francs, and 55,000 francs. The Tribunal
civil de la Seine declared the sale void and ordered S. to restore the amount
he had been paid by Delvaux (400,000 francs) and to pay him 100,000 francs
as damages. The Cour d’appel upheld this decision, saying “that Delvaux
thus committed a considerable error in the value of the oil paintings which
were offered him, and that fraud is a basis for invalidating a contract when it
has produced an error in value . . . [T]he facts of the case show that S., who
knew Delvaux to be lacking in experience, as he recognized in a letter of
November 7, 1946, deceived the buyer in the value of the three oil paintings
offered . . . [T]his deceit has clearly surpassed the exaggeration and hedging
permitted to every seller . . . [T]he buyer of old paintings, unless he possesses

special knowledge himself, ﬁnds himself forced to leave much to the

affirmations of the merchant, particularly when the merchant presents
himself as one with a reputation guaranteeing honesty and a special
technical ability . . . [I]n this case, by publicizing his reputation as an
‘art critic, expert on old paintings, arbitrator at the Tribunal de commerce
de la Seine, member of the French Society of Literature, Officer of Public
Education,’ S. obligated himself to demonstrate competence and probabil-
ity and, in any event, renounced the use of any deceit as to Delvaux, an
uninstructed buyer who placed a particular confidence in him because of
his reputation . . . [T]he circumstances show that S. only used this repu-
tation, and particularly his title as arbitrator at the Tribunal de com-
merce, which he held at the time, for the purpose of capturing Delvaux’s
confidence . . . [T]he letter of S. cited above, written several days after the
sale, is indicative of the procedures he used with regard to Delvaux . . . [T]
o hold on to Delvaux, who was disturbed by the valuations of experts, S.
did not hesitate to boast of his ‘long experience as an expert recognized by
the government, an art critic, and a correspondent with all the journals of
the fine arts both in France and abroad,’ and of his large fortune, nor did
he hesitate to present himself as ‘often called to act as judge of the false
opinion of ignorant experts who give themselves titles which they do not
really possess,’ and to affirm that the paintings sold ‘have an inter-
national value’ . . . .”

Cour d’appel, Paris, October 14, 1931, D. 1934.II.128

In a contract with Ciment Verre, Marchand et fils agreed to demolish
reinforced concrete tanks at a price of 100 francs per cubic meter. The trial
court held Marchand et fils liable, finding that “Ciment Verre was able to
believe that Marchand et fils possessed all the means of demolition appro-
priate for any concrete of this type, which in this case turned out to be of a
special kind of particular hardness, a fact which Marchand and fils should
have taken into account before entering into the agreement.” The Cour
d’appel overturned this decision. It said: “[T]here is no indication that
Marchand et fils, who by profession were suppliers of sand, gravel and
cement and not owners of a demolition business, were aware when they
bound themselves to the agreement of the special difficulties inherent in
the relationship of Ciment Verre to the Brasseries Karcher, even though at
the time of construction they had furnished some of the materials in which
they deal . . . [O]n its part, Ciment Verre, having done the construction, was
aware of the special nature of the building and the very particular hard-
ness of the cement which they had mixed and the particularly high per-
centage of steel added to the cement because of the purpose for which the
tanks were intended . . . [T]he expert report shows that it is improbable that
a specialist in reinforced concrete and in tanks such as Ciment Verre would
not have known of the flagrant and absolute impossibility of performing
this demolition at a price of 100 francs per cubic meter . . . [T]his substan-
tial difference indicates sufficiently that Marchand et fils, in setting the
price of 100 francs, perhaps hastily, only had in view the demolition of
normal reinforced concrete and that, given the silence intentionally

preserved by Ciment Verre, the common intention of the parties only

covered concrete of such a nature . . . [O]ne must see in this case an error
in substance in a quality of the thing which was the object of the contract,
an error which a party committed or was induced to commit, and which is
sufficient to vitiate the consent of Marchand et fils, Ciment Verre having
only itself to blame both for its silence over the nature of the work and for
the fact that it had accepted performance of the work to which it was
obligated before ever having contracted with Marchand et fils . . .. ”

Cour de Cassation, ch. soc., May 4, 1956, J.C.P. 1957.II.9762

The lower court invalided a lease between Sanchez-Boxa and Vidal
Associates on the ground of an error in substance. The Cour de cassation
affirmed. It noted that the court below had found that “the rented property
is in a dilapidated state, having vast amounts of uncultivated land not
mentioned in the contract and important deficiencies in the vineyards and
orchards . . . but also that the lessee could not have understood the diffi-
culty and the importance of the efforts necessary to put the property in
order, and this situation is due to the initial failure of the lessor to give an
objective initial presentation of the circumstances,” and the decision adds
that “the silence or maneuvers of the lessor to conceal the importance and
difficulty of putting the property in order led the lessee into error, and if the
lessee had known the true situation, the contract would never have been
accepted in its current form and perhaps would never have been accepted
at all . . . [T]he result of these findings is that Sanchez-Boxa took the lease
to the knowledge of the lessor with the view of rapidly putting the property
in order, and consequently the decision below could hold, without violating
the relevant texts, that there was an error in the substantial qualities of
the thing leased, which the judge called its ‘agricultural value’ . . . .”

Cour de cassation, ch. civ., November 29, 1968, Gaz. Pal. 1969.J.63
Vanden-Borre leased a villa on the Côte d’Azur for the month of July
from its owner, Berthon. The lower court held that the lease was void for an
error in substance. It ordered the lessor to return the rent paid in advance
and to pay damages. The Cour de cassation upheld this decision. It noted
that “the decision under review states that, standing alone, the lease,
taken for the month of July, 1964, at a price of 6,000 francs with additional
charges would permit Vanden-Borre to assume that the premises were
correspondingly desirable given that the bureau which was Berthon’s
agent had told him speciﬁcally that this was a comfortably equipped villa
. . . [H]owever, both the interior and exterior of this villa gave the incontro-
vertible impression of a general lack of maintenance, the bedding, doors
and walls being manifestly in a ﬁlthy condition, the furniture being clearly
inadequate, and major construction work, undertaken by the Société
Caliqua in the immediate area of the villa, would disturb the peace and
independence of the occupant . . .. ”

Chinese Law
With the promulgation of the General Principles of Civil Law (1986),
Chinese law adopted two doctrines that remedy unfairness: “obvious unfair-
ness” (显示公平) and the “exploitation of one’s vulnerabilities” (趁人之危).
Under Article 54 of the Contract Law (1999) these factors make a contract
voidable. According to the Supreme Court’s opinion in GPCL (1988), “obvi-
ous unfairness” requires both subjective unfairness and objective unfairness
as a requirement, a distinction like that drawn in the United States in
discussions of the doctrine of unconscionability. Subjective unfairness con-
cerns what in American law is called “procedural unconscionability”: one
party exploits its bargaining advantages over the other. Objective unfair-
ness concerns only the disparity (or gross disparity) between price and
value, which is similar to “substantive unconscionability” in American
law. Therefore, the two doctrines seem to overlap. Han Shiyuan has claimed
that despite the Supreme Court’s opinion, judges applying the doctrine of
“obvious unfairness” continued to require only substantive unfairness or
objective unfairness.1 In applying the doctrine of “exploitation of one’s
vulnerability” they required procedural unfairness.
In 2017, the General Provisions of Civil Law merged the two doctrines
into one which is called the doctrine of “obvious unfairness.” “Obvious
unfairness” makes a contract voidable. It appears that both procedural
unfairness (exploitation) and substantive unfairness (significant imbal-
ance or gross disparity) are necessary to establish “obvious unfairness”:
this provision has been adopted by the Chinese Civil Code. But whether the
change in the General Provisions will lead to a change in practice has yet to
be seen. Han Shiyuan expects relief for “obvious unfairness” will still be
given for substantive unfairness which will depend on an objective
standard.2 According to Han, however, to give relief on that basis is a
mistake. He believes that Chinese law should be primarily concerned
with relief for procedural unfairness. In his view, to give relief for substan-
tive unfairness through such doctrines as obvious unfairness and change of
circumstances circumvents party autonomy and the principle of pacta sunt
servanda. Consequently, relief should be given only under exceptional
circumstances.3
Even leading Chinese scholars are still sufficiently under the influence
of will theories that they cannot explain why the fairness of a price should
matter. Yet the doctrine of “obvious unfairness” has commonly been used to
give relief when the price in a contract is unfair.

Supreme People’s Court’s Opinions on General Principles of Civil

Law (1988)
SECTION 70. EXPLOITATION OF ONE’S VULNERABILITY
The conduct of a party is considered exploitation of one’s vulnerability
when he forces the other to make an untruthful declaration of intent and

1. 韩世远《合同法总论》 Han Shiyuan, 2. Ibid. 52.

The Law of Contract (Beijing, 2018), 292. 3. Ibid. 53.

seriously harms the other party’s interest by taking advantage of the other
party’s unfavorable position in order to obtain undue beneﬁt.
SECTION 71. OBVIOUS UNFAIRNESS
It is considered obvious unfairness when one party uses its strength or
the other party’s inexperience to achieve signiﬁcantly unjust balance
between rights and obligations that is contrary to the principle of compen-
sation for equal value.

Chinese Civil Code

A RTICLE 151
When one party exploited situations such as the other’s danger, vulner-
ability or lack of judgment and it resulted in the obvious unfairness of a civil
juristic act at the time of its formation, the aggrieved party has the right to
request people’s court or arbitration agency to avoid such a civil juristic act.
(Previously General Provision of Civil Law of People’s Republic of China,
Article 151.)
Note. The Chinese term translated as “civil juristic act” is a Chinese
translation of the German term Rechtgeschäft. A Rechtgeschäft is an expres-
sion of will by a private person directed to producing a legal result. A contract
is a Rechtgeschäft that requires the expression of will of two or more parties.

Jinding Corp. v. Jirong Corp., (2014) 民申字第1072号 (2014) Min

Shen Zi No.1072
A product sales agreement was entered between Jinding Corp. (JD) and
Jirong Corp. (JR). During the course of transactions, they entered a supple-
mentary agreement that stipulated the equipment payment amount, pay-
ment method, timing of delivery. JD Corp. sued for breach of contract
because of a 28-day delay in performance. It argued that the supplementary
agreement modiﬁed the original agreement and was the result of gross
misconception, which renders the supplementary agreement voidable.
The Supreme Court held that “[t]he supplementary agreement was
the result of careful calculation and market risk allocation given the
sudden and rapid increase of the cost of rare-earth magnet materials
after the original contract was reached. It is within the range of normal
market activities. As such, the supplementary agreement is not voidable.”

Yang v. Zhang, (2016) 宁03民终801号 (2016) Ning 03 Min

Zhong No. 801
Defendant, a medical doctor, was driving negligently and hit the
plaintiff, a pedestrian who owned a bar close by. The defendant quickly
examined the plaintiff at the scene. Before the plaintiff could have had a
reasonable chance to ascertain the amount of harm suffered, the defendant
approached the family and reached a quick settlement and release of
liabilities for a fee of RMB 90,000 yuan. The settlement was reached the
day after the accident. It turned out the plaintiff suffered brain damage

and severe bone fractures. Damages were assessed at 130,000 yuan at the
time of trial and further damages were anticipated. The plaintiff sued to
avoid the contract on the ground of gross misconception. The court set aside
the contract for both obvious unfairness and gross misconception.

Shi v. Xia, (2016) 苏09民终3731号 [(2016) Su 09 Min Zhong No. 3731]

Shi was riding a bike when she was hit by Xia who was backing his
tractor. Shi was injured and reached a settlement and release with Xia for
24,000 yuan. It turned out that the medical expenses were 28,000 and
nursing fee was 4,000 yuan. Shi sued to set aside the settlement on the
ground of misconception.
The court held that there was valid consent and no gross misconcep-
tion was found.

Tong Xu v. Liang ZF, (2017) 粤 01 民终 23863 号 [(2017) Yue 01 Min

Zhong No. 23863]
Both the trial and appellate courts held that the price in the stock
purchase agreement that assigned 49 percent of the shares of JZG Corp at
RMB 3.9 million yuan was conclusive evidence of obvious unfairness of the
contract in which the defendant sold the shares at the unreasonably high
price to the plaintiff.
It was found that “[t]he company had long been in deficit and had no
commercial value and the asset value of the company did not exceed 100,000
yuan. It is clear that the company’s shares were not worth the contract price.
The defendant either hid or did not properly disclose the true state of assets
and finances of the company and so tricked the plaintiff into making the wrong
decision in contracting. This is a violation of the principle of good faith pre-
scribed under article 6 of the Contract Law, which requires that parties shall
discharge their rights and obligations in good faith.” “Even when there is a
disparity between the contract price and value, the contract is binding contract
so long as parties reached the price after proper disclosure of the finances of the
company. Here, although the defendant claimed that he had made proper
disclosure, he was not able to prove that he had showed the plaintiff documen-
tation that reflect the asset value and finances of the company.” Therefore, the
appellate court affirmed that the defendant had not made proper disclosure
and violated the principle of good faith. Tong was ordered to return the 390,000
yuan in payment and the stock purchase agreement was avoided.

The Draft Common Frame of Reference

A RT ICLE II. 7:207 U NFA IR EXPL OITAT ION

(1). A party may avoid a contract if, at the time of the conclusion of the
contract:
(a). the party was dependent on or had a relationship of trust
with the other party, was in economic distress or had urgent
needs, was improvident, ignorant, inexperienced or lacking
in bargaining skill; and

(b). the other party knew or could reasonably be expected to have

known this and, given the circumstances and purpose of the
contract, exploited the ﬁrst party’s situation by taking an
excessive beneﬁt or grossly unfair advantage.
(2). Upon the request of the party entitled to avoidance, a court may if
it is appropriate adapt the contract in order to bring it into accord-
ance with what might have been agreed had the requirements of
good faith and fair dealing been observed.
(3). A court may similarly adapt the contract upon the request of a party
receiving notice of avoidance for unfair exploitation, provided that
this party informs the party who gave the notice without undue delay
after receiving it and before that party has acted in reliance on it.

The Unidroit Principles of International Commercial Contracts

ARTICLE 1.1 FREEDOM OF CONTRACT
The parties are free to enter into a contract and to determine its content.

ARTICLE 3.10 GROSS DISPARITY

(1). A party may avoid the contract or an individual term of it if, at the
time of the conclusion of the contract, the contract or term unjus-
tiﬁably gave the other party an excessive advantage. Regard is to
be had, among other factors, to
(a). the fact that the other party has taken unfair advantage of
the ﬁrst party’s dependence, economic distress or urgent
needs, or of its improvidence, ignorance, inexperience or
lack of bargaining skill; and
(b). the nature and purpose of the contract.
(2). Upon the request of the party entitled to avoidance, a court may
adapt the contract or term in order to make it accord with reason-
able commercial standards of fair dealing.
(3). A court may also adapt the contract or term upon the request of
the party receiving notice of avoidance, provided that the party
informs the other party of its request promptly after receiving
such notice and before the other party has acted in reliance on it.

c. Chinese Law and the State-Owned Enterprise

Zhang v. Jiangsu Performing Arts Group (PAG) & Jiangsu

Huayang Corp (H Corp) (2013) 南京市秦淮区人民法院民事判决书;
2013）白商初字第231号 [(2013)Bai Shang Chu Zi No. 231]
Jiangyang Corp (J Corp) was owned by four legal persons (corpor-
ations) that are state-owned enterprises (SOEs) including PAG and H
Corp and eight natural persons including Zhang, the plaintiff.

Zhang sued to avoid a Stock Purchase Agreement (SPG) that sold 69%
of J Corp shares owned by PAG and H Corp to Dafeng Corp (D Corp). Zhang
claimed that the SPG was reached without proper notice to her and
deprived her of her right of first refusal. Also, she alleged that the enforce-
ment of SPG led to the stripping of state assets and harm to state interest
because the state assets were severely undervalued. The transaction vio-
lated the mandatory regulations in trading state assets. The trade was the
result of malicious collusion. In addition, the transaction was a sham
transaction that adopted a legitimate means to conceal an illegal purpose.
Summary of facts and legal arguments:
The balance sheet listed J Corp’s equity interest as RMB 3,812,877.19
yuan.
J Corp also enjoys the land use right [equivalent to land ownership in
China] of 13491.9 square meters.
The purchase price for 69% of the J Corp shares was RMB 345,000
yuan.
The plaintiff was not properly notified of the transaction and failed to
exercise her right of first refusal.
The transaction was approved by the state authority. Public announce-
ment was properly made in a state-run newspaper.
The defendants argued that there was no undervaluation of state assets. The
numbers in the balance sheet were falsified in order to pass the annual
inspection of State Administration of Industry and Commerce (SAIC). The
true value of the net assets of J Corp was RMB -1,570,3000 yuan [a negative
value], which was the value they used to seek state approval of the transac-
tion. The method used for valuation was cost-plus. Also the valuation and
appraisal method excluded the real estate interest of the J Corp.
The plaintiff maintained that the transaction was a result of malicious
collusion for the purpose of stripping state assets. The valuation method
adopted by the defendants was not among the ones (income method, cur-
rent market price method, replacement cost method etc.) permitted by the
state council’s Regulations on Valuation of State Assets.
Also, the 69% J Corp shares acquired by D Corp were subsequently
traded to the two individual shareholders of J Corp who also own D Corp.
Plaintiff presented this fact as evidence for malicious collusion.
The Court held:
1. “Even if we assume that plaintiff was not duly notified of the
transaction, right of first refusal is not a mandatory condition for
the contract to be valid. Therefore, infringement of right of first
refusal does not render the purchase agreement void.
2. The Regulations on Valuation of State Assets is an administrative
regulation but rules on valuation methods do not constitute a
condition for the validity of contract, neither does violation of
these rules result in the invalidity of the purchase agreement.”

As to whether public interest was harmed, this court held that, in

order to guard the safety of transactions, we should emphasize exter-
nal formalism in determining the validity of civil juristic acts in
commerce. Therefore, we should only look at the external forms of
the civil juristic act in determining its validity. The sale of the dis-
puted shares was approved by the supervisory authority, followed the
procedures such as public announcement, and was properly registered.
The forms of the transaction had met the requirements of legal com-
pliance. Defects in valuation method and scope will not necessarily
harm public interest.
As to malicious collusion, the plaintiff cannot prove the subjective
intention of the defendants and, moreover, no harm to the third party
can be proved. Therefore, the alleged malicious collusion does not vitiate
the contract.
Note. Compare this case with Tong Xu v. Liang ZF, (2017)粤 01 民终
23863 号, presented above, and consider why the same the result was not
reached.

Bureau of Forestry of Yi County v. Fang & Fang, (2014) 宣中民四终字

第00105号; (2014) Yuan Min Si Zhong Zi No. 00105
Facts and Arguments:

Yi County Timber Company sold various houses and buildings to

two individuals Fang Shan and Fang Yusheng for RMB 47,000
yuan.
Zhang Wenqing, the general manager of the timber company, signed
the contract and later was found to have received 10,000 yuan from
Fang and Fang as a gesture of gratitude for the convenience and
help provided to them in the sale process. Zhang was convicted of
bribery. Zhang was found guilty of illegally taking a bribe and
beneﬁting the others when disposing state assets.
The Bureau of Forestry, the supervisory government agency of the
Timber company, sued on the basis of conviction to avoid the con-
tract. They claimed that the contract sold state assets at a low price
and resulted in the loss of state assets.
The Bureau of Forestry also alleged there were procedural defects in
the sale. The transaction was not approved by the management of
the Timber Company, nor did it receive government approval.
There was neither public announcement nor a public bidding
process.
Rulings and the reasoning:
The court found that the real estate sales agreement was valid. “The
defects in internal approval procedures were internal managerial issues of
the Timber company and therefore not sufﬁcient to constitute as a defense

to the validity of contract.” The fact that Zhang was found in a criminal
proceeding to have received 10,000 yuan is not sufﬁcient by itself to prove
that the sale price was suppressed and resulted in stripping of state assets.
The bribe took place three years after the contract was concluded and
therefore had no causal relationship with the contract. “The Bureau of
Forestry failed to prove otherwise and, without evidence to the contrary,
the contract is valid without evidence to the contrary.”

Chen v. Hongta, 云高二民初字第一号 (2012) [Yun Gao Er Min Chu

No.1]; (2013) 民申字第2119号 [(2013) Min Shen Zi No. 2119]
Yunnan Hongta (Hongta) is a state-owned tobacco company that owns
12.32 percent or 65,813,912 state-owned legal person shares [corporate
shares] of Yunnan Baiyao (B Corp), a state-owned and publicly traded
company. State-owned legal person shares are not usually tradable in the
market.
China Tobacco is another state-owned manufacturer of tobacco prod-
ucts and at the same time the regulator of Chinese tobacco industry
[otherwise known as the State Administration of Tobacco Monopoly].
The Ministry of Finance exercises the de facto ownership rights on
behalf of the state of China Tobacco.
SUMMARY
On January 4, 2009, China Tobacco approved Hongta’s proposal to sell
its 12.32 precent shares of B Corp. Per this approval, Hongta was permit-
ted to sell the shares without restrictions.
On August 13 and August 14, 2009, B Corp. publicly announced the
intention to trade these shares and issued a call for bidders.
On September 10, 2009, Hongta and Chen Fashu (Chen) concluded a
stock purchase agreement at a price of 33.543 yuan per share, and a total
price of 2,207,596,050.22 yuan.
Chen rendered the payment within ﬁve days of the signing of the
contract.
Art. 12 of the Agreement states that “Hongta shall, upon the receipt of
payment in full, rapidly complete all the legally required procedural steps
related to the trade such as securing state approval and public disclosure of
information. Chen shall cooperate in the completion of these measures.”
Art. 30 states that: “This Agreement becomes effective upon signing,
but it can only be performed after an approval is received from the regula-
tory agency of state assets with appropriate authority.”
On September 11, 2009, Hongta sent China Tobacco a request for
approval of the transaction that sells the B class Corp shares to Chen.
[Though the request to sell the shares had been approved, this particular
transaction also needed approval in accordance with Article 30 of the
agreement.]
On April 27, 2011, Chen sent Hongta a formal request to transfer the
shares. The response from Hongta was that they were still waiting for the

approval from their superior government agency but had not yet received a
response.
On December 21, 2011, Chen filed a lawsuit against Hongta in the
High Court of Yunnan Province. Chen asked the court to affirm the validity
of the contract and to enforce the contractual obligations. Chen also sought
to recover the damage from Hongta for breach of contract. By the time the
lawsuit was filed, the value per share had gone up to 58.45 yuan/share from
33.543 yuan/share.
On January 17, 2012, China Tobacco formally replied and disapproved
the transaction. The reason for the disapproval was to preserve and
increase the value of state assets, and to prevent the loss of state assets.
On December 28, 2012, the trial court held that the contract was valid
but denied all the other claims. The court reasoned that the contract was
legally formed and took effect upon signing. There is no breach of contract
because Hongta fulfilled its contractual obligations to seek approval. This
approval had not been obtained. Court costs of 16,968,480.02 yuan were to
be paid by Chen. Hongta kept both the shares and the money.
Chen appealed to the Chinese Supreme Court claiming that the contract
is valid and performance is due. Also, Chen argued that Ministry of Finance is
the only appropriate state agency since it, rather than China Tobacco, has the
exclusive authority to approve or disapprove the transaction.
There is a departmental regulation by the Ministry of Finance that
requires all sales of state assets exceeding 100 million by the tobacco
industry to be approved by the Ministry of Finance at the request of
China Tobacco.
By the time the appeal was heard on December 5, 2013, the value of the
shares reached 6.8 billion yuan.
The Supreme Court held that “[t]he contract had been terminated for
failure to satisfy the condition of obtaining state approval. The Ministry of
Finance does not have to consider approving the transaction because it was
not submitted for approval by China Tobacco. When a contract is termin-
ated, property received under the contract is to be returned. Therefore,
Hongta was ordered to return the contract price of 2,207,596,050.22 yuan
with interest to Chen.”

Nanning City Road East Farms v. Teng Meicai, 南宁市路东养猪场 v.滕

美, Nanning Municipal Interm. People’s Ct. 2012, (2012) 南市民二二终
字第397号; [(2012) Nan Shi Min Er Er Zong Zi No. 397]
In a 2012 appellate case regarding a dispute over the rent in a land
contract, the appellate court, Nanning Intermediate Court, affirmed the
trial court’s decision to uphold the lower rent specified in the contract and
denied the SOE’s claims that the contract was unenforceable because of
obvious unfairness and changed circumstances. In this case, a wholly state-
owned farm (“the farm”) signed a land contract leasing 4.82-mu of farmland
to a then retiring employee, Teng Meicai (“Teng”). The lease was for a
fifteen-year term, from 2003 to 2018, at the annual rent of RMB 200 yuan/

mu. The rent was considered at the time of the lawsuit to be below market.
The contract provided managing the leased farmland was Teng’s new
employment. Since his retirement, Teng was categorized as self-employed
and had to pay his own social welfare. Teng had since subleased the farm-
land to others and was using the rent as the main source of income, which
was permitted under the contract. The farm had received the rent of RMB
200 yuan/mu until 2011. Then the farm sought to increase the annual rent
to RMB 1,500 yuan/mu. When Teng refused to pay the higher rent, the farm
sued in 2011 to either terminate the contract or increase the rent to the
market level.
The court requested a third party agency to appraise the fair rent of the
farmland. It appraised the annual rent at RMB 1,447 yuan/mu for the period
of 2011 to 2018. Nevertheless, concurring with the trial court, the appellate
court upheld the original terms of the contract and ordered the state-owned
farm to perform them. The court invoked the principle of freedom of contract,
stating that “contract law protects the parties’ freedom to contract voluntarily
and whatever terms are agreed by both parties that are not against the law
are legally binding.” The court further reasoned that modification of a con-
tract requires mutual consent, which was lacking in this case. The court
rejected the farm’s argument concerning the obvious unfairness of the low
price for two compelling reasons. One was that the purpose of the contract
was to be interpreted as a subsidy; the other was that there had been a
significant disparity in financial capacities between the two parties. The
rent constituted the distribution of welfare benefits, as seen by the fact that
the farm cut Teng off the welfare benefits by allowing him to live off the leased
farmland and to sublease it. Therefore, the RMB 200 yuan/mu rent was not
subject to the market rent. Also, having defined the purpose of the contract as
a sort of subsidy, neither changed circumstances, obvious unfairness, or
impossibility arguments were grounds for relief. The farm argued that ter-
minating the contract or raising the rent is a means to prevent the dissipation
of state assets, and the continued performance of the contract will affect the
operation of the farm. Therefore, the court had to weigh the public policy of
subsidizing a retiring SOE employee against the policy of preserving state
assets. The court decided to prioritize the policy that is of greater assistance to
the more vulnerable retiring SOE employee. The court reasoned that the farm
has substantial financial capacity, while Teng was counting on the 4.82 mu
farmland as the main source of his income. Also, the contract had been
performed for ten years and only had five years remaining. The continued
performance of the contract would have only very limited impact on the farm.
Therefore, the court upheld the validity of the contract terms and ordered the
farm to continue the performance for the rest of the term.

Gao Wenjie v. Dingxi City Hee Sea Oil LLC, 高文杰 v.定西市熙海油脂有
限责任公司; Dingxi City Interm. People’s Ct. 2014; (2014) 定中民二初字
第4号 [(2014) Ding Zhong Min Er Cu Zi No.4]
In a 2014 case, the validity of an asset purchase agreement was chal-
lenged when an SOE employee, Gao Wenjie, purchased RMB 6.67 million

yuan worth of state assets at the price of RMB 3.66 million yuan. The SOE at
the time, under the direction of the local government, was going through a
restructuring process in which the SOE was sold to its employees. [Only
employees were allowed to bid and the assets were sold to the highest
bidder.] Gao acquired the state assets through an open bidding process
under the supervision of the government. His purchase of the corporate
assets and an equity interest were also affirmed by the government. The
company and the other shareholders denied his equity interest, arguing to
affirm the sale would be to encourage the stripping of state assets. The court,
however, affirmed the validity of the sale of the equity interest and the asset
purchase agreement even though the price was lower than the market
value. The court reasoned that both parties agreed that the purpose of the
asset sale at the lower price was to implement the state policy of re-settling
the former SOE employees after privatization. The Provisional Rules on
Transferring State Shares in Listed Companies by Holders of State Shares
allows holders of state shares to transfer their shares gratuitously to gov-
ernment agencies, public sector organizations, and wholly state-owned
enterprises. Such transfers require a feasibility study, financial reports,
legal opinions by law firms, development and restructuring plans, protocols
to deal with the debts, and approval by the State-owned Assets Supervision
and Administration Commission (SASAC).

2. Fairness of the Auxiliary Terms

English Law
Consumer Rights Act 2015 c. 1.
PART 2. UNFAIR TERMS
61. Contracts and notices covered by this Part
(1). This Part applies to a contract between a trader and a
consumer.
(2). This does not include a contract of employment or apprenticeship
...
62. Requirement for contract terms and notices to be fair
(1). An unfair term of a consumer contract is not binding on the
consumer.
(2). An unfair consumer notice is not binding on the consumer.
(3). This does not prevent the consumer from relying on the term or
notice if the consumer chooses to do so.
(4). A term is unfair if, contrary to the requirement of good faith, it
causes a signiﬁcant imbalance in the parties’ rights and obliga-
tions under the contract to the detriment of the consumer.
(5). Whether a term is fair is to be determined –
(a). taking into account the nature of the subject matter of the
contract, and

(b). by reference to all the circumstances existing when the term

was agreed and to all of the other terms of the contract or of
any other contract on which it depends.

Law in the United States

See Uniform Commercial Code § 2–302; Restatement (Second) of
Contracts § 208, quoted above.

Weaver v. American Oil Co., 276 N.E.2d 144 (Ind. 1971)

“In this case the appellee oil company presented to the appellant-
defendant lessee, a filling station operator, a printed form contract as a
lease to be signed, by the defendant, which contained, in addition to the
normal leasing provisions, a ‘hold harmless’ clause which provided in sub-
stance that the lessee operator would hold harmless and also indemnify the
oil company for any negligence of the oil company occurring on the leased
premises. The litigation arises as a result of the oil company’s own employee
spraying gasoline over Weaver and his assistant and causing them to be
burned and injured on the leased premises. This action was initiated by
American Oil and Hoffer (Appellees) for a declaratory judgment to deter-
mine the liability of appellant Weaver, under the clause in the lease.
It will be noted that this lease clause not only exculpated the lessor oil
company from its liability for its negligence, but also compelled Weaver to
indemnify them for any damages or loss incurred as a result of its negli-
gence . . .
This is a contract, which was submitted (already in printed form) to a
party with lesser bargaining power. As in this case, it may contain uncon-
scionable or unknown provisions which are in fine print. Such is the case
now before this court.
The facts reveal that Weaver had left high school after one and a half
years and spent his time, prior to leasing the service station, working at
various skilled and unskilled labor oriented jobs. He was not one who
should be expected to know the law or understand the meaning of technical
terms. The ceremonious activity of signing the lease consisted of nothing
more than the agent of American Oil placing the lease in front of Mr.
Weaver and saying ‘sign,’ which Mr. Weaver did. There is nothing in the
record to indicate that Weaver read the lease; that the agent asked Weaver
to read it; or that the agent, in any manner, attempted to call Weaver’s
attention to the ‘hold harmless’ clause in the lease. Each year following, the
procedure was the same. A salesman, from American Oil, would bring the
lease to Weaver, at the station, and Weaver would sign it. The evidence
showed that Weaver had never read the lease prior to signing and that
the clauses in the lease were never explained to him in a manner from
which he could grasp their legal significance. The leases were prepared by
the attorneys of American Oil Company, for the American Oil Company,
and the agents of the American Oil Company never attempted to explain
the conditions of the lease nor did they advise Weaver that he should

consult legal counsel, before signing the lease. The superior bargaining
power of American Oil is patently obvious and the significance of Weaver’s
signature upon the legal document amounted to nothing more than a mere
formality to Weaver for the substantial protection of American Oil.
Had this case involved the sale of goods it would have been termed an
‘unconscionable contract’ under sec. 2–302 of the Uniform Commercial
Code . . .
The facts of this case reveal that in exchange for a contract which, if
the clause in question is enforceable, may cost Mr. Weaver potentially
thousands of dollars in damages for negligence of which he was not the
cause[.] Weaver must operate the service station seven days a week for long
hours, at a total yearly income of $5,000–$6,000. The evidence also reveals
that the clause was in fine print and contained no title heading which would
have identified it as an indemnity clause. It seems a deplorable abuse of
justice to hold a man of poor education, to a contract prepared by the
attorneys of American Oil, for the benefit of American Oil which was
presented to Weaver on a ‘take it or leave it basis’ . . .
We do not mean to say or infer that parties may not make contracts
exculpating one of his negligence and providing for indemnification, but it
must be done knowingly and willingly as in insurance contracts made for
that very purpose.”
French Law
French Civil Code
ARTICLE 1170
Any contract term which deprives a debtor’s essential obligation of its
substance is deemed to be not written.
Note. The wording of this provision was based on the language used by
the Cour de Cassation in the following two cases.
Cour de cassation, ch. comm., October 22, 1996, Bull. civ. IV no. 261,
D. 1997.Jur.121
Banchereau hired Chronoplast to deliver envelopes containing its
response to a tender offer. Chronoplast failed to deliver them within the
time agreed. A term of the contract limited Chronoplast’s liability to the
price for carrying the envelopes.
“[G]iven that, acting as a specialist in rapid carriage, guaranteeing the
reliability and speed of its service, Chronoplast had undertaken to deliver
the envelopes of Banchereau within a specified period of time, and
given the breach of that essential obligation, the clause limiting liability
under the contract, which contradicted the scope of the undertaking given,
was deemed not to be written,” the decision of the Cour d’appel in favor of
Chronoplast is overturned.1

1. Translation by Philippe Stoffel- The Code Napoléon Rewritten French

Munck, “The Revolution in Unfair Terms,” Contract Law after the 2016 Reforms
John Cartwright and Simon Whittaker, eds, (Oxford, 2017), 145 at 147.

Cour de cassation, ch. comm., June 29, 2010, Bull. civ. IV no. 115, JCP
E 2010 n.1790
Oracle contracted to deliver the final version (V12) of production man-
agement software to Faurecia, a manufacturer. Oracle failed to perfect the
software. A term in the contract limited its liability for damages.
“[A] limitation of liability clause is deemed not to be written only if it
contradicts the essential obligation undertaken by the debtor[.] [T]he judg-
ment below states that although Oracle has breached an essential obliga-
tion of the contract, the amount of the compensation, negotiated under a
term that the agreed prices reflect the allocation of risk and the resulting
limitation of liability, was not derisory[.] . . . Oracle has granted a discount
rate of 49%[.] [T]he contract provides that Faurecia will be the main
European representative participating in a committee to conduct a global
study to develop an Oracle product for the automotive sector and will
benefit from preferential treatment when defining the requirement neces-
sary for a continuous improvement of the Oracle automotive solution for
V12 version of Oracle’s applications[.] [T]he Cour d’appel inferred from this
that the limited liability clause did not empty Oracle’s obligations of any
substance and thus legally justified its decision . . . .”2
French Civil Code
ARTICLE 1171
Any term of a standard-form contract which creates a significant
imbalance in the rights and obligations of the parties to the contract is
deemed not written.
Note. The wording of this provision was based on that of the following
statute.
Law on Consumer Practices Article L. 442–6, Part I, par. 2
Commercial Code3
I. Any producer, merchant, manufacturer or person registered in the
trades directory is liable for the following acts and is required to compen-
sate the loss caused thereby:
...
(2) Subjecting or attempting to subject a trading partner to obligations
which create a significant imbalance in the rights and obligations of the
parties; . . .
Cour de cassation, ch. civ., 2e ch. civ. July 5, 2018, pourvoi no. 17–14.731
“The forfeiture guarantee on which the insurance company SMA pre-
vailed . . . is drafted as follows:

‘if the insured makes false declarations, and in particular exaggerates

the amount of damages, claims the destruction of goods that did not exist
at the time of the accident, dissimulates or conceals all or part of the

2. Translation by Stoffel-Munck, 3. Translation by Stoffel-Munck,

“Revolution in Unfair Terms”, 148. “Revolution in Unfair Terms”, 153.

goods insured, knowingly fails to disclose or claims the existence other

insurance covering the same risks, uses in support documents that are
inaccurate or means that are fraudulent, the insured completely forfeits
all right to an indemnity on all of the risks of the accident.’
In the present case is it established that the company Etablissements Y . . .
submitted to the tribunal de commerce on November 20, 2014, a liability
claim against its insurer [for business losses] . . . with documentation of a
kind to deceive the insurance company concerning the economic and finan-
cial situation of the insured . . . .
...
In the first place, every clause that deprives the essential obligation of
the debtor of its substance is deemed to be not written. In this case, the
forfeiture clause inserted in the contract of insurance, which deprives the
insured of all right to indemnification on the entirety of the risks the accident
if it uses in support documents that are inaccurate or means that are fraudu-
lent, leads by its generality to depriving the insurer’s obligation to indemnify
of its substance because the insured loses all right to indemnification even
when false declarations or fraudulent means were used to obtain indemnifi-
cation of one of the risks guaranteed. Such a clause, which attaches excessive
consequences to the use of false declarations and fraudulent means should be
deemed not to be written. By applying that clause, notwithstanding, despite
its general character, the Cour d’appel violated article 11312 of the Civil Code
as redacted prior to the ordinance of February 10, 2016.
In the second place, an act that subjects or attempts to subject a
trading partner to obligations that create a significant disequilibrium in
the rights and obligations of the parties makes the author liable and
obligates him to repair the damage caused. The forfeiture clause inserted
in the insurance contract deprives the insured of all right to indemnity as
to all the risks of the accident if he uses documents that are inexact or
means that are fraudulent. Such a clause, on account of its generality,
creates a significant disequilibrium in the rights and obligations of the
parties to the detriment of the insured because the latter loses all right to
indemnification even when the false declarations and fraudulent means
were only used to obtain indemnification for one of the risks guaranteed.
Such a clause necessarily makes the insurer liable with the result that he
evade such a liability. The Cour d’appel misunderstood article L. 442–6, I,
2° of the Code de commerce.”
German Law
German Civil Code
§ 307. C ONTR OL OF THE C O N T E N T
(1). Provisions in standard form terms (allgemeine
Geschäftsbedingunen) are ineffective when they disproportion-
ately disadvantage the contract partner of the party who employs
them in violation of the commands of good faith (Treu und
Glauben). A disproportionate disadvantage may be shown when
the provision is not clear and understandable.

(2). When in doubt, a disproportionate advantage is to be found when

a provision
1. is not in accord with the underlying ideas (wesenliche
Grundgedanken) of statutory provisions from which it devi-
ates, or
2. so limits essential rights and duties which arise from the
nature of the contract so as to endanger the attainment of
the purpose of the contract.
Bundesgerichtshof, February 8, 2012, NJW 2012, 1431
On April 17, 2007, the parties entered into a contract for the use of a
fitness center beginning May 1. The contract was to last for twenty-four
months and, unless three months notice was given, for an additional twelve
months. The monthly payment for use was 44.90 euros. Paragraph 7 of the
contract allowed the user to terminate by giving notice “if he could not use
the center for the remainder of the term for reasons of illness. For the notice
to be effective it must be given promptly, at the latest within two weeks
after the user becomes aware of the legal grounds for termination and the
notice must be accompanied by a medical certification which fully sets forth
the illness/health impairment that prevents the use.” The user gave notice
on July 24, 2008, that he would be unable to use the fitness center for
health reasons, accompanied by medical certification. The fitness center
apparently refused to accept this notice because the certification accom-
panying it was too unspecific. This court and the lower court agreed that
the user had not given notice as required by the contract. The fitness center
sued for the fees due for the remainder of the term ending April 30, 2009.
The defendant claimed that the clause was invalid under § 307 of the
German Civil Code.
The court held that in principle, it was permissible to prohibit users
from terminating their contracts within a two-year period. Nevertheless,
paragraph 7 of the contract violated § 307.
“According to § 307(1) sentence 1 of the German Civil Code, provisions
in standard form terms are ineffective when they disproportionately dis-
advantage the contract partner of the party who employs them in violation
of the commands of good faith. A clause is disproportionate in the sense of
§ 307(1) sentence 1 when the party who employs it formulates the contract
solely with his own end in view and seeks his own interests unfairly at the
expense of the other party by without adequately taking the other party’s
interests into account by providing appropriate compensation.
In a contract for the use of a fitness center, a circumstance [warranting
termination] cannot only be the illness of the user. There may be other
grounds that do not lie within his sphere of responsibility which would
prevent further use of the [center] until the end of the agreed term of the
contract. For example, the occurrence of a pregnancy could be a ground for
the premature termination of the contract.
The plaintiff contends that notice is dependent on a medical certifica-
tion which described the kind and the extent of the illness. Certainly, the
management of a fitness center has a legitimate interest in recognizing in

principle the production of medical certiﬁcation in a notice based on illness

from its users in order to prevent a misuse of the right of notice permitted
him. [citation omitted] Nevertheless, the appeal correctly observes that
this interest of the plaintiff is already served by a medical certification
which states that athletic activity by the user is no longer possible. The
interest of the plaintiff in protecting itself against unjustified notices does
not justify requiring from the user information about the concrete nature of
the illness. For in principle, trust can be placed in the certification of a
doctor.”
Chinese Law
Chen Wei v. Amazon, (2014）三中民终字第09383号
Chen Wei found a good deal on Amazon and placed an order to pur-
chase a 32 inch LED TV for RMB 161.99 yuan. The order was later
cancelled and Amazon alleged that the TV was out of stock and that
there was no contract between the two parties according to Amazon’s
Terms of Use [which were the same as the one in the previous case].
The appellate court held that “[t]he boilerplate terms in the Terms of
Use are not enforceable, that showing of prices and products on the website
is sufficient to constitute an offer, and that placing an order is an effective
way to accept the offer.” The court held that Chen was not bound by the
boilerplate. The court reasoned that “[t]he website did not require the
consumers to read and agree the Terms of Use. In addition, the Terms of
Use were placed at the bottom of the webpage in darker but not bold fonts,
which was not conspicuous enough to draw consumers’ attention. A click
was needed for consumers to read the Terms of Use. Overall, this court
found that Amazon’s duty to reasonably and sufficiently notify consumers
of the Terms of Use was not properly fulfilled. As such, the contract was
effective upon acceptance and Amazon is liable for breach of contract.”
Note. Compare this case with one considered earlier, in which, on
similar facts, the court reached the same result, not on the grounds that
the Terms of Use are not binding, but on the grounds of precontractual
liability. Yang Fan v. Amazon, Third Intermediary Court of Beijing (2017),
(2017) 京民终1120号.
Note. In response to the surge of online shopping disputes, the
Chinese Civil Code settled the dispute over the timing of contract by
providing that contract was concluded the moment the order was placed
online (Chinese Civil Code, Article 491).
The Law of the European Union
Directive of the European Council on Unfair Terms in Consumer
Contracts, 93/13/EEC, April 5, 1993
ARTICLE 1
(1). The purpose of this Directive is to approximate the laws, regula-
tions and administrative provisions of the Member States relat-
ing to unfair terms in contracts concluded between a seller or
supplier and a consumer.

(2). The contractual terms which reﬂect mandatory statutory or regu-

latory provisions and the provisions or principles of international
conventions to which the Member States or the Community are
party, particularly in the transport area, shall not be subject to
the provisions of this Directive.

ARTICLE 2
For the purposes of this Directive:
(a). “unfair terms” means the contractual terms deﬁned in Article 3;
(b). “consumer” means any natural person who, in contracts covered
by this Directive, is acting for purposes which are outside his
trade, business or profession;
(c). “seller or supplier” means any natural or legal person who, in
contracts, covered by this Directive, is acting for purposes relating
to his trade, business or profession, whether publicly owned or
privately owned.

ARTICLE 3
(1). A contractual term which has not been individually negotiated
shall be regarded as unfair if, contrary to the requirement of good
faith, it causes a significant imbalance to the parties’ rights and
obligations arising under the contract, to the detriment of the
consumer.
(2). A term shall always be regarded as not individually negotiated
where it has been drafted in advance and the consumer has
therefore not been able to influence the substance of the term,
particularly in the context of a preformulated standard contract.
The fact that certain aspects of a term or one specific term have
been individually negotiated shall not exclude the application of this
Article to the rest of a contract if an overall assessment of the
contract indicates that it is nevertheless a pre-formulated standard
contract.
Where any seller or supplier claims that a standard term has
been individually negotiated, the burden of proof in this respect
shall be incumbent on him.
(3). The Annex shall contain an indicative and non-exhaustive list of
the terms which may be regarded as unfair.

ARTICLE 4
(1). Without prejudice to Article 7, the unfairness of a contractual term
shall be assessed, taking into account the nature of the goods or
services for which the contract was concluded and by referring, at
the time of conclusion of the contract, to all the circumstances
attending the conclusion of the contract and to all the other terms
of the contract or of another contract on which it is dependent.
(2). Assessment of the unfair nature of the terms shall relate neither
to the deﬁnition of the main subject matter of the contract nor to

the adequacy of the price and remuneration, on the one hand, as

against the services or goods supplied in exchange, on the other,
insofar as these terms are in plain intelligible language.

ARTICLE 5
In case of contracts where all or certain terms offered to the consumer
are in writing, these terms must always be drafted in plain, intelligible
language. Where there is doubt about the meaning of a term, the interpret-
ation most favourable to the consumer shall prevail. This rule on interpret-
ation shall not apply in the context of the procedures laid down in Article 7
(2).
ARTICLE 6
(1). Member States shall lay down that unfair terms used in a con-
tract concluded with a consumer by a seller or supplier shall, as
provided for under their national law, not be binding on the
consumer and that the contract shall continue to bind the parties
upon those terms if it is capable of continuing in existence without
the unfair terms.
(2). Member States shall take the necessary measures to ensure that
the consumer does not lose the protection granted by this
Directive by virtue of the choice of the law of a non-Member
country as the law applicable to the contract if the latter has a
close connection with the territory of the Member States.

ARTICLE 7
(1). Member States shall ensure that, in the interests of consumers
and of competitors, adequate and effective means exist to prevent
the continued use of unfair terms in contracts concluded with
consumers by sellers or suppliers.
(2). The means referred to in paragraph 1 shall include provisions
whereby persons or organizations, having a legitimate interest
under national law in protecting consumers, may take action
according to the national law concerned before the courts or before
competent administrative bodies for a decision as to whether
contractual terms drawn up for general use are unfair, so that
they can apply appropriate and effective means to prevent the
continued use of such terms.
(3). With due regard for national laws, the legal remedies referred to
in paragraph 2 may be directed separately or jointly against a
number of sellers or suppliers from the same economic sector or
their associations which use or recommend the use of the same
general contractual terms or similar terms.

ARTICLE 8
Member States may adopt or retain the most stringent provisions
compatible with the treaty in the area covered by this Directive, to ensure
a maximum degree of protection for the consumer.

ARTICLE 9
The Commission shall present a report to the European Parliament
and to the Council concerning the application of this Directive five years at
the latest after the date in Article 10(1).
ARTICLE 10
(1). Member States shall bring into force the laws, regulations and
administrative provisions necessary to comply with this Directive
no later than 31 December 1994. They shall forthwith inform the
Commission thereof.
These provisions shall be applicable to all contracts concluded
after 31 December 1994.
(2). When Member States adopt these measures, they shall contain a
reference to this Directive or shall be accompanied by such refer-
ence on the occasion of their official publication. The methods of
making such a reference shall be laid down by the Member States.
(3). Member States shall communicate the main provisions of
national law which they adopt in the field covered by this
Directive to the Commission.

ARTICLE 11
This Directive is addressed to the Member States . . .
ANNEX
Terms Referred to in Article 3(3)
(1). Terms which have the object or effect of:
(a). excluding or limiting the legal liability of a seller or supplier
in the event of the death of a consumer or personal injury to
the latter resulting from an act or omission of that seller or
supplier;
(b). inappropriately excluding or limiting the legal rights of the
consumer vis-à-vis the seller or supplier or another party in
the event of total or partial non-performance or inadequate
performance by the seller or supplier of any of the contrac-
tual obligations, including the option of offsetting a debt
owed to the seller or supplier against any claim which the
consumer may have against him;
(c). making an agreement binding on the consumer whereas
provision of services by seller or supplier is subject to a
condition whose realization depends on his own will alone;
(d). permitting the seller or supplier to retain sums paid by the
consumer where the latter decides not to conclude or per-
form the contract, without providing for the consumer to
receive compensation of an equivalent amount from the
seller or supplier where the latter is the party cancelling
the contract;
(e). requiring any consumer who fails to fulﬁll his obligation to
pay a disproportionately high sum in compensation;

(f). authorizing the seller or supplier to dissolve the contract on a

discretionary basis where the same facility is not granted to
the consumer, or permitting the seller or supplier to retain the
sums paid for services not yet supplied by him where it is the
seller or supplier himself who dissolves the contract;
(g). enabling the seller or supplier to terminate a contract of
indeterminate length without reasonable notice except
where there are serious grounds for doing so;
(h). automatically extending a contract of fixed duration where
the consumer does not indicate otherwise, when the dead-
line fixed for the consumer to express this desire not to
extend the contract is unreasonably early;
(i). irrevocably binding the consumer to terms with which he
had no real opportunity of becoming acquainted before the
conclusion of the contract;
(j). enabling the seller or supplier to alter the terms of the
contract unilaterally without a valid reason which is speci-
fied in the contract;
(k). enabling the seller or supplier to alter unilaterally without a
valid reason any characteristics of the product or service to
be provided;
(l). providing for the price of goods to be determined at the time
of delivery or allowing a seller of goods or supplier of services
to increase their price without in both cases giving the con-
sumer the corresponding right to cancel the contract if the
final price is too high in relation to the price agreed when the
contract was concluded;
(m). giving the seller or supplier the right to determine whether
the goods or services supplied are in conformity with the
contract, or giving him the exclusive right to interpret any
term of the contract;
(n). limiting the seller’s or supplier’s obligation to respect
commitments undertaken by agents or making his com-
mitments subject to compliance with a particular
formality;
(o). obliging the consumer to fulfill all his obligations where the
seller or supplier does not perform his;
(p). giving the seller or supplier the possibility of transferring
his rights and obligations under the contract, where this
may serve to reduce the guarantees for the consumer, with-
out the latter’s agreement;
(q). excluding or hindering the consumer’s right to take legal
action or exercise any other legal remedy, particularly by
requiring the consumer to take disputes exclusively to arbi-
tration not covered by legal provisions, unduly restricting
the evidence available to him or imposing on him a burden of
proof which, according to the applicable law, should lie with
another party to the contract.

(2). Scope of subparagraphs (g), (j), and (l)

(a). Subparagraph (g) is without hindrance to terms by which a
supplier of financial services reserves the right to terminate
unilaterally a contract of indeterminate duration without
notice where there is a valid reason, provided that the sup-
plier is required to inform the other contracting party or
parties thereof immediately.
(b). Subparagraph (j) is without hindrance to terms under which
a supplier of financial services reserves the right to alter the
rate of interest payable by the consumer or due to the latter,
or the amount of other charges for financial services without
notice where there is a valid reason, provided that the sup-
plier is required to inform the other contracting party or
parties thereof at the earliest opportunity and that the latter
are free to dissolve the contract immediately.
Subparagraph (j) is also without hindrance to terms under
which a seller or supplier reserves the right to alter unilat-
erally the conditions of a contract of indeterminate duration,
provided that he is required to inform the consumer with
reasonable notice and that the consumer is free to dissolve
the contract.
(c). Subparagraphs (g), (j) and (l) do not apply to:
– transactions in transferable securities, financial instru-
ments and other products or services where the price is
linked to fluctuations in a stock exchange quotation or
index or a financial market rate that the seller or supplier
does not control;
– contracts for the purchase or sale of foreign currency,
traveller’s cheques or international money orders denom-
inated in foreign currency;
(d). Subparagraph (l) is without hindrance to price-indexation
clauses, where lawful, provided that the method by which
prices vary is explicitly described.
Note on the law in England, France and Germany. All three
countries have enacted legislation giving effect to the provisions of this
Directive.1 In each case, this legislation supplements laws that were pre-
viously enacted that govern unfair terms.
The Draft Common Frame of Reference
ARTICLE II. 9:402 DUTY OF TRANSPARENCY IN TERMS NOT INDIVIDUALLY NEGOTIATED

(1). A person who supplies terms which have not been individually
negotiated has a duty to ensure that they are drafted and commu-
nicated in plain, intelligible language.

1. Unfair Terms in Consumer Contracts consommation art. L. 132–1 (France);

Regulations 1994, S.I. 1994/3159 (England); Gesetz zur Änderung des AGB-Gesetzes,
Law 95–96 of Feb. 1, 1995, Code de la BGBl I 1996, 1013 (Germany).

(2). In a contract between a business and a consumer a term which

has been supplied by the business in breach of the duty of trans-
parency imposed by paragraph (1) may on that ground alone be
considered unfair.
ARTICLE II. 9:403 MEANING OF “UNFAIR” IN CONTRACTS BETWEEN A BUSINESS AND A
CONSUMER

In a contract between a business and a consumer, a term [which has

not been individually negotiated] is unfair for the purposes of this Section if
it is supplied by the business and if it signiﬁcantly disadvantages the
consumer, contrary to good faith and fair dealing.
ARTICLE II. 9:404 MEANING OF “UNFAIR” IN CONTRACTS BETWEEN NON-BUSINESS
PARTIES

In a contract between parties neither of whom is a business, a term is

unfair for the purposes of this Section only if it is a term forming part of
standard terms supplied by one party and signiﬁcantly disadvantages the
other party, contrary to good faith and fair dealing.
ARTICLE II. 9:405: MEANING OF “UNFAIR” IN CONTRACTS BETWEEN BUSINESSES

A term in a contract between businesses is unfair for the purposes of

this Section only if it is a term forming part of standard terms supplied by
one party and of such a nature that its use grossly deviates from good
commercial practice, contrary to good faith and fair dealing.
ARTICLE II. 9:406: EXCLUSIONS FROM UNFAIRNESS TEST

(1). Contract terms are not subjected to an unfairness test under this
Section if they are based on:
(a). provisions of the applicable law;
(b). international conventions to which the Member States are
parties, or to which the European Union is a party; or
(c). these rules.
(2). For contract terms which are drafted in plain and intelligible
language, the unfairness test extends neither to the deﬁnition of
the main subject matter of the contract, nor to the adequacy of the
price to be paid.
ARTICLE II. 9:407: FACTORS TO BE TAKEN INTO ACCOUNT IN ASSESSING UNFAIRNESS

(1). When assessing the unfairness of a contractual term for the

purposes of this Section, regard is to be had to the duty of trans-
parency under II. – 9:402 (Duty of transparency in terms not
individually negotiated), to the nature of what is to be provided
under the contract, to the circumstances prevailing during the
conclusion of the contract, to the other terms of the contract and to
the terms of any other contract on which the contract depends.
(2). For the purposes of II. – 9:403 (Meaning of “unfair” in contracts
between a business and a consumer) the circumstances prevailing
during the conclusion of the contract include the extent to which
the consumer was given a real opportunity to become acquainted
with the term before the conclusion of the contract.

ARTICLE II. 9:408: EFFECTS OF UNFAIR TERMS

(1). A term which is unfair under this Section is not binding on the
party who did not supply it.
(2). If the contract can reasonably be maintained without the unfair
term the other terms remain binding on the parties.

ARTICLE II. 9:410: TERMS WHICH ARE PRESUMED TO BE UNFAIR IN

CONTRACTS BETWEEN A BUSINESS AND A CONSUMER

[This article contains a list of terms presumed to be unfair like that in

the Annex to the Directive of the European Council on Unfair Terms in
Consumer Contracts.]
The Unidroit Principles of International Commercial Contracts
ARTICLE 1.1 FREEDOM OF CONTRACT
The parties are free to enter into a contract and to determine its
content.
ARTICLE 2.20 SURPRISING TERMS
(1). No term contained in standard terms which is of such a
character that the other party could not reasonably have
expected it, is effective unless it has been expressly accepted
by that party.
(2). In determining whether a term is of such a character regard is to
be had to its content, language and presentation.

IV. EXCUSES FOR NON-PERFORMANCE

1. Impossibility and Force Majeure
Suppose you hire a doctor or a lawyer. In the United States,
France, and Germany, he is normally liable only if he is negligent.
If he is not negligent, he is not liable even if he fails to cure you or
win your lawsuit. On the other hand, suppose that you hire someone
to transport your goods to a certain destination by a certain date. If
he fails to perform, sometimes he is liable even if it was not his fault:
for example, if his ﬁnancial resources are insufﬁcient to hire his
crew, or if the crew strikes. But he would not be liable, for example,
if war is declared and no ships are allowed to sail. That is so in
common law, French law, and German law. And yet jurists in
these countries express these conclusions by using very different
language.
The language they use traces back to Roman law. It is different
because of the different ways in which they altered or deformed Roman
law in the process of borrowing from it.
Roman law denied enforcement to some but not all contracts in which
performance is impossible. A famous Roman text contained the maxim,

“there is no obligation to the impossible.”1 A number of texts excuse a party

when performance was impossible at the time the contract was made.
Nevertheless, if his performance was initially impossible, a party cannot
escape if performance is merely beyond his own power. It must be beyond
anyone’s power.2 As later commentators put it, impossibility must be
“objective” or “absolute,” not “subjective” or “personal.” Other texts excused
a party’s performance if it became impossible after the time it was made. To
escape liability, a party then had to prove that he was not at fault.
Nevertheless, he could not escape merely because he was not at fault in
the ordinary sense of the word. One who borrowed property gratuitously
for his own use is liable if he failed to exercise the most scrupulous diligence
(exactissima diligentia).3 He was not liable if the property is destroyed by
invading enemies or bands of robbers.4 He was not liable for vis maior, that
is, for accidents that no one could have prevented.5 The medieval jurists
classified this kind of “fault” as culpa levissima – most light fault. From
there, one ascended through culpa levis, culpa lata, and culpa latior to
dolus or intentional wrongdoing, the correct definition of each degree
remaining a matter of continual argument.6 The type of fault for which
one was liable was said to depend on for whose benefit the contract was
made.
The medieval canon lawyers, however, turned impossibility and fault
into basic principles of moral responsibility which the late scholastics then
defended on Aristotelian principles. The canonists concluded, after some
initial hesitation, that one could not be morally obligated to do the
impossible.7 Such a person was not at fault. In the thirteenth century,
Thomas Aquinas used Aristotle’s theory of human responsibility to explain
the conclusions of the canonists. Choice was an act of will, and one could
only choose what was possible.8 A promise to do the impossible was not
binding.9 Once impossibility and fault had been interpreted as principles of
moral responsibility, it was difficult to harmonize them with the Roman
rules. A struggle now began in which the Roman rules were never dis-
placed by Aristotelian principles – as were the rules governing contract
formation – nor explained by them – as were the rules governing relief for
mistake and unfairness. The late scholastics borrowed the conclusion that
one cannot be obligated to keep an impossible promise.10 They never

1. Dig. 50.17.185. 8. Thomas Aquinas, Summa theologiae

2. Dig. 45.1.137. I-II, Q. 13 a. 5 ad 1.
3. Dig. 44.7.1.4. 9. Ibid. II-II, Q. 88 a. 2 (vow to do the
4. Dig. 13.6.18.pr. impossible not binding); Q. 89, a. 7 (oath to do
5. Reinhard Zimmermann, The Law of the impossible not binding).
Obligations: Roman Foundations of the 10. Cajetan (Tomasso di Vio), Comme-
Civilian Tradition (1990), 192–7. ntaria to Thomas Aquinas, Summa
6. E.g., Bartolus de Saxoferrato, theologica (1698), to II-II, Q. 113, a. 1;
Commentaria Corpus Iuris Civilis to D. Domenicus Soto, De iustitia et iure libri
16.3.32 nos. 13, 16, 26, 27, in Omnia quae decem (1551), lib. 8, q. 2, a. 1; Ludovicus
extant opera (1615). Molina, De iustitia et iure tractatus (1614),
7. Glossa ordinaria to Gratian, disp. 271. no. 1; Leonardus Lessius, De
Decretum (1595), to dicta Gratiani ante D. iustitia et iure, ceterisque virtutibus
13, c. 1. cardinalis libri quartuor (1628), lib. 2, cap.
10, dub. 10 no. 70.

explained how to reconcile this maxim with the Roman rules. The confu-
sion lasted throughout the natural law era. Pufendorf claimed that the
seller was never liable for failing to do the impossible but, if he were at fault
in making the promise, the buyer could recover any loss suffered.11 He had
achieved consistency but only by sacriﬁcing the Roman texts.
The nineteenth-century jurists thus inherited a body of law in dis-
array. The principled explanations of the natural lawyers did not seem to
explain the Roman law, which was very hard to explain in any case. As we
will see, they borrowed their rules from Roman law, but borrowed
selectively.

Common Law
Taylor v. Caldwell, (1863) 3 Best & S. 826 (Q.B.)
Blackburn, J. “In this case the plaintiffs and defendants had, on May
27th, 1861, entered into a contract by which the defendants agreed to let
the plaintiffs have the use of The Surrey Gardens and Music Hall on four
days then to come, viz., June 17th, July 15th, August 5th, and August 19th,
for the purpose of giving a series of four grand concerts, and day and night
fêtes, at the Gardens and Hall on those days respectively; and the plaintiffs
agreed to take the Gardens and Hall on those days, and pay £100 for each
day . . .
After the making of the agreement, and before the first day on which a
concert was to be given, the Hall was destroyed by fire. This destruction, we
must take it on the evidence, was without the fault of either party, and was
so complete that in consequence the concerts could not be given as
intended. And the question we have to decide is whether, under these
circumstances, the loss which the plaintiffs have sustained is to fall upon
the defendants . . .
There seems no doubt that where there is a positive contract to do a
thing, not in itself unlawful, the contractor must perform it or pay damages
for not doing it, although in consequence of unforeseen accidents the
performance of his contract has become unexpectedly burdensome or
even impossible. The law is so laid down in 1 Roll.Abr. 450, Condition
(G), and in the note (2) to Walton v. Waterhouse (2 Wms.Saund. 421a,
6th Ed.). And is recognized as the general rule by all the judges in the much
discussed case of Hall v. Wright (E.B. & E. 746). But this rule is only
applicable when the contract is positive and absolute, and not subject to
any condition either express or implied; and there are authorities which, as
we think, establish the principle that where, from the nature of the con-
tract, it appears that the parties must from the beginning have known that
it could not be fulfilled unless when the time for the fulfilment of the
contract arrived some particular specified thing continued to exist, so
that, when entering into the contract, they must have contemplated such

11. Samuel Pufendorf, De iure naturae et

gentium libri octo (1688), III.vii.2–3.

continuing existence as the foundation of what was to be done; there, in the

absence of any express or implied warranty that the thing shall exist, the
contract is not to be construed as a positive contract, but as subject to an
implied condition that the parties shall be excused in case, before breach,
performance becomes impossible from the perishing of the thing without
default of the contractor.
There seems little doubt that this implication tends to further the
great object of making the legal construction such as to fulfill the intention
of those who entered into the contract. For in the course of affairs men in
making such contracts in general would, if it were brought to their minds,
say that there should be such a condition . . .
There is a class of contracts in which a person binds himself to do
something which requires to be performed by him in person; and such
promises, e.g. promises to marry, or promises to serve for a certain
time, are never in practice qualified by an express exception of the
death of the party; and therefore in such cases the contract is in terms
broken if the promisor dies before fulfilment. Yet it was very early
determined that, if the performance is personal, the executors are not
liable; Hyde v. The Dean of Windsor (Cro.Eliz. 552, 553). See 2 Wms.
Exors. 1560 (5th Ed.), where a very apt illustration is given. ‘Thus,’
says the learned author, ‘if an author undertakes to compose a work,
and dies before completing it, his executors are discharged from this
contract; for the undertaking is merely personal in its nature, and by
the intervention of the contractor’s death, has become impossible to be
performed.’ For this he cites a dictum of Lord Lyndhurst in Marshall v.
Broadhurst (1 Tyr. 348, 349) and a case mentioned by Patteson, J., in
Wentworth v. Cock (10 A. & E. 42, 45–46). In Hall v. Wright (E.B. & E.
746, 749), Crompton, J., in his judgment, puts another case. ‘Where a
contract depends upon personal skill, and the act of God renders it
impossible, as, for instance, in the case of a painter employed to paint
a picture who is struck blind, it may be that the performance might be
excused.’ . . .
These are instances where the implied condition is of the life of a
human being, but there are others in which the same implication is made
as to the continued existence of a thing. For example, where a contract of
sale is made amounting to a bargain and sale, transferring presently the
property in specific chattels, which are to be delivered by the vendor at a
future day; there, if the chattels, without the fault of the vendor, perish in
the interval, the purchaser must pay the price, and the vendor is excused
from performing his contract to deliver, which has thus become impossible
...
We think, therefore, that the Music Hall having ceased to exist, with-
out fault of either party, both parties are excused, the plaintiffs from taking
the gardens and paying the money, the defendants from performing their
promise to give the use of the Hall and Gardens and other things.
Consequently the rule must be absolute to enter the verdict for the
defendants.”

Note on Taylor v. Caldwell. It is hard to speak of a common law rule

before the nineteenth century. Sometimes, English courts excused a party
who could not perform. They did so, for example, when the performance
was illegal,1 or the party obligated to perform had died,2 or the object bailed
had been destroyed by an “act of God,”3 or a plague suspended construction
work.4 On the other hand, in the case of Paradine v. Jane,5 a lessee was not
excused from paying rent when soldiers in the English Civil War made it
impossible for him to occupy the property.
Blackburn seems to have been drawing on two different lines of con-
tinental authority. One is the doctrine of changed circumstances which we
will meet later on. For centuries, continental lawyers had said that every
contract is subject to an implied condition that “matters remain in their
present state,” the so-called clausula rebus sic stantibus. As we will see,
that doctrine can excuse a party even when performance has not become
impossible.
As Samuel Williston, Max Rheinstein, and others have noted,
Blackburn was also drawing on a Roman rule about impossibility.6 A
contract was void if it was impossible to perform although, again, the
defendant could not escape liability by simply proving the performance
was impossible for him personally. He had to show that the performance
was beyond the power of people generally.7 Blackburn not only borrowed
this rule but extended it. As we saw, the Romans distinguished between
whether performance was impossible initially or whether it became so
subsequently. In the latter case, liability depended on whether the party
who failed to perform was at “fault” but they did not mean fault in the
ordinary sense of the term. They meant a party was liable unless he could
prove vis maior. Here, although Blackburn was borrowing from Roman
law, he did not distinguish between initial and subsequent impossibility
nor of did he speak of vis maior.

French Law
French Civil Code
ARTICLE 1218
In contractual matters, there is force majeure where an event beyond
the control of the debtor, which could not reasonably have been foreseen at
the time of the conclusion of the contract and whose effects could not be
avoided by appropriate measures, prevents performance of his obligation
by the debtor. If the prevention is temporary, performance of the obligation
is suspended unless the delay which results justiﬁes termination of the
contract. If the prevention is permanent, the contract is terminated by

1. Abbott of Westminster v. Clerke, 1 Dy. 5. Aleyn 26, 82 Eng. Rep. 897 (K.B.
26b, 28b, 73 Eng. Rep. 59, 63 (K.B. 1536). 1647).
2. Hyde v. Dean of Windsor, Cro. Eliz. 6. Samuel Williston, The Law of Contracts
552, 78 Eng. Rep. 798 (K.B. 1597). (1920), § 1931; Max Rheinstein, Die Struktur
3. Williams v. Hide, Palm. 548 (1624). des vertraglichen Schuldverhältnisses im
4. H. Rolle, Abridgment 450, Cond. (G), anglo-amerikanischen Recht (1932), 175.
p. 10 (London 1668). 7. Dig. 45.1.137.

operation of law and the parties are discharged from their obligations
under the conditions provided by articles 1351 and 1351–1.
ARTICLE 1351
The impossibility of making a performance frees the debtor from doing
so when it results from an occasion of force majeure and when it is final, at
least when he has not agreed to be responsible . . .
Note. As these articles indicate, unlike Roman law, the French
Civil Code does not distinguish between situations in which perform-
ance is excused by impossibility and those in which it is excused by
force majeure.
In the nineteenth century, French jurists, like French jurists today,
explained that to constitute force majeure, an event must be irresistible:
tempest, earthquake, war, and so forth.1 Nevertheless, they either stated
or implied that absent force majeure, a party who fails to perform is not at
fault.2 If that were so, a party would be liable only if he intentionally or
negligently breached the contract. A French jurist today would explain
liability for breach of contract more clearly by using a distinction first
developed by René Demogue.3 He said that some contracts entail a duty
to use best efforts (obligation de moyens) and others entail a duty actually
to achieve a specific result (obligation de résultat). In the former case a
party is liable only if he is at fault. In the latter case he is liable unless he
can prove force majeure.

German Law
Until 2002, the German Civil Code followed Roman law by distin-
guishing initial from subsequent liability. The Code was then amended
so that it did not matter when the impossibility occurred. Retained from
the past, however was the principle that liability for an impossible per-
formance depended on whether a party was responsible for the fact that
performance became impossible. According to § 276 of the Code, he was
“responsible” only for “willful default and negligence.”
The drafters had meant what they said. If a performance was impos-
sible, and it was not the fault of the person who was supposed to perform,
why should he be held liable? For several hundred years, many jurists had
been insisting that a party who did not perform a contract should only be
liable for fault in the ordinary sense. The late scholastics1 and the natural

1. Charles Aubry and Charles Rau, Cours not be at fault even though no such event
de droit civil français 4 (4th edn., Paris 1869– had occurred, but he simply noted that the
71), § 308; Charles Demolombe, Cours de Code security of transactions requires that the
Napoléon 24 (Paris 1854–82), 549–52; François party be held liable. Demolombe, Cours, 24,
Laurent, Principes de droit civil français 16 § 550.
(3rd edn., Paris 1869–78),§ § 256–7; Leobon 3. René Demogue, Traité des obligations
Larombière, Théorie et pratique des en général 5 (1921–33), § 1237.
obligations 1 (Paris, 1857), 541–2. 1. Ludovicus Molina, De iustitia et iure
2. See Aubry and Rau, Cours, 4, § 308; libri decem (1614), disp. 293 no. 23;
Laurent, Principes, 16, § 256; Larombière, Leonardus Lessius, De iustitia et iure,
Théorie et pratique, 1, 541–2. Demolombe ceterisque virtutibus cardinalis (1628), lib. 2
did observe that sometimes a party might cap. 7 dubs. 6–8.

lawyers2 did not understand strict liability in contract for much the same
reason that they did not understand it in tort. Neither did the nineteenth-
century German jurists.3 If a party had behaved like a reasonable person
should, any event that made performance impossible for him was an acci-
dent. As Puchta said, liability that went beyond fault was liability for
chance.4 What could be the point of distinguishing between an accident
and an utter accident? The drafters of the German Civil Code agreed
although they made an exception when “what is owed is designated only
by species.”
But even before the reforms of 2002, the German courts were
unable to live with that position. As a result, cases in Germany come
out in much the same way as in France, England, and the United
States.5 In some contracts, a party can escape liability if he was not
at fault. But in others – the sort that the French would call contracts
to achieve a particular result – he is liable even if he was not at fault if
the performance became impossible because of an event that is nor-
mally within a person’s control: if he failed to perform because he
lacked the ﬁnancial resources to do so,6 or materials were delivered
to him late,7 or his suppliers failed him.8 Moreover, the event that
prevents performance must be one that the parties would not foresee
or take into account at the time the contract was formed.9
And so, by implication, this idea of when a party was excused was
accepted by the drafters of the 2002 reforms.

2. Hugo Grotius, De iure belli ac pacis 4. Puchta, Pandekten, § 266. Similarly,

libri tres (1646), II.xvii.1; Samuel see Windscheid, Lehrbuch, 1: § 101.
Pufendorf, De iure naturae et gentium libri 5. Manfred Löwisch in Staudinger,
octo (1688), III.i.2, III.i.6; Jean Barbeyrac, Kommentar zum Bürgerlichen Gesetzbuch
Le droit de la nature et des gens . . . par le (13th edn., 1994) no. 11 to § 282; Peter
baron de Pufendorf, traduit du latin (5th Schlechtriem, “Rechtvereinheitlichung in
edn., 1734), n. 1 to III.i.2, n. 4 to III.i.6. See Europa und Schuldrechtreform in
generally, Reinhard Zimmermann, The Law Deutschland,” Zeitschrift für Europäisches
of Obligations: Roman Foundations of the Privatrecht 1 (1993), 228–9.
Civilian Tradition (1990), 692–3, 1032–4. 6. Emmerich in Münchener Kommentar
The natural lawyers generally applied the zum Bürgerlichen Gesetzbuch (3rd edn.,
same principles to liability in both contract 1995), no. 3 to § 285; Löwisch in Staudinger,
and tort. See Grotius, De iure belli ac pacis Kommentar, no. 12 to § 285; Frank Peters in
libri tres, II.xvii.1–2; Pufendorf, De iure Staudinger, Kommentar, no. 13 to § 635.
naturae et gentium libri octo, III.i.2–3; 7. Battes in Erman, Handkommentar
Barbeyrac, Le droit de la nature, n. 1 to III. zum Bürgerlichen Gesetzbuch (9th edn.,
i.3. 1993), no. 2 to § 285.
3. Karl Ludwig Arndts, Lehrbuch der 8. Emmerich in Münchener Kommentar,
Pandekten (14th edn., 1889), § 86 n. 3; Aloys no. 3 to § 285.
Brinz and Philipp Lotmar, Lehrbuch der 9. Emmerich Münchener Kommentar,
Pandekten 2 (2nd edn., 1892), § 267 n. 26; no. 3 to § 285; Peters in Staudinger,
Georg Friedrich Puchta, Pandekten (2nd Kommentar, no. 10 to § 635; Herbert
edn., 1844), § 266; Bernhard Windscheid, Wiedemann, in Soergel, Kommentar zum
Lehrbuch des Pandektenrechts 1 (7th edn., Bürgerlichen Gesetzbuch (12th edn., 1990),
1891), § 101; Karl Vangerow, Leitfaden für no. 6 to § 285.
PandektenVorlesungen 1 (1847), § 107.

Chinese Law
Chinese Civil Code
A RTICLE 180
If a civil obligation cannot be performed due to force majeure, the non-
performing party is exempted from civil liability except in situations
provided for by law.
Force majeure means objective circumstances that are unforeseeable,
unavoidable and insurmountable.

Baijia Real Estate Consulting LLC v. Chen Jinjin, 珠海百佳房地产投

资顾问有限公司、陈金金居间合同 (2017)粤04民终2875号 (2017) Yue 04
Min Zhong No.2875
Baijia LLC, the realtor, sued Chen, the buyer of an apartment, for
the service fees in the amount of RMB 52,000 yuan incurred in ser-
vicing the transaction when the defendant decided not to go through
with it.
The defendant intended to purchase the apartment 401 and handed
over a deposit to the seller, Liu, via Baijia LLC in the amount of RMB
20,000 yuan on October 4, 2016. The sales agreement was concluded on the
same day. On October 6, the municipal government issued housing regula-
tions that, in some regard, limit certain people’s eligibility to purchase a
second house that is under the size of 144 square meters. One of the
restrictions applies to people who do not hold a household registration in
Zhuhai. The defendant holds her household registration in Shenzhen and
has owned one house. Given the fact that the apartment was under 144
square meters in area, the defendant became ineligible and refused to
make an effort to go through with the transaction and try her luck regis-
tering with the housing authority.
The service fee in the contract was already paid in full by both buyer
and seller when the agreement was entered. There is a penalty clause in
the agreement that stipulates the loss suffered by the agent to RMB 52,000
yuan for breach of contract by either party after the signing. The realtor
argued that Chen did not go through with the contract because she specu-
lated that the market price was going to fall after the regulations. She
should at least make the effort to close the deal and register with the
housing authority.
The trial court held that Chen was excused from performing the
contract because of the policy change, which is a change of circum-
stances. Chen, as a result, is not liable for breach of contract. The
appellate court held that there was no evidence supporting the add-
itional service fee incurred. The court further held that “[t]he govern-
ment policy change bars defendant from purchasing the apartment
and is an objective circumstance that is unforeseeable and
insurmountable.”

The Draft Common Frame of Reference

ARTICLE II. 7:102 INITIAL IMPOSSIBILITY OR LACK OF RIGHT OR AUTHORITY
TO DISPOSE

A contract is not invalid, in whole or in part, merely because at the

time it is concluded performance of any obligation assumed is impossible,
or because a party has no right or authority to dispose of any assets to
which the contract relates.

A RT ICL E III. 3:104 EXCUSE DUE TO AN IMPEDIMENT

(1). A debtor’s non-performance of an obligation is excused if it is due

to an impediment beyond the debtor’s control and if the debtor
could not reasonably be expected to have avoided or overcome the
impediment or its consequences.
(2). Where the obligation arose out of a contract or other juridical act,
nonperformance is not excused if the debtor could reasonably be
expected to have taken the impediment into account at the time
when the obligation was incurred.
(3). Where the excusing impediment is only temporary the excuse has
effect for the period during which the impediment exists.
However, if the delay amounts to a fundamental non-perform-
ance, the creditor may treat it as such.
(4). Where the excusing impediment is permanent the obligation is
extinguished.

The Unidroit Principles of International Commercial

Contracts
ARTICLE 3.3 INITIAL IMPOSSIBILITY

(1). The mere fact that at the time of the conclusion of the contract the
performance of the obligation assumed was impossible does not
affect the validity of the contract.
(2). The mere fact that at the time of the conclusion of the contract a
party was not entitled to dispose of the assets to which the con-
tract relates does not affect the validity of the contract.

ARTICLE 5.4 DUTY TO ACHIEVE A SPECIFIC RESULT; DUTY OF BEST

EFFORTS
(1). To the extent that an obligation of a party involves a duty to
achieve a speciﬁc result, that party is bound to achieve that
result.
(2). To the extent that an obligation of a party involves a duty of best
efforts in the performance of an activity, that party is bound to
make such efforts as would be made by a reasonable person of the
same kind in the same circumstances.

ARTICLE 5.5 DETERMINATION OF THE KIND OF DUTY INVOLVED

In determining the extent to which an obligation of a party involves a
duty of best efforts in the performance of an activity or a duty to achieve a
speciﬁc result, regard shall be had, among other factors, to
(a). the way in which the obligation is expressed in the contract;
(b). the contractual price and other terms of the contract;
(c). the degree of risk normally involved in achieving the expected
result;
(d). the ability of the other party to inﬂuence the performance of the
obligation.

ARTICLE 7.1.7 FORCE MAJEURE

(1). Non-performance by a party is excused if that party proves that
the non-performance was due to an impediment beyond its control
and that it could not reasonably be expected to have taken the
impediment into account at the time of the conclusion of the
contract or to have avoided or overcome it or its consequences.
(2). When the impediment is only temporary, the excuse shall have
effect for such period as is reasonable having regard to the effect of
the impediment on the performance of the contract.

2. Changed Circumstances
a. Origins
The Romans did not have a doctrine of changed circumstances. This
doctrine was an invention of the medieval Canon lawyers. Gratian’s
Decretum contained a passage in which St. Augustine, following Cicero,
said that one need not keep a promise to return a sword to a person who
has become insane.1 A gloss to the Decretum explained that “this condition is
always understood: if matters remain in the same state.”2 Baldus then read
the doctrine into civil law. All promises were subject to such a condition.3
The canon lawyers did not have a theoretical explanation for the
doctrine. It just seemed reasonable to them. An explanation was proposed
by Thomas Aquinas on the basis of an idea he took from Aristotle and was
eventually adopted by the late scholastics in the sixteenth century.
The idea was Aristotle’s theory of “equity.” According to Aristotle, since
laws are made to serve purposes, circumstances can always arise in which
obeying the law will no longer serve the purpose for which it was made. Under
these circumstances, the law maker would not want it to be obeyed. Therefore,
as a matter of “equity” it should not be obeyed. Aquinas said that a promise is

1. Gratian, Decretum C. 22, q. 2, c. 14. 3. Baldus de Ubaldis, Commentaria

2. Glossa ordinaria to Gratian, Corpus Iuris Civilis (1577), to Dig. 12.4.8.
Decretum to “furens” to C. 22, q. 2, c. 14.

like a law that a person makes for himself. Therefore, like a law, a promise is
not binding in circumstances where the promisor would not have intended to
be bound.4 Aquinas’ explanation was adopted by late scholastics such as
Lessius.5 Again, the principle was preserved by the northern natural lawyers
of the seventeenth and eighteenth century. The promisor is not bound if the
change of circumstances concerns the “unique reason” or “unique cause” for his
promise6 or the “presumption of some fact” on which his consent was
conditioned.7 Grotius used this doctrine to explain relief for mistake as well.8
Again, with the rise of the will theories of contract in the nineteenth
century, this doctrine went into eclipse. To most jurists, enforcing the will
of the parties meant enforcing what the parties had consciously and
expressly willed. Nevertheless, a few defenders of the doctrine explained
relief by saying the existence of certain circumstances was a tacit or
implied condition of the contract. According to the French jurist
Larombière, an “error in motive” affected the validity of a contract only if
the parties so wished, but a judge would determine whether they so wished
by examining “according to the circumstances, if the fact alleged as a
motive was taken to be the determining reason (raison déterminante) and
if the consent depended on its reality.”9 The German jurist Windscheid said
that the continuation of certain circumstances could be an “undeveloped
condition” of the contract, “undeveloped” in the sense that it was not
expressly willed by the parties.
The doctrine forced itself on the attention of Anglo-American jurists
when the Coronation Cases were decided in the early twentieth century.
Rooms had been rented along the route of the coronation procession of
Edward VII for a single day and at a suitably enhanced price. When
Edward became ill, the procession was postponed. In Krell v. Henry, relief
was granted on the grounds, again, that an implied condition of the con-
tract had not been fulﬁlled.10 Anglo-American jurists repeated this
explanation.
For most nineteenth-century jurists, the obvious objection to the doc-
trine was that a tacit or undeveloped condition was one that the parties
never consciously willed. They had never thought about the change in
circumstances, let alone agreed on what should happen if the change
occurred. The judge said the contract was subject to such a condition in
order to obtain what he thought was a sensible and fair result. As Williston
said, “any qualiﬁcation of the promise is based on the unfairness or unrea-
sonableness of giving it the absolute force which its words clearly state.”11

4. Thomas Aquinas, Summa theologiae 8. Grotius, De iure belli ac pacis, II.xi.6.

II-II, Q. 88, a. 10; Q. 89, a. 9. 9. Leobon Larombière, Théorie et
5. Lessius, De iustitia et iure, lib. 2, cap. pratique des obligations 1 (1857), 282–3.
17, dub. 10; cap. 18, dub. 10. 10. [1903] 2 K.B. 740.
6. Grotius, De iure belli ac pacis, II. 11. Samuel Williston, The Law of
xvi.25.2; Barbeyrac, Le droit de la nature, to Contracts (1920), § 1937. Instead of
n. 3 to III.vi.6; Christian Wolff, Ius naturae speaking of implied conditions, Williston
methodo scientiﬁca pertractatum 3 (1764), § said that relief was given because of a
504. “presumed assumption by the parties of
7. Pufendorf, De iure naturae ac some vital supposed fact.” He acknowledged
gentium, III.vi.6. that “[t]he only evidence . . . of such mutual

French courts in the nineteenth century refused to give relief for change of
circumstances, and, except in administrative courts where claims are
brought against the government, they still refuse to do so. The drafters of
the German Civil Code did not include such a doctrine. And yet, as we will
see, in Germany and the United States, the doctrine of changed circum-
stances, like relief for unfairness, has seen a renaissance.

b. Modern Law
English Law
Krell v. Henry, [1903] 2 K.B. 740
“The plaintiff, Paul Krell, sued the defendant, C.S. Henry, for £ 50,
being the balance of a sum of £ 75, for which the defendant had agreed to
hire a flat at 56A, Pall Mall on the days of June 26 and 27, for the purpose of
viewing the processions to be held in connection with the coronation of His
Majesty [King Edward VII]. The defendant denied his liability, and coun-
terclaimed for the return of the sum of £ 25, which had been paid as a
deposit, on the ground that, the processions not having taken place owing
to the serious illness of the King, there had been a total failure of consider-
ation for the contract entered into by him.”
Vaughn Williams, L.J. “The real question in this case is the extent of
the application in English law of the principle of the Roman law which has
been adopted and acted on in many English decisions, and notably in the
case of Taylor v. Caldwell . . . I do not think that the principle of the civil law
as introduced into the English law is limited to cases in which the event
causing the impossibility of performance is the destruction or nonexistence
of some thing which is the subject matter of the contract, or of some
condition or state of things expressly specified as a condition of it. I think
that you first have to ascertain, not necessarily from the terms of the
contract, but, if required, from necessary inferences, drawn from surround-
ing circumstances recognized by both contracting parties, what is the
substance of the contract, and then to ask the question whether that
substantial contract needs for its foundation the assumption of the exist-
ence of a particular state of things. If it does, this will limit the operation of
the general words, and in such a case, if the contract becomes impossible of
performance by reason of the nonexistence of the state of things assumed
by both contracting parties as the foundation of the contract, there will be
no breach of the contract thus limited . . .
In my judgment the use of the rooms was let and taken for the purpose
of seeing the Royal procession . . . And in my judgment the taking place of
those processions along the proclaimed route, which passed 56A, Pall Mall,
was regarded by both contracting parties as the foundation of the contract
. . .”

assumption is, generally, that the court question.” Ibid. Thus although Williston did
thinks a reasonable person, that is, the not talk about “implied conditions,” he asked
court itself, would not have contemplated the same question: what was sensible for the
taking the risk of the existence of the fact in parties to have done.

Tsakiroglou & Co., Ltd. v. Noblee & Thorl G.m.b.h., [1962] A.C.
93 (H.L.)
“By a contract dated Oct. 4, 1956, the appellants agreed to sell to the
respondents three hundred tons of Sudanese groundnuts c.i.f. Hamburg,
shipment during November/December, 1956 . . . [A]t the date of the con-
tract, the usual and normal route for the shipment of Sudanese groundnuts
from Port Sudan to Hamburg was via the Suez Canal. Sufficient ground-
nuts were held at Port Sudan to the appellants’ order to fulfil the contract,
and space was booked on ships for them. Following the military operations
against Egypt by British and French armed forces, the Suez Canal was
blocked to shipping on Nov. 2, 1956, and it remained blocked until April,
1957, but the appellants could have transported the groundnuts via the
Cape of Good Hope during November/December, 1956. The appellants did
not ship any groundnuts . . . ”
Lord Reid. “My Lords, the appellants agreed to sell to the respondents
three hundred tons of Sudan groundnuts at £ 50 per ton c.i.f. Hamburg.
Admittedly the groundnuts had to be shipped from Port Sudan. The usual
and normal route at the date of the contract was via Suez Canal. Shipment
was to be November/December, 1956, but, on Nov. 2, 1956, the canal was
closed to traffic and it was not reopened until the following April . . . The
freight via Suez would have been about £7 10s. per ton. The freight via the
Cape was increased by stages. It was £15 per ton after Dec. 13. I shall
assume in favour of the appellants that the proper comparison is between
£7 10s. and £15 per ton . . . The question now is whether, by reason of the
closing of the Suez route, the contract had been ended by frustration . . .
There might be cases where damage to the goods was a likely result of
the longer voyage which twice crossed the Equator, or, perhaps, the buyer
could be prejudiced by the fact that the normal duration of the voyage via
Suez was about three weeks, whereas the normal duration via the Cape
was about seven weeks. But there is no suggestion in the case that the
longer voyage could damage the groundnuts or that the delay could have
caused loss to these buyers of which they could complain. Counsel for the
appellants rightly did not argue that this increase in the freight payable by
the appellants was sufficient to frustrate the contract, and I need not,
therefore, consider what the result might be if the increase had reached
an astronomical figure. The route by the Cape was certainly practicable.
There could be, on the findings in the case, no objection to it by the buyers,
and the only objection to it from the point of view of the sellers was that it
cost them more. And it was not excluded by the contract. Where, then, is
there any basis for frustration? It appears to me that the only possible way
of reaching a conclusion that this contract was frustrated would be to
concentrate on the altered nature of the voyage. I have no means of judging
whether, looking at the matter from the point of view of a ship whose route
from Port Sudan was altered from via Suez to via the Cape, the difference
would be so radical as to involve frustration, and I express no opinion about
that. As I understood the argument, it was based on the assumption that
the voyage was the manner of performing the sellers’ obligations and that,

therefore, its nature was material. I do not think so. What the sellers had to
do was simply to find a ship proceeding by what was a practicable and now
a reasonable route – if, perhaps, not yet a usual route – to pay the freight
and obtain a proper bill of lading, and to furnish the necessary documents
to the buyer. That was their manner of performing their obligations, and,
for the reasons which I have given, I think that such changes in these
matters as were made necessary fell far short of justifying a finding of
frustration.”
Lord Hodson. “Nothing was proved or found as to the nature of the
goods or other circumstances which would render the route round the Cape
unreasonable or impracticable, and this route was at all times available.
Unless shipment by the Cape route was so onerous to the sellers as to make
the performance of the contract fundamentally different in kind from any
performance they had promised, the contract of Oct. 4, 1956, remained
binding between the parties.”
Viscount Simonds. “[T]he seller may be put to greater cost; his profit
may be reduced or even disappear. But it hardly needs reasserting that an
increase of expense is not a ground of frustration . . . .”

Law in the United States

Mineral Park Land Co. v. Howard, 172 Cal., 289, 156 P. 458 (1916)
Defendants made a contract with public authorities to build a concrete
bridge across a ravine on land owned by the plaintiff. They made a contract
with the plaintiff in which he granted them the right to haul gravel and
earth from his land, and the defendants agreed to take from the land all the
gravel and earth necessary for the fill and cement work on the bridge.
Defendants used 101,000 cubic yards for this work but obtained 50,869
cubic yards from persons other than plaintiff. The trial court found that the
plaintiff’s land contained over 101,000 cubic yards of earth and gravel but
that only the 50,131 cubic yards taken by defendants were above water. To
take more, the defendants would have to have used a steam dredger, and
the earth and gravel taken could not have been used before drying it.
According to the trial court, the defendants took all the earth and gravel
from plaintiff’s land “that was practical to take and remove from a financial
standpoint.” To take more would have cost ten or twelve times the usual
cost per yard which would have been possible but not “advantageous or
practical.” The trial court held that the defendant was excused. In affirm-
ing the decision, the California Supreme Court said:
When [the parties] stipulated that all of the earth and gravel needed
for this purpose should be taken from plaintiff’s land, they contem-
plated and assumed that the land contained the requisite quantity,
available for use. The defendants were not binding themselves to take
what was not there. And, in determining whether the earth and gravel
were “available,” we must view the conditions in a practical and rea-
sonable way. Although there was gravel on the land, it was so situated
that the defendants could not take it by ordinary means, not except at

a prohibitive cost. To all fair intents then, it was impossible for defend-
ants to take it . . .
A thing is impossible in legal contemplation when it is not practic-
able; and a thing is impracticable when it can only be done at an
excessive and unreasonable cost. 1 Beach on Cont. § 216. We do not
mean to intimate that the defendants could excuse themselves by
showing the existence of conditions which would make the perform-
ance of their obligation more expensive than they had anticipated, or
which would entail a loss upon them. But, where the difference in cost
is so great as here, and has the effect, as found, of making performance
impracticable, the situation is not different from that of a total absence
of earth and gravel.

Transatlantic Financing Corp. v. United States, 363 F.2D 312 (D.C.

Cir. 1966)
On October 2, 1956, Transatlantic Financing Corp. contracted with
the United States to carry a full cargo of wheat from a United States Gulf
port to a port in Iran. On July 26, the government of Egypt had national-
ized the Suez Canal. On October 27, the ship operated by Transatlantic
Financing left Galvaston on a course that would have taken her through
Gibraltar and the Suez Canal. Israel invaded Egypt on October 29, Britain
and France did so on October 31. On November 2, the Egyptian govern-
ment closed the canal. On or about November 7, a Transatlantic employee
asked an employee of the United States to agree to additional compensa-
tion for a voyage around the Cape of Good Hope. This request was refused.
The ship changed course and reached Iran by sailing around the Cape.
Skelly Wright, J. “When the issue [of impossibility] is raised, the court
is asked to construct a condition of performance based on the changed
circumstances, a process which involves at least three reasonably definable
steps. First, a contingency – something unexpected – must have occurred.
Second, the risk of the unexpected occurrence must not have been allocated
either by agreement or by custom. Finally, occurrence of the contingency
must have rendered performance commercially impracticable. Unless the
court finds these three requirements satisfied, the plea of impossibility
must fail.
The first requirement was met here. It seems reasonable, where no
route is mentioned in a contract, to assume the parties expected perform-
ance by the usual and customary route at the time of contract . . .
Proof that the risk of a contingency’s occurrence has been allocated
may be expressed in or implied from the agreement . . . If anything, the
circumstances surrounding this contract indicate that the risk of the
Canal’s closure may be deemed to have been allocated to Transatlantic.
We know or may safely assume that the parties were aware, as were most
commercial men with interests affected by the Suez situation [citation
omitted], that the Canal might become a dangerous area. No doubt the
tension affected freight rates, and it is arguable that the risk of closure
became part of the dickered terms. Uniform Commercial Code § 2–615,

comment 8. We do not deem the risk of closure so allocated, however.

Foreseeability or even recognition of a risk does not necessarily prove its
allocation. Compare Uniform Commercial Code § 2–615, Comment 1;
Restatement, Contracts § 457 (1932). Parties to a contract are not always
able to provide for all the possibilities of which they are aware, sometimes
because they cannot agree, often simply because they are too busy.
Moreover, that some abnormal risk was contemplated is probative but
does not necessarily establish an allocation of the risk of the contingency
which actually occurs. In this case, for example, nationalization by Egypt of
the Canal Corporation and formation of the Suez Users Group did not
necessarily indicate that the Canal would be blocked even if a confronta-
tion resulted. The surrounding circumstances do indicate, however, a
willingness by Transatlantic to assume abnormal risks, and this fact
should legitimately cause us to judge the impracticability of performance
by an alternative route in stricter terms than we would were the contin-
gency unforeseen.
We turn then to the question whether occurrence of the contingency
rendered performance commercially impracticable under the circum-
stances of this case. The goods shipped were not subject to harm from the
longer, less temperate Southern route. The vessel and crew were ﬁt to
proceed around the Cape. Transatlantic was no less able than the United
States to purchase insurance to cover the contingency’s occurrence. If
anything, it is more reasonable to expect owner–operators of vessels to
insure against the hazards of war. They are in the best position to calculate
the cost of performance by alternative routes (and therefore to estimate the
amount of insurance required), and are undoubtedly sensitive to inter-
national troubles which uniquely affect the demand for and cost of their
services. The only factor operating here in appellant’s favor is the added
expense, allegedly $43,972.00 above and beyond the contract price of
$305,842.92, of extending a 10,000 mile voyage by approximately 3,000
miles. While it may be an overstatement to say that increased cost and
difﬁculty of performance never constitute impracticability, to justify relief
there must be more of a variation between expected cost and the cost of
performing by an available alternative than is present in this case, where
the promisor can legitimately be presumed to have accepted some degree of
abnormal risk, and where impracticability is urged on the basis of added
expense alone.”

French Law
French Civil Code
A R T I C L E 1195
If a change of circumstances that was unforeseeable at the time of the
conclusion of the contract renders performance excessively onerous for a
party who had not accepted the risk of such a change, that party may ask
the other contracting party to renegotiate the contract. The ﬁrst party
must continue to perform his obligations during renegotiation. In the

case of refusal or the failure of renegotiations, the parties may agree to

terminate the contract from the date and on the conditions which they
determine, or by a common agreement ask the court to set about its
adaptation. In the absence of an agreement within a reasonable time, the
court may, on the request of a party, revise the contract or put an end to it,
from a date and subject to such conditions as it shall determine.
Note. This provision was added to the Code by Ordonnance no. 2016–
131 of February 10, 2016. Previously, French courts had refused to give
relief for changed circumstances even in extreme cases.

German Law
German Civil Code
§ 242 PERFORMANCE IN GOOD FAITH
The party owing a performance is bound to perform in the way which is
required by good faith (Treu und Glauben) having regard to the ordinary
usage.
Note. The following provision was enacted in 2002 to amend the
German Civil Code codifying, as we will see, a doctrine the courts had
already developed by applying § 242.
§ 313 DESTRUCTION OF THE BASIS OF THE TRANSACTION (GESCHÄFTSGRUNDLAGE)
(1). If circumstances that formed the basis of the transaction have
seriously changed thereafter and the parties would not have
entered into the contract or one with the same content had they
foreseen the change, then the adaptation of the contract can be
required insofar as for one of the parties, taking into account all of
the circumstances of the particular case, and especially the div-
ision or risks provided for by the contract or by statute, adherence
to the contract no longer can be expected.
(2). It is equivalent to a change of circumstances when essential
conceptions which formed the basis of the contract have proven
false.
(3). If an adaptation of the contract is not possible or unreasonable in
part, then the disadvantaged party can withdraw from the con-
tract . . .

Reichsgericht, 21 September 1920, RGZ 100, 129

“In 1912, the plaintiff rented the defendant business space in its Berlin
property for a period ending on April 1, 1915. The contract continued to run
until the end of March, 1920 because the defendant availed itself of the
right [contained in the lease] to renew for ﬁve years. Under article 20 of the
contract, the defendant could require that steam be furnished for indus-
trial purposes. The plaintiff considers that it is justiﬁed, because of the
basically changed conditions since the time when the contract was con-
cluded, in demanding additional compensation, besides the compensation

paid under article 20, for the steam provided between September 1, 1917,
through the end of July, 1919. The plaintiff also seeks to establish either
that the contract for the delivery of steam was invalid or that in the future
there was no obligation to deliver steam unless a reasonable price was
paid. Both the Landgericht and the court of appeal gave judgment for the
defendant, but the plaintiff’s appeal [Revision] has been successful . . .
The court of appeal properly refused to accept the plaintiff’s argument,
according to which, under a proper interpretation, article 20, number 6, of
the contract . . . ‘the price for industrial steam is determined as follows,’ as
well as other contractual language, requires a change in the price of steam
when a fundamental change in conditions occurs. The discussion of the
court of appeal on this point is basically directed to factual matters and
does not reveal any error as to the law. Nor can any objections be raised to
the discussion of the court of appeal in which it rejected the attempt of the
plaintiff to find a basis for its claim by seeing in the defendant’s hard-
headed insistence upon the contract price a violation of good morals under
§ 138 of the Civil Code, from which would follow, according to the plaintiff’s
further argument, the present invalidity of the contractual stipulations as
to the price of steam so that the possibility of establishing a fair price for
steam under the provisions of § 632 or § 812 of the Civil Code would be
open.
However, the request of the plaintiff appears to be justified from the
point of view of the so-called clausula rebus sic stantibus.
The Civil Code recognizes this principle only as applied to a few special
cases and, as this Senate said recently in a decision of July 8, 1920, RGZ 99,
259, the Reichsgericht has not recognized this as a general principle.
However, the Reichsgericht has recognized, in a series of decisions of
this and other Senates in the last few years, in exceptional cases, the effect
upon existing contracts of the collapse of, and changes in, all economic
relations brought about by the unexpected course and conclusion of the
war. The court has held the request of one party for the dissolution of a
contractual relationship to be justified when it could no longer be expected,
from the economic point of view, that the party to the contract carry it out
under the new, completely changed conditions. This rule found and finds
support in the positive written law in §§ 242 (157) and 325 of the Civil Code.
If, under the first of these provisions, good faith (Treu und Glauben)
regulates the debtor’s duty to perform as well as the creditor’s right of
performance – his right to the performance – then, under this provision,
the performance of a contract can no longer be owed or demanded when, as
a result of a complete change in conditions, the performance has become
completely different from the performance originally contemplated and
desired by both parties. And if, in § 325 of the Civil Code, under impossibil-
ity not only factual but also economic impossibility is to be understood, the
clausula rebus sic stantibus is, to this extent, clearly contained in the code.
In the cases decided earlier, the situation was such that one party to
the contract demanded a complete dissolution of the contractual bond on
the ground of completely changed conditions. In the present case both

parties desire to continue the contract or have continued it. One of them,
here the plaintiff, demands in connection with the continuation of the
contract an increase in the contract price. This demand is based upon the
assertion that its own performance, as a result of the complete change in all
the important relationships, has, economically speaking, become so
entirely different from that created upon the conclusion of the contract,
that, if the other performance is not changed, there would be a completely
unsupportable disproportion, economically speaking, between the two per-
formances, so that good faith requires that the other performance be
changed. It is now the Senate’s conviction that the [previous] declaration
of this Senate [that contractual relations could not be modified to relieve
the hardships of war] can no longer be supported as a strict, general
proposition. The statement has become outmoded due to the experience
that the Senate has had during the subsequent course of war and especially
due to the unexpected outcome of the war and the subsequent, and also
unexpected, overturning of all economic relations. These conditions clearly
require an interference by the judge with existing contractual relations if
an unbearable condition in which good faith and every requirement of
justice and fairness are ignored is not to be created. But in order to prevent
from the very beginning every misuse of this principle three things must be
required for its application:
First, as has already been repeatedly noted, both parties must desire
the continuation of the contract. The case of compulsory continuation
cannot be considered here. Second, only very special and very exceptional
changes in circumstances, such as have now been brought about by the
war, can bring about the result described. The mere circumstance that a
later change in conditions was not foreseen and could not have been
foreseen does not suffice. Third, in a case of this sort an adjustment of the
interests on each side must take place. A change cannot take place only in
favor of the person who suffers under the new conditions because of the
continuation of the contract, but one must also consider the interests of the
other party who in the future must give more or something else in perform-
ing. The whole disadvantage cannot be placed on him, so that the condition
now becomes unsupportable for him and fairness and justice are not
observed. Instead the damages must be fairly apportioned between both
parties. Proper finding of this adjustment depends upon the experience of
the judge and his understanding judgment of the reciprocal relations. If
one considers the instant case from this point of view the decision below is
at least supportable. The plaintiff showed that because of the enormous
increase in coal and other prices, it had added the amount of 89,000
Reichsmarks to the payment made by the defendant under the contract
for the steam delivered in the period between September 1, 1917 and the
end of July 1919, and thus had a clear loss in this amount. In this connec-
tion it should be noted that the yearly rental for the space rented to the
defendant amounted to only 9,362 Reichsmarks. The condition in question
will be most clearly seen, however, in the fact that the Rent Office in Berlin
raised by more than ten times the contract price for the steam to be
delivered by the plaintiff to the defendant in the period from March 31,

1920, the end of the contract, to March 31, 1921, the time to which the Rent
Ofﬁce extended the lease the plaintiff had terminated. In view of this fact
and the other clearly apparent relations, the argument of the judge on
appeal, that the plaintiff merely miscalculated when the contract was
concluded by not considering the consequences of a war, cannot be
accepted. Faulty calculations when a contract is concluded do not, of
course, constitute a basis for a change in prices that were agreed upon.
But even if one wished to agree with the argument of the judge on appeal
that the plaintiff should perhaps have taken the consequences of a possible
war into consideration, one cannot claim that when the contract was
concluded in 1912, the plaintiff should have given any consideration, in
view of the situation of the German Reich at that time, to the possibility of
such a war with such a size, such an outcome, and such effects, or that it
could have taken such a war into consideration. No one in Germany had, or
could have had, any notion of such a thing; the events were beyond human
prognostication. The judge on appeal thus did a clear wrong to the plaintiff,
when, because the plaintiff did not consider the consequences of a possible
war, he put the consequences of the present war in the plaintiff’s relation-
ship with the defendant upon the plaintiff alone. That the failure to have a
war clause in the contract cannot prejudice the plaintiff needs no further
explanation . . . .”

Reichsgericht, 29 November 1921, RGZ 103, 177

“In October, 1918, the plaintiff bought ten tons of iron wire for imme-
diate delivery from the defendant. When the defendant failed to make
delivery, the plaintiff brought . . . an action for damages for nonperfor-
mance. The defendant based his defense on changed conditions. A judg-
ment in the court of ﬁrst instance for the defendant was reversed on appeal
and judgment entered for the plaintiff. This decision has been overturned
on appeal [Revision].
The defendant argues that because of changes that arose since the
contract was concluded, it cannot now be expected to perform the contract.
The court of appeal had the following to say on this point: ‘The defendant’s
position, that the contract was terminated due to subsequent impossibility,
is not acceptable. It would be acceptable only if the collapse [of Germany]
had brought about a complete change in economic conditions and such a
considerable increase in prices that the performance of the contract would
entail economic ruin for the defendant.’ This, the court of appeal said, was
not claimed. The appeal quite properly challenges this analysis. That
analysis shows a position that is too narrow from every point of view. The
court of appeal should have considered the question not only from the point
of view of impossibility, but, above all, should have determined whether the
performance could have been expected in good faith (Treu und Glauben)
taking into account ordinary usage. The court of appeal’s analysis is also
too narrow in that it makes the decision turn upon whether performance
would have resulted in economic ruin for the obligee. It was not claimed
that this would result, nor, apparently, could it have been claimed. Where

this can be shown it is, of course, quite decisive. But such a showing is not
indispensable. For such a requirement clearly does not correspond to the
idea that lies behind the clausula rebus sic stantibus doctrine and justifies
its results. In the first place the requirement of economic ruin leads to a
difference in treatment depending upon a party’s wealth . . . The clausula
rebus sic stantibus doctrine is rather justified by the reciprocal nature of
bilateral contracts of exchange . . . In such a contract it must be assumed
that the parties concluding the contract intended to enter into a fair
contract of exchange, one in which each side is ready to give the other a
performance that this latter considers as a full equivalent for his own
performance. In general, it is true that each party has to look out for his
own interests and that the contract remains effective even though one or
both parties are mistaken relative to past or future events. But the case is
otherwise if the events so change values, especially the value of money,
that the obligee would receive for his performance a counter-performance
that no longer comes even near to containing the equivalent that the
contract had contemplated. The obligor violates the requirement of good
faith when he insists upon the performance under such circumstances.”

Reichsgericht, 28 November 1923, RGZ 107, 78

“The plaintiff is the owner of real property entered on the land register of
the former German court in Lüderitzbucht [in Africa]. The defendant has
been, since 1913, the holder of a mortgage for 13,000 Reichsmarks, which
was noted on the land register. The mortgage debt fell due on April 1, 1920.
The plaintiff, in payment of the principal obligation and of overdue interest,
paid the defendant 18,980 Reichsmarks through a bank. The plaintiff seeks a
judgment ordering the defendant to turn over the mortgage papers and to
agree to the extinguishing of the mortgage. The defendant refused to do this on
the ground that the debt must either be paid in the hard currency of the former
German protectorate in Southwest Africa or in money of corresponding value
...
In this case . . . it is necessary to answer the question of whether, under
German law, the defendant, as mortgage-creditor, can demand a revalor-
ization of the claim secured by the mortgage in view of the heavy inflation
in German paper money . . .
The legal possibility of a revalorization of mortgage debts is to be
recognized under the German law now in force, especially under § 242 of
the Civil Code. In the case of mortgage debts, as a rule – at least when
paper money is taken as a basis – the debtor has received a corresponding
increase in value due to the considerably increased value of the land.
Whether this increase in value has occurred with reference to the property
located in Lüderitzbucht that is involved in the instant case must be
determined by the Kammergericht.
It is not important whether – as the plaintiff argues – the admissibility
of revalorization of mortgage debts was legally recognized in 1920 or
whether revalorization was accepted later, under the influence of continuing
inflation. Incorrect legal conceptions of the year 1920 are not decisive today.

Under § 242 of the Civil Code, the requirements of good faith (Treu und
Glauben), taking into account commercial practice, must be considered in the
individual case. A fair consideration of the interests of both sides is required. It
follows from this that a general principle requiring the revalorization of every
mortgage debt cannot be established. Nor will the extent of the revalorization
. . . be the same in each case. It will be necessary to take into account, besides
the increase in terms of paper Reichsmarks of the value of the real property,
which will have the principal weight, also the other circumstances of the cases:
for example, the economic ability of the debtor to perform under the circum-
stances, whether agricultural, industrial, or city property is involved. There
must also be taken into account the public charges that the property must pay.
In the case of rental property the reduction of income resulting from the
measures taken to protect renters deserves consideration.
The provisions of the German currency law do not stand in the way of a
revalorization. It is true that under the Gesetz über die Abänderung des
Bankgesetzes of June 1, 1909 (RGB 515) the notes of the Reichsbank are
legal tender. [References to other statutory provisions omitted.] But all
these provisions rested, at the time of their promulgation, on the . . .
assumption that the notes . . . had a value equal to hard money . . . The
legislator had not considered the possibility of a considerable paper money
inflation, let alone one of the extent that has occurred . . . when these
provisions were enacted . . .
The permissibility of revalorization can also be shown by way of an
interpretation of the contract in which the court considers what the parties
would have wanted, in view of the whole purpose of the contract, if they had
foreseen the possibility of a considerable degree of inflation . . ..
Therefore, the legal possibility of a revalorization must, in view of the
considerable inflation of German paper money, be recognized as legally
permissible.”
Note. In this decision, the court dealt with the problem of hyperinfla-
tion which the legislature had refused to confront. The mortgage indebted-
ness in Germany in 1913 was approximately 40,000,000,000 Reichsmarks,
or about one-sixth of the total German wealth. In 1923, this amount of
Reichsmarks was worth less than one American cent. F. Graham,
Exchange, Prices, and Production in Hyper-Inflation: Germany, 1920–
1923 (1930), 241 n. 1. The consequence of the court’s decision was that
the terms of hundreds of thousands of contracts were open to revision, and
hundreds of new judges were hired to decide on a case-by-case basis how
they should be revised.

Bundesgerichtshof, October 14, 1959, NJW 1959, 22031

“A claim for an increase in the amount of the dead rent ﬁxed in a
contract for the extraction of saltpetre at the turn of the century cannot

1. Excerpt from translation by Kurt Obligations, vol. 1. The Law of Contracts

Lipstein in B.S. Markesinis, W. Lorenz and and Restitution: A Comparative
G. Dannemann, The German Law of Introduction (1997).

be upheld on the ground that the intervening decline in the purchasing

power of money has caused the collapse of the basis of the transaction.”
The contract, made in 1898, provided for a dead rent of 1,200
Reichsmarks. The lower court found that “it was impossible to say” why
the dead rent was set at this figure. “[T]hat sum was not related to the
current price of saltpetre, since the parties in 1898 did not refer to it, and
indeed did not know, because there was technically no means of finding
out, whether there were any extractable saltpetre at all in the area covered
by the contract or if so, how much of it there might be.” According to the
Bundesgerichtshof : “It is indeed possible that in the course of a long-term
contractual relationship the balance between performance and counter-
performance may become so upset that it would no longer be fair to keep
the disadvantaged party to what was originally agreed. If that be so, then
the principle of good faith and fair dealing which dominates the whole of
our law (§ 242 BGB) requires either that the reciprocal obligations be
adapted to the changed situation, supposing that the maintenance of the
contract is in the interests of the parties as properly conceived, or that the
contract be completely canceled.
One of the stated requirements for the application of the theory of the
collapse of the basis of the transaction, and one which is especially import-
ant in cases of this kind, is that the intervening change be of a critical
nature and affect the interests of the parties to a significant degree. Not
every adverse modification of the prior relationship of equivalence, unfore-
seen by the parties at the time of the contract, justifies a departure from the
principle that contracts must be adhered to (‘pacta sunt servanda’).
What is really required is such a fundamental and radical change in
the relevant circumstances that it would be an intolerable result quite
inconsistent with law and justice to hold the party to the contract [refer-
ences omitted]. This test is crucial in this case. The court below recognized
this and was right to apply this test. In doing so it went thoroughly into the
facts and after considering the interests of both parties came to the conclu-
sion that the stated pre-conditions for breaking with the principle that
contracts must be kept were not satisfied.”

Bundesgerichtshof, May 28, 1973, BGHZ 61, 312

“The plaintiff became a director of the defendant company in 1926. By
a contract of employment dated 18 February 1935, he received a ﬁxed
salary of 50,000 Reichsmarks and a percentage of the proﬁts. The contract
provided further that his pension was to be calculated as follows: after ten
years’ service 25% of 40,000 Reichsmarks with an annual increase of 1% up
to a maximum of 60% after 35 years. After 20 years’ service the basic
standard was to be increased to 50,000 Reichsmarks.

2. Excerpt from translation by Kurt Obligations, vol. 1. The Law of Contracts

Lipstein in B.S. Markesenis, W. Lorenz and and Restitution: A Comparative
G. Dannemann, The German Law of Introduction (1997), 595.

The plaintiff retired in 1951 and received from then onwards an

annual pension of 15,000 DM equal to monthly payments of 3,083.33 DM.
In 1969, plaintiff asked for an increase, which was refused. He claimed an
additional pension at the monthly rate of 804.17 DM on the ground that
wages and salaries and the general cost of living had increased
considerably.”
The Court of Appeal upheld the plaintiff’s claim on the grounds that
cost of living had risen by 45.2 points between 1950 and 1970, and the
pension must therefore be adjusted “to the changed conditions.” The
Bundesgerichtshof dismissed the defendant’s appeal.
“Normally both contracting parties envisage that the pension provided
to a director or manager will serve, either alone or with other revenues, to
assure for the beneficiary a standard of living commensurate to his position
hitherto in case of old age, premature incapacity to work or of dismissal
without any expectation of an equivalent means of livelihood of another
kind. Here, too, the pension can be regarded as part of the remuneration for
services which the beneficiary has given before he retired and which
contributes to the prosperity of the enterprise, the profits of which now
feed the pension. This balance, assumed to exist when the obligation to pay
a pension is incurred, is seriously disturbed if, as a result of a fall in the
purchasing power as compared with that outlined previously, the pension
can no longer fulfill by its agreed amount its intended function which is to
guarantee the previous standard of living completely or in part. The enter-
prise, on the other had, is not affected in the result by the depreciation of
money, for generally the revenues have at least kept up with the increase
in prices or they have even overtaken it as a result of economic growth. It is
true that costs, especially wages and salaries, have increased as well. The
proportion of the individual pension obligations, however, the nominal
value of which has remained the same, has decreased correspondingly.
The special features set out here preclude a comparison with other
obligations of long duration which are not concerned with maintenance
(e.g. for the production of potash) as the practice of this court cited by the
appellant has underlined expressly [references omitted].”

Chinese Law
Judicial Interpretation (II) of Contract Law
A R T I C L E 26
After the conclusion of a contract, when an unforeseeable major
change of event occurs that is beyond the normal commercial risk and yet
is not force majeure, the court may at the request of the obligor, modify or
terminate the contract based on the principle of fairness and the factual
situation of the case, if continued performance would result in obvious
unfairness and the purpose of the contract cannot be fulﬁlled.
Note. According to a Supreme People’s Court rule that encourages
restraint in use of the doctrine, an approval from the Supreme Court or

provincial high court is needed before the doctrine of change of circum-

stances can be applied.1
This judicial interpretation will be superseded by Articles 533 and 580.
Article 533 resembles German Civil Code §313 and Article 580-2 is a
version of the common law frustration of purpose. As a last-minute add-
ition to the draft, Article 580-2 primarily works to excuse performance that
can only be made at an excessive cost, but the non-performing party is still
liable for damages. In principle, as in German law, the non-breaching party
is always entitled to performance regardless of the cost of performance.
When a performance becomes excessively more expensive after a con-
tract is concluded, the burdened party would have two options: he can seek
to terminate the contract under Article 533 or if that fails, he will ask to be
excused from performing the contract and pay damages instead. Clear
standards will need to be established to distinguish these two situations.

Chinese Civil Code

A R T I C L E 533
After a contract is formed, if a condition that formed the basis of the
contract has undergone signiﬁcant change, which was unforeseeable and
beyond normal commercial risk, and that continued performance will be
manifestly unfair to one party, the adversely affected party is entitled to
renegotiate; if an agreement cannot be reached within a reasonable time,
the parties can request the people’s court or arbitration institution to
modify or terminate the contract.
The people’s court or the arbitration institution shall base its decisions
on the facts and modify or terminate the contract according to the principle
of fairness.
A R T I C L E 580
Where a party failed to perform a non-monetary obligation or if his
performance was not in conformity with the agreement, the other party
may demand performance, except in one of the following situations:
(1). performance is impossible in law or in fact;
(2). the subject matter of the obligation is unsuitable for enforced
performance or the cost of performance would be excessively high;
(3). the obligee fails to demand performance within a reasonable time.
When one of the aforementioned circumstances has arisen and
resulted in the nonfulﬁlment of purpose of contract, the people’s court or
the arbitration institution may terminate the contractual rights and
obligations at the request of the party. However, the termination does
not affect liability for breach of contract (Modifying Contract Law, Article
110).

1. 《关于正确适用<中华人民共和国合同 from Supreme Court re Interpretation II of

法>若干问题的解释（二）服务党和国家的工 Contract Law (Fa [2009] No.165).
作大局的通知》（法【2009】165号）Notice

ZT Corp. v. XD Corp., 常州新东化工工发展有限公司、江苏正通宏泰股份有

限公司建设工工程施工工合同纠纷、技术委托开发合同纠纷 Supreme
People’s Court (2015)民提字第39号 (2015) Min Ti Zi No. 39
ZT Corp agreed to complete a boiler flue gas desulfurization pro-
ject for XD Corp. The contract was concluded on September 29, 2011.
After the contract, the municipal government issued a new energy-
saving and pollution reduction policy that banned the use of coal-
burning boilers within the area where the defendant, XD Corp, was
located. The order to suspend the project was issued to XD Corp in mid
October and XD Corp was also ordered to disable its coal-burning
boiler all together by June, 2012. XD immediately terminated the
contract relying upon the doctrine of change of circumstances citing
the sudden change of state policy.
ZT Corp agreed that the duty to perform shall be terminated. They
sued, however, to recover expectation damage and alleged that XD
Corp breached the contract. ZT’s main arguments were that change
of circumstances should only be applied when there is a state policy
change at the national level rather than the local policy directive
issued by a municipal government and that it is a normal commercial
risk that parties should have foreseen at the time of contracting. Both
trial court and appellate court refused to allow relief under the doc-
trine of change of circumstances. Both courts held that XD Corp
breached the contract and awarded a sizable portion of the expectation
damage, 1.32 million yuan out of 1.84 million yuan (full expectation
damage was calculated at a 41.74% profit margin, the rate of profit on
the prevailing market).
The Supreme Court reversed the decisions and held that XD Corp is
entitled to terminate the contract under the doctrine of change of circum-
stances and only liable for the cost already incurred before the policy change
in the amount of 52,000 yuan. The Supreme Court held that “[t]he objective
circumstances surrounding the contractual performance had changed sig-
nificantly since the promulgation of policy directive. As a result, the purpose
of the contract cannot be fulfilled and continued performance is meaning-
less. Such a change is not one that belongs to normal commercial risk and
one that can be foreseen by the parties. As such, the policy change is a
change of circumstances as defined by art. 26 of the Judicial Interpretation
II of Contract Law.”

An Y v. Shao QZ, 安妍与邵庆珍房屋买卖合同纠纷 Supreme People’s

Court (2017) 最高法民再26号; (2017) Zui Gao Fa Min Zai No. 26
On May 28, 2006, An and Shao reached an agreement where Shao was
to lease a house to An for four years from July 1, 2006 to June 30, 2010, and
Shao will sell An the house upon the expiration of the term of the lease.
This agreement was made in order to avoid a legal obstacle that prevented
the seller, Shao, from selling the house right away. The sales price was set
at RMB 608,000 yuan. Upon the conclusion of the term of the lease, Shao
refused to sell the house to An at the contract price because the market

price had tripled. She demanded that she shall be allowed to sell the house
at the market price of RMB 2,548,555 yuan, claiming that the market price
change constituted change of circumstances. The trial court upheld the
contract and denied that there was a change of circumstances.
The decision was reversed by the appellate court. An extra 700,000
yuan was ordered as a remedy for the change in market price in order to
avoid an obvious unfair outcome. The appellate court deemed the price
change to be a change of circumstances.
An objection to the appellate court’s decision was made by the ofﬁce of
the Supreme Procurator. That ofﬁce is not only in charge of prosecutions
but has the duty to supervise the work of judiciary. It can appeal a decision
on its own initiative. The Supreme People’s Court reopened the case. The
Court held that the price change might be unforeseeable but that it still is
to be considered a normal commercial risk. Therefore, the performance of
the contract was not excused, and Shao was ordered to perform her con-
tractual obligations.

The Draft Common Frame of Reference

ARTICLE III. 1:110 VARIATION OR TERMINATION BY COURT ON A CHANGE OF
CIRCUMSTANCES

(1). An obligation must be performed even if performance has become

more onerous, whether because the cost of performance has
increased or because the value of what is to be received in return
has diminished.
(2). If, however, performance of a contractual obligation or of an
obligation arising from a unilateral juridical act becomes so
onerous because of an exceptional change of circumstances
that it would be manifestly unjust to hold the debtor to the
obligation a court may:
(a). vary the obligation in order to make it reasonable and equit-
able in the new circumstances; or
(b). terminate the obligation at a date and on terms to be deter-
mined by the court.
(3). Paragraph (2) applies only if:
(a). the change of circumstances occurred after the time the obli-
gation was incurred;
(b). the debtor did not at that time take into account, and could
not reasonably be expected to take into account, the possibil-
ity or scale of that change of circumstances;
(c). the debtor did not assume, and cannot reasonably be regarded
as having assumed, the risk of that change of circumstances;
and
(d). the debtor has attempted, reasonably and in good faith, to
achieve by negotiation a reasonable and equitable adjust-
ment of the terms regulating the obligation.

The Unidroit Principles of International Commercial

Contracts
ARTICLE 6.2.1 CONTRACT TO BE OBSERVED
Where the performance of a contract becomes more onerous for one of
the parties, that party is nevertheless bound to perform its obligations
subject to the following provisions on hardship.

ARTICLE 6.2.2 DEFINITION OF HARDSHIP

There is hardship where the occurrence of events fundamentally alters
the equilibrium of the contract either because the cost of a party’s perform-
ance has increased or because the value of the performance a party receives
has diminished, and
(a). the events occur or become known to the disadvantaged party
after the conclusion of the contract;
(b). the events could not reasonably have been taken into account by
the disadvantaged party at the time of the conclusion of the
contract;
(c). the events are beyond the control of the disadvantaged party; and
(d). the risk of events was not assumed by the disadvantaged party.

ARTICLE 6.2.3 EFFECTS OF HARDSHIP

(1). In case of hardship the disadvantaged party is entitled to
request renegotiations. The request shall be made without
undue delay and shall indicate the grounds on which it is
based.
(2). The request for renegotiation does not in itself entitle the disad-
vantaged party to withhold performance.
(3). Upon failure to reach agreement within a reasonable time either
party may resort to the court.
(4). If the court ﬁnds hardship it may, if reasonable,
(a). terminate the contract at a date and on terms to be ﬁxed; or
(b). adapt the contract with a view to restoring its equilibrium.

V. REMEDIES
1. Speciﬁc Performance
a. Origins
In England, law was administered by two sets of courts: the
common law courts and the court of equity which was presided over
by the Chancellor. The role of the court of equity was to help parties
whose cause was deemed to be just but who could not get relief from a

court of common law. One such case was the person who could not
receive an adequate remedy in an action of assumpsit. The common
law courts could award damages when a promise was broken but they
could not order the promise breaker to perform. A court of equity could
do so: the court of equity “acts on the conscience,” which meant that
the court could order a party to be imprisoned until he was prepared to
do as the court ordered. But since the role of the court of equity was
only to provide a remedy when the remedy at common law was inad-
equate, that court would only order speciﬁc performance of an obliga-
tion when an award of damages from a common law court would not be
an adequate remedy.
In countries which had adopted Roman law, a crucial role was
played by two Roman texts. According to one: “If an object sold is not
delivered, there is an action for damages (id quod interest), that is, for
the damages suffered by the buyer by not having the object (hoc est
quod rem habere interest emptoris).”1 According to the other: “[A]s he
did not do as he promised, he is to be adjudged to pay a sum of money,
as is the case in all obligations to do something.”2 It is not clear what
these statements meant to the Romans. Their meaning was controver-
sial throughout the Middle Ages and early modern times, some jurists
claiming that a court could never order speciﬁc performance in such
cases, and others claiming that it could.3 Pothier took the position that
when a party defaulted on an obligation to do or not to do something,
the only remedy available against him was an action for damages. As
we will see, this rule passed into Article 1142 of the French Civil Code,
only to be subverted by the courts.
The late scholastics and the natural lawyers took the position that,
whatever the Roman law might be, as a matter of “natural law,” the
party owing a performance should have to do so. According to Molina:
“But surely if the Roman law or any other means that when a person
is obligated to do something, he then has the option not to perform but
only to pay damages, that would plainly be irrational . . . .”4 He cited
the Canon law which was to the contrary.5 Grotius agreed that “as a
matter of natural law, whoever promises to do something is obligated
to do it if he can” although he thought that only damages could be
recovered in civil law.6 As Reinhard Zimmermann pointed out, this
was the position that triumphed in nineteenth-century Germany after
the natural law era was over. As we will see, it was incorporated in
§ 241 of the German Civil Code.

1. Dig. 19.1.1.pr. 4. Ludovicus de Molina, De iustitia et

2. Dig. 42.1.13.1. iure tractatus (1614), II, disp. 562, no. 5.
3. Reinhard Zimmermann, The Law of 5. Ibid.
Obligations: Roman Foundations of the 6. Hugo Grotius, Institutiones iuris
Civilian Tradition (1990), 773–6. Hollandici (trans. J. van der Linden, ed. H.
F.W.D. Fischer, 1962), III.iii.41.

b. Modern Law
English Law
Guenter Treitel, The Law of Contract (10th edn., 1999), 950–60
“(1) Granted where damages not ‘adequate’
The traditional view is that specific performance will not be ordered
where damages are an ‘adequate’ remedy.1 After illustrating this require-
ment, we shall see that it now requires some reformulation.
(a). Availability of satisfactory equivalent. Damages are most
obviously an adequate remedy where the claimant can get a
satisfactory equivalent of what he contracted for from some
other source. For this reason specific performance is not generally
ordered of contracts for the sale of commodities, or of shares,
which are readily available in the market.2 In such cases the
claimant can buy in the market and is adequately compensated
by recovering the difference between the contract and the market
price by way of damages. Indeed, he is required to make the
substitute purchase in performance of the duty to mitigate his
loss. If he fails to do so, he cannot recover damages for extra loss
suffered because the market has risen after the date when the
substitute contract should have been made. To award him specific
performance in such a case would, in substance, conflict with the
principles of mitigation3 as well as being oppressive to the
defendant.4 Similar reasoning seems to underlie the rule that a
contract to lend money cannot be specifically enforced by either
party:5 it is assumed that damages can easily be assessed by
reference to current rates of interest.

1. Co-operative Insurance Society Ltd v. and market price on the day fixed for
Argyll Stores (Holdings) Ltd. [1998] A.C. 1 at performance, as in Colt v. Nettervill (1725) 2
11. P. Wms. 301. See also Whiteley Ltd. v. Hilt
2. Cud v. Rutter (1719) 1 P.Wms. 570; Re [1918] 2 K.B. 808; M.E.P.C. v. Christian
Schwabacher (1908) 98 L.T. 127 at 128; cf. Edwards [1978] Ch. 281 at 293 (affirmed on
Fothergill v. Rowland (1873) L.R. 17 Eq. 137; other grounds [1981] A.C. 205); Chinn v.
Garden Cottage Foods Ltd v. Milk Marketing Hochstrasser [1979] Ch. 447 (reversed on
Board [1984] A.C. 130; aliter if the shares are other grounds [1981] A.C. 533).
not readily available: Duncuft v. Albrecht 5. Rogers v. Challis (1859) 27 Beav. 175
(1841) 12 Sim. 189; Langen & Wind Ltd v. (suit by lender); Sichel v. Mosenthal (1862)
Bell I [1972] Ch. 685; Jobson v. Johnson I 30 Beav. 371 (suit by borrower: decision
[1989] 1 W.L.R. 1026; Grant v. Cigman based on lack of mutuality rather than
[1996] 2 B.C.L.C. 24; or if the contract is for adequacy of damages); cf. Larios v. Bonnany
the sale of shares giving a controlling y Gurety (1873) L.R. 5 C.P. 346. By statute
interest in the company, Harvela the court can specifically enforce a contract to
Investments Ltd. v. Royal Trust Co. of take debentures in a company, that is, to
Canada (C.I.) Ltd [1986] A.C. 207. make a secured loan to the company:
3. See Buxton v. Lister (1746) 3 Ark. 383 Companies Act 1985, s.195 reversing South
at 384. African Territories Ltd v. Wallington [1898]
4. See Re Schwabacher (1908) 98 L.T. A.C. 109. A contract to subscribe for shares in
127, where shares rose in value after a company is also specifically enforceable:
breach. In such a case the defendant could Odessa Tramways Co. v. Mendel (1878) 8
be given the option of transferring the shares Ch.D. 235; Sri Lanka Omnibus Co. v. Perera
or paying the difference between contract [1952] A.C. 76.

Damages will, on the other hand, not be regarded as an

adequate remedy where the claimant cannot obtain a satisfac-
tory substitute. The law takes the view that a buyer of land or
of a house6 (however ordinary) is not adequately compensated
by damages, and that he can therefore get an order of specific
performance.7 Even a contractual license to occupy land,
though creating no interest in the land,8 may be specifically
enforced.9 . . .
(b). Damages hard to quantify. A second factor which is relevant
(though not decisive10) in considering the adequacy of damages is
the difficulty of assessing and recovering them. This is one reason
why specific performance has been ordered of contracts to sell (or
to pay) annuities,11 and of a sale of debts proved in bankruptcy,12
the value of such rights being uncertain . . .
(c). Appropriateness of the remedy. The more satisfactory
approach found in the cases just discussed is also expressed
in dicta to the effect that the availability of specific perform-
ance depends on ‘the appropriateness of that remedy in the
circumstances of each case.’ The question is not whether dam-
ages are an ‘adequate’ remedy, but whether specific perform-
ance will ‘do more perfect and complete justice than an award
of damages.’13 The point was well put in a case concerned with
the analogous question whether an injunction should be
granted: ‘The standard question . . ., Are damages adequate
remedy? Might perhaps, in the light of the authorities in
recent years, be rewritten: Is it just in all circumstances
that the plaintiff should be confined to his remedy in damages
. . . ?’14 . . .

(2) Discretionary
Speciﬁc performance is a discretionary remedy: the court is not bound
to grant it merely because the contract is valid at law and cannot be
impeached on some speciﬁc equitable ground such as misrepresentation

6. Fry, Speciﬁc Performance (6th edn.), 10. Soc. des Industries Metallurgiques S.
§ 62. Damages are, however, an adequate A. v. Bronx Engineering Co. Ltd [1975] 1
remedy for breach of a “lockout” agreement Lloyd’s Rep. 465.
relating to land since such an agreement is 11. Ball v. Coggs (1710) 1 Bro. P.C. 140;
intended merely to protect the prospective Kenney v. Wexham (1822) 6 Madd. 355;
purchaser from wasting costs and does not Adderley v. Dixon (1824) 1 C. & S. 607 at
give him any right to insist on conveyance of 611; Clifford v. Turrell (1841) 1 Y. & C.C.C.
the land: Tye v. House [1997] 2 E.G.L.R. 171. 138; Beswick v. Beswick [1968] A.C. 58; see
7. Unless he elects to claim damages, as however Fry, Speciﬁc Performance (6th
in Meng Leong Developments Pte. Ltd v. Tip edn.), pp. 30, 111, 112; Crampton v. Varna
Hong Trading Co. Pte. Ltd. [1985] A.C. 511. Ry. (1872) L.R. 7 Ch. App. 562.
8. See Ashburn Anstalt v. Arnold [1989] 12. Adderly v. Dixon (1824) 1 C. & S. 607.
Ch. 1, overruled on another point in 13. Tito v. Waddell (No. 2) [1977] Ch. 106
Prudential Assurance Co. Ltd v. London at 322. Rainbow Estates Ltd v. Tokenhold
Residuary Body [1992] 2 A.C. 386. [1998] 2 All E.R. 860 et 868.
9. Verrall v. Great Yarmouth B.C. 14. Evans Marshall & Co. Ltd. v. Bertola
[1981] Q.B. 202. S.A. [1973] 1 W.L.R. 349 et 179.

or undue inﬂuence.15 The discretion is, however, ‘not an arbitrary . . .

discretion, but one to be governed as far as possible by ﬁxed rules and
principles.’16 . . .

(3) Contracts not speciﬁcally enforceable

(a) Contracts involving personal service. It has long been settled
that equity will not, as a general rule, enforce a contract of personal
service.17 Specific enforcement against the employee was thought to inter-
fere unduly with his personal liberty . . .
The equitable principle applies to all contracts involving personal
service even though they are not strictly contracts of service. Thus an
agreement to allow an auctioneer to sell a collection of works of art cannot
be specifically enforced18 by either party, though specific enforcement
would hardly be an undue interference with personal liberty, even in a
suit against the auctioneer. Again, an agreement to enter into a partner-
ship will not be specifically enforced as ‘it is impossible to make persons
who will not concur carry on a business jointly, for their common
advantage.’19 The court can, however, order the execution of a formal
partnership agreement, and leave the parties to their remedies on the
agreement.20 Similarly, the court can order the execution of a service
contract even though that contract, when made, may not be specifically
enforceable.21
The equitable principle here under discussion applies only where the
services are of a personal nature. There is no general rule against the
specific enforcement of a contract merely because one party undertakes
to provide services22 under it. Thus specific performance can be ordered of a
contract to publish a piece of music23 and sometimes of contracts to build. It

15. Stickney v. Keeble [1915] A.C. 386 et sharing arrangement which had been made
419. between members of a family who later
16. Lamare v. Dixon (1873) L.R. 6 H.IL. quarreled: Burrows and Burrows v. Sharp
414 et 423; Co-operative Insurance Society (1991) 23 H.L.R. 82, where the basis of
Ltd v. Argyll Stores (Holdings) Ltd. [1998] liability was not contract but proprietary
A.C. 1 at 16. estoppel.
17. Johnson v. Shrewsbury and 20. As in England v. Curling, where the
Birmingham Ry. (1853) 3 D.M. & G. 358; object of obtaining such a decree was to
Brett v. East India and London Shipping ascertain the exact terms that had been
Co. Ltd (1864) 2 H. & M. 404; Britain v. agreed, and then to prevent one of the
Rossiter (1883) 11 Q.B.D. 123 at 127; Rigby contracting parties from competing in
v. Connol (1880) 14 Ch.D. 482 at 487. Cf. business with the other.
Taylor v. N.U.S. [1967] 1 W.L.R. 532; 21. C. H. Giles & Co. Ltd v. Morris [1972]
Chappell v. Times Newspapers Ltd [1975] 1 1 W.L.R. 307; cf. Posner v. Scott-Lewis [1987]
Ch.D. 482 (injunction); The Scaptrade [1983] Ch. 25.
2 A.C. 694 at 700–1; Wishart v. National 22. E.g. Regent International Hotels v.
Association of Citizens Advice Bureaux Page-guide, The Times, May 13, 1985
[1990] I.C.R. 794; Wilson v. St. Hellen’s B.C. (injunction against preventing claimant
[1998] 3 W.L.R. 1070 at 1081. company from managing a hotel); Posner v.
18. Chinnock v. Sainsbury (1861) 30 L.J. Scott-Lewis [1987] Ch. 25.
Ch. 409; cf. Mortimer v. Beckett [1920] 1 Ch. 23. Barrow v. Chappel & Co. (1951), now
571. reported in [1976] R.P.C. 355, and cited in
19. England v. Curling (1844) 8 Beav. Joseph v. National Magazine Co. Ltd [1959]
129 at 137. On the same principle, speciﬁc Ch. 14; contrast Malcolm v. Chancellor
performance has been refused of a house- Masters and Scholars of the University of

has, indeed, been suggested that a time charterparty cannot be speciﬁcally

enforced against the shipowner because it is a contract for services24; but
the services that the shipowner undertakes under such a contract will
often be no more personal than those to be rendered by a builder under a
building contract. Denial of speciﬁc performance in the case of time char-
ters is best explained on other grounds.”

Law in the United States

Restatement (Second) of Contracts
§ 359. EFFECT OF ADEQUACY OF DAMAGES
(1) Specific performance or an injunction will not be ordered if dam-
ages would be adequate to protect the expectation interest of the injured
party . . .
§ 369. FACTORS AFFECTING ADEQUACY OF DAMAGES
In determining whether the remedy in damages would be adequate,
the following circumstances are significant:
(a). the difficulty of proving damages with reasonable certainty,
(b). the difficulty of procuring a suitable substitute performance by
means of money awarded as damages, and
(c). the likelihood that an award of damages could not be collected.

E. Allan Farnsworth, Contracts (3rd edn., 1999), 781

“A court will not grant specific performance of a contract to provide a
service that is personal in nature. This refusal is based in part on the
difficulty of passing judgment on the quality of performance . . . It is also
based on the undesirability of compelling the continuance of personal
relations after disputes have arisen confidence and loyalty have been
shaken and the undesirability, in some instances, of imposing what
might seem like involuntary servitude.”

French Law
French Civil Code
ARTICLE 1217
A party towards whom an undertaking has not been performed or has
been performed imperfectly, may:
–. refuse to perform or suspend performance of his own obligations;
–. seek enforced performance in kind of the undertaking;
–. request a reduction in price;

Oxford, The Times, December 19, 1990, that continued co-operation between author
where speciﬁc performance of a contract to and publishers would have been required.
publish a book was refused on the ground 24. The Scaptrade [1983] 2 A.C. 94 at
700–1.

–. provoke the termination of the contract;

–. claim reparation of the consequences of non-performance.

ARTICLE 1221
A creditor of an obligation may, having given notice to perform, seek
performance in kind unless performance is impossible or if there is a
manifest disproportion between its cost to the debtor and its interest for
the creditor.

German Law
German Civil Code
§ 241. OBLIGATION TO PERFORM
The effect of an obligation is that the person owed performance is
entitled to claim performance from the person who owes it.

Konrad Zweigert and Hein Kötz, An Introduction to Comparative

Law (3rd edn., trans. by Tony Weir, 1998), 505–9
“In German law and in related systems it is axiomatic that a creditor
has the right to bring a claim for performance of a contract and to obtain a
judgment ordering the debtor to fulﬁl it. For this purpose it is immaterial
whether the debtor’s obligation is to deliver goods pursuant to a sale, to
vacate a dwelling house, or to produce a work of art. The view that it is of
the very essence of an obligation that it be actionable in this sense is so
fundamental that it is not expressly stated in any legislative text, but the
words of § 241 of the Civil Code, the creditor is entitled, on the grounds of
the creditor-debtor relationship, ‘to demand performance from the debtor’,
imply that actual performance may be demanded before a court and that a
judgment ordering performance in kind may be issued by it.
A judgment ordering the debtor to perform his contract in kind can be
issued only if performance by the debtor is still possible. As the
Reichsgericht once said, it would be ‘nonsensical to order a person to
perform when it has been established that performance is objectively
impossible’ (RGZ 107, 15, 17). Accordingly a judgment for performance
cannot be issued if, for instance, a picture has been destroyed after sale,
or if a ship has been requisitioned while under charter, or if, just before the
première, an opera-singer is rendered so hoarse by a bad cold that for the
duration she cannot sing; in such cases the creditor can bring only a claim
for damages . . .
It is clear from the Civil Code and the Code of Civil Procedure that
their draftsmen believed that a disappointed contractor who decided to sue
would always choose to claim performance. This is not what happens in
practice, but their belief explains the fact that several texts concern them-
selves in loving detail with the creditor who, having brought a claim for
performance, then ﬁnds that this is not the right step and that a claim for
damages makes better sense. Thus, according to § 268 Code of Civil
Procedure, it is not a change of claim (Klageänderung) of which the

defendant can complain as being an unfair surprise or procedural trick if a

plaintiff in the course of a suit abandons his claim for performance in kind
and prosecutes his claim for damages instead. A plaintiff who has actually
obtained a judgment for performance may, instead of executing it, wish to
proceed immediately to a judgment for damages; this case also has been
foreseen and carefully regulated. By § 283 Civil Code the creditor who has
obtained a judgment for performance may, instead of executing it, wish to
proceed immediately to a judgment for damages; this case also has been
foreseen and carefully regulated. By § 283 Civil Code the creditor who has
obtained judgment for performance can ﬁx a time within which perform-
ance from the debtor must be forthcoming. On the expiry of this period the
plaintiff can forthwith institute a claim for damages, against which the
only admissible defence is that performance has been rendered impossible
by circumstances not entailing the defendant’s responsibility and arising
after the judgment for performance was handed down (see RGZ 107, 15,
19). These well-intentioned provisions are rarely used today. They stem
from the legislator’s belief that the creditor who did not know or could not
prove that performance by the debtor was impossible would always bring a
claim for performance. Today commercial men resolve this uncertainty
differently: they grant the debtor an additional period for performance in
accordance with § 326 Civil Code and, if this period elapses without result,
they forthwith institute a claim for damages . . .
Claims for performance may not be very frequent in practice, since
creditors bring them only when their interest in performance cannot easily
be reckoned in money, but it remains the theory that, in a case where
performance is still possible and the creditor so elects, the courts are
bound to deliver judgment ordering the debtor to perform . . . If the claim
on which the creditor has obtained judgment is that the debtor should take
some positive action other than handing over property, a distinction is
made. If the act in question is one which could be equally well performed
by someone else, that is, it need not be performed by the debtor personally
but is, as the Code of Civil Procedure puts it, vertretbar, then the method of
execution – the only method – is for the creditor, on the authority of the
court granted at his request, to have the act performed by a third party at
the expense of the debtor (Ersatzvornahme, § 887 Code of Civil Procedure).
As examples of acts which are vertretbar, or capable of substitute
performance, one may cite manual tasks which call for no especial talent
and can therefore be carried out by third parties – the execution of building
operations (LG Hagen JR 1948, 314), the installation of a lift in an apart-
ment block (KG JW 1927, 1945), the printing of a manuscript (OLG Munich
MDR 1955, 682). The making of an extract from the books of a business or
the production of its accounts may also be vertretbar if an expert could do it
after inspecting the debtor’s records (OLG Hamburg MDR 1955, 43).
If the act to which the creditor lays claim is one which can be
performed only by the debtor himself, it is said to be unvertretbar. In
such a case the method of execution provided by the Code of Civil
Procedure (§ 888) is to threaten the unwilling debtor with a ﬁne or impris-
onment. Should the debtor still not perform, he may be imprisoned for up to

six months in all; ﬁnes, unlimited in amount, are collected like judgment
debts, and go to the Treasury . . .
[These means of execution cannot] be used against a debtor whose
obligation is to do something which calls for special artistic or scientiﬁc
talent, for here also the performance of the act does not depend exclu-
sively on the debtor’s will. However good his intentions may be, a
composer cannot compose his sonata nor a law professor write his
commentary without the right inspiration, mood, energy, and other
preconditions of great spiritual creativity (see OLG Frankfurt OLGE
29, 251).”

Chinese Law
Chinese Civil Code
ARTICLE 577
Where a party fails to perform his contractual obligations or where
the performance is non-conforming with the agreement, he shall bear
liability for breach of contract by continuing to performance, taking
remedial measures, paying damages and so forth. (previously Contract
Law, Article 107)
ARTICLE 580
Where a party failed to perform a non-monetary obligation or if his
performance was not in conformity with the agreement, the other
party may demand performance, except in one of the following
situations:
(1). the performance is impossible in law or in fact;
(2). the subject matter of the obligation is unsuitable for enforced
performance or the cost of performance would be excessively
high;
(3). the obligee fails to demand performance within a reasonable
time.
When one of the aforementioned circumstances has arisen and
resulted in the nonfulﬁlment of purpose of contract, the people’s court or
the arbitration institution may terminate the contractual rights and obli-
gations at the request of the party. However, the termination does not
affect liability for breach of contract.
Note. Consider the relief that each legal system would give (1) when
the contract is to obtain some unique performance, such as the purchase of
a painting, and (2) when the contract is to obtain fungible goods, such as
steel, which are readily available on the market at the prevailing market
price. In the ﬁrst case, could the plaintiff obtain the picture? In the second
case, is the plaintiff any better or worse off whether the defendant is
ordered to perform or the plaintiff receives damages equal to the difference
between the contract and market price? Consider then whether it matters
that the common law, French law, and German law adhere to different
rules.

2. Damages
a. The General Principle
English Law
Guenter Treitel, The Law of Contract (10th edn., 1999), 873
“The object of damages for breach of contract is to put the victim
‘so far as money can do it. . . . in the same situation . . . as if the
contract had been performed’ [citing Robinson v. Harman, (1848) 1
Ex. 850, 855]. In other words, the victim is to be compensated for the
loss of his bargain, so that his expectations arising out of or created by
the contract are protected.”

Law in the United States

Restatement (Second) of Contracts
§ 347 MEASURE OF DAMAGES IN GENERAL
Subject to the limitations stated in §§ 350–51, the injured party
has a right to damages based on his expectation interest as measured
by
(a). the loss in the value to him of the other party’s performance
caused by its failure or deficiency, plus
(b). any other loss, including incidental or consequential loss, caused
by the breach, less
(c). any cost or other loss that he has avoided by not having to
perform.
Note. § 344 defines the “expectation interest as a party’s interest in
having the benefit of his bargain by being put in as good a position as he
would have been in had the contract been performed.”

French Law
French Civil Code
ARTICLE 1231–2
The damages due to the person owed the performance are, in general,
the loss which he has incurred plus the gain of which he was deprived with
the exceptions and qualiﬁcations to be described.

German Law
German Civil Code
§ 249 NATURE AND EXTENT OF COMPENSATION
One who is obligated to make compensation must bring about the
condition that would have existed if the circumstance which gave rise to
his duty to compensate had not arisen.

Chinese Law
Chinese Civil Code
ARTICLE 584
Where a party fails to perform his contractual obligations or where his
performance of the contractual obligations is not in conformity with the
agreement, thereby causing a loss to the other party, the amount of dam-
ages shall be equal to the loss sustained as a result of the breach, including
the beneﬁts that could have been obtained after the performance of the
contract, but shall not exceed the loss that the breaching party foresaw or
ought to have foreseen at the time of the conclusion of the contract as a
possible consequence of the breach of contract. (previously Contract Law,
Article 113)

b. Excessive Cost of Performance

English Law
Ruxley Electronics and Construction Ltd v. Forsyth; Laddingford
Enclosures Ltd v. Forsyth, [1994] 3 All ER 801
“The defendant contracted with the two plaintiff companies to build a
swimming pool in his garden and a building to enclose it for a total price of
£70,178. The contract expressly provided that the maximum depth of the
pool should be 7 ft 6 in. After the work had been completed, the owner
discovered that the maximum depth was only 6 ft 9 in and that at the point
where people would dive into the pool the depth was only 6 ft . . . Although it
was accepted that the failure to provide the required depth was a breach of
contract, the trial judge found that the shortfall in depth had not decreased
the value of the pool and . . . awarded the owner £2,500 general damages for
loss of amenity on his counterclaim . . . The Court of Appeal allowed the
[defendant’s] appeal, holding that it was not unreasonable to award as
damages the cost of replacing the swimming pool in order to make good the
breach of contract, even though the shortfall in the depth of the pool had
not decreased its value. The court awarded the owner £21,560 damages
against R[uxley]. R[uxley] appealed to the House of Lords.”
Lord Bridge of Harwich. “The cogent argument of Mr Jacob for the
respondent, reduced to its bare essentials, can, I think, be summarised in
three propositions. (1) The judge’s award of £2,500 damages to the respond-
ent for ‘loss of amenity’ demonstrates that the respondent suffered a real
loss for which he is entitled to be compensated. (2) In a building contract
case there is no admissible head of damages capable of assessment by
reference to such concepts as loss of amenity, inconvenience or loss of
aesthetic satisfaction. These are imponderables which the court can only
evaluate by plucking ﬁgures out of the air. If a possible head of damage of
this nature were to be admitted in building contract cases, this would
introduce chaotic uncertainty into the law and undermine clear and well-
settled principles. (3) By these well-settled principles damages in a build-
ing contract case can only be assessed by reference to diminution in value

or cost of reinstatement. There being here no diminution in value, the only

available measure of damages to compensate the respondent for his real
loss is the cost of reinstatement.
Attractive as was Mr Jacob’s development of this argument, it seems
to me to suffer from an inherent logical flaw in that it leads from the
premise that a loss has been suffered which is incapable of economic
measurement to the conclusion that it must be compensated by reference
to a measure of economic loss, namely the cost of reinstatement, which has
not been and will not be incurred . . .
[T]o hold in a case such as this that the measure of the building owner’s
loss is the cost of reinstatement, however unreasonable it would be to incur
that cost, seems to me to fly in the face of common sense.”
Lord Mustill. “My Lords, I agree that this appeal should be allowed . . . .
I add some observations of my own on the award by the trial judge of
damages in a sum intermediate between on the one hand the full cost of
reinstatement and on the other the amount by which the malperformance
has diminished the market value of the property on which the work was
done: in this particular case, nil.
The proposition that these two measures of damage represent the only
permissible bases of recovery lies at the heart of the employer’s case.
In my opinion there would indeed be something wrong if, on the
hypothesis that cost of reinstatement and the depreciation in value were
the only available measures of recovery, the rejection of the former neces-
sarily entailed the adoption of the latter; and the court might be driven to
opt for the cost of reinstatement, absurd as the consequence might often be,
simply to escape from the conclusion that the promisor can please himself
whether or not to comply with the wishes of the promisee which, as
embodied in the contract, formed part of the consideration for the price.
Having taken on the job the contractor is morally as well as legally obliged
to give the employer what he stipulated to obtain, and this obligation ought
not to be devalued. In my opinion, however, the hypothesis is not correct.
There are not two alternative measures of damage, at opposite poles, but
only one: namely the loss truly suffered by the promisee. In some cases the
loss cannot be fairly measured except by reference to the full cost of
repairing the deficiency in performance. In others, and in particular
those where the contract is designed to fulfil a purely commercial purpose,
the loss will very often consist only of the monetary detriment brought
about by the breach of contract. But these remedies are not exhaustive, for
the law must cater for those occasions where the value of the promise to the
promisee exceeds the financial enhancement of his position which full
performance will secure. This excess, often referred to in the literature as
the ‘consumer surplus’ (see e.g. the valuable discussion by Harris, Ogus
and Phillips, ‘Contract Remedies and the Consumer Surplus’ (1979) 95
LQR 581) is usually incapable of precise valuation in terms of money,
exactly because it represents a personal, subjective and non-monetary
gain. Nevertheless, where it exists the law should recognise it and compen-
sate the promisee if the misperformance takes it away.”

Law in the United States

Restatement (Second) of Contracts
§ 348 ALTERNATIVES TO LOSS IN VALUE OF PERFORMANCE
(2). If a breach results in defective or unﬁnished construction and the
loss in value to the injured party is not proved with sufﬁcient
certainty, he may recover damages based on
(a). the diminution in the market price of the property caused by
the breach, or
(b). the reasonable cost of completing performance or of remedy-
ing the defects if that cost is not clearly disproportionate to
the probable loss in value to him.

Peevyhouse v. Garland Coal & Mining Co. 382 P.2d 109 (Okl. 1962)
“Briefly stated, the facts are as follows: plaintiffs owned a farm con-
taining coal deposits, and in November, 1954, leased the premises to
defendant for a period of five years for coal mining purposes. A ‘strip
mining’ operation was contemplated in which the coal would be taken
from pits on the surface of the ground, instead of from underground mine
shafts. In addition to the usual covenants found in a coal mining lease,
defendant specifically agreed to perform certain restorative and remedial
work at the end of the lease period. It is unnecessary to set out the details of
the work to be done, other than to say that it would involve the moving of
many thousands of cubic yards of dirt, at a cost estimated by expert
witnesses at about $29,000.00. However, plaintiffs sued for only
$25,000.00 . . .
Plaintiffs introduced expert testimony as to the amount and nature of
the work to be done, and its estimated cost. Over plaintiffs’ objections,
defendant thereafter introduced expert testimony as to the ‘diminution in
value’ of plaintiffs’ farm resulting from the failure of defendant to render
performance as agreed in the contract – that is, the difference between the
present value of the farm, and what its value would have been if defendant
had done what it agreed to do. [According to their evidence, even if the work
were carried out, the farm would have a total value of $300.00] . . .
On appeal, the issue is sharply drawn. Plaintiffs contend that the true
measure of damages in this case is what it will cost plaintiffs to obtain
performance of the work that was not done because of defendant’s default.
Defendant argues that the measure of damages is the cost of performance
‘limited, however, to the total difference in the market value before and
after the work was performed’ . . .
It is highly unlikely that the ordinary property owner would agree to
pay $29,000 (or its equivalent) for the construction of ‘improvements’ upon
his property that would increase its value only about ($300) three hundred
dollars. The result is that we are called upon to apply principles of law
theoretically based upon reason and reality to a situation which is basically
unreasonable and unrealistic . . .

The primary purpose of the lease contract between plaintiffs and

defendant was neither ‘building and construction’ nor ‘grading and exca-
vation’. It was merely to accomplish the economical recovery and market-
ing of coal from the premises, to the proﬁt of all parties. The special
provisions of the lease contract pertaining to remedial work were inciden-
tal to the main object involved.
Even in the case of contracts that are unquestionably building and
construction contracts, the authorities are not in agreement as to the
factors to be considered in determining whether the cost of performance
rule or the value rule should be applied. The American Law Institute’s
Restatement of the Law, Contracts, Volume 1, Sections 346(1)(a)(i) and (ii)
submits the proposition that the cost of performance is the proper measure
of damages ‘if this is possible and does not involve unreasonable economic
waste’; and that the diminution in value caused by the breach is the proper
measure ‘if construction and completion in accordance with the contract
would involve unreasonable economic waste’. (Emphasis supplied.)
In view of the unrealistic fact situation in the instant case, . . . we are of
the opinion that the ‘relative economic beneﬁt’ is a proper consideration
here.”
Note. On similar facts, a court reached the opposite result in Groves v.
John Wunder Co., 286 N.W. 235 (1939).

Eastern Steamship Lines, Inc. v. United States, 112 F. Supp. 167 (Ct.
Cl. 1953).
The United States government chartered the ship Acadia to use to
transport troops during World War II. The charter provided that before
returning the ship, the government would “restore the Vessel to at least as
good a condition and class as upon delivery . . . .”
The owner claimed $4,000,000, which was the cost of restoring the ship
to its original condition. The government claimed that it owed no more than
$2,000,000 which was the estimated value of the ship after restoration. The
Court of Claims held for the government.

French Law
French Civil Code
ARTICLE 1221
A creditor of an obligation may, having given notice to perform, seek
performance in kind unless performance is impossible or if there is a
manifest disproportion between its cost to the debtor and its interest for
the creditor.

François Terré, Phillippe Simler, Yves Lequette and François

Chénedé, Droit civil Les obligations (12th edn., Paris, 2019), 834–5
“The ordinance of 2016 also innovated by placing a new limit on speciﬁc
performance (execution forcée en nature): a manifest disproportion between

the cost for the debtor and the interest of the creditor. According to the
Report of the President of the Republic, this new exception ‘seeks to avoid
certain very contested judicial decisions; when specific performance is
extremely onerous for the debtor without the creditor having a true interest
in obtaining performance, it would appear to be inequitable and unjustified
that he can require it, when liability in damages can provide him with an
adequate compensation at a much lower price.’ . . . This new limit on specific
performance has been the object of conflicting opinions. Although some have
praised the merits of a solution that prevents specific performance ‘of a
contract that is too onerous and leads to the ruin’ of a debtor at the mercy
of an ‘obstinate creditor,’ others have denounced ‘an undermining of the
contractual rights of the creditor’ which reflects the influence of the economic
analysis of law and common law rights.” [citations omitted]

German Law
German Civil Code
§ 251. DAMAGES IN MONEY . . .
(1). To the extent that performance is impossible or is insufﬁcient to
compensate the party who is owed performance, the other party
has the duty to compensate him in money.
(2). Compensation can be made in money when performance is only
possible with disproportionate expense . . .

Chinese Law
Chinese Civil Code
ARTICLE 580
Where a party failed to perform a non-monetary obligation or if his
performance was not in conformity with the agreement, the other party
may demand performance, except in one of the following situations:
(1). performance is impossible in law or in fact;
(2). the subject matter of the obligation is unsuitable for enforced
performance or the cost of performance would be excessively high;
(3). the obligee fails to demand performance within a reasonable time.
When one of the aforementioned circumstances has arisen and
resulted in the nonfulﬁlment of purpose of contract, the people’s court or
the arbitration institution may terminate the contractual rights and obli-
gations at the request of the party. However, the termination does not
affect liability for breach of contract

Xinyu Corp. v. Feng Yumei, 冯玉梅诉新宇公司商品房买卖合同纠纷

(2004) 宁民四终字第470号 (2004) Ning Min Si Zhong Zi No. 470
Xingyu Corp is the developer of a 60,000 sqm shopping mall named
“Times Square” in downtown, Nanjing. In 1998, Xingyu Corp sold Feng

Yumei a store unit on the premises of the mall while it was still under
construction. The price was 368,184 yuan and the area 22.5 m2. The full
amount of sale price was paid and the unit delivered. Soon after, the mall
was leased to and managed by JH department store. Due to JH’s misman-
agement, the mall closed and JH went into bankruptcy in June, 1999.
Times Square reopened in December, 1999 and closed down in January,
2002. Times Square had not been used for business since. Most of the store
unit owners could not continue to operate their businesses.
In order to revitalize the assets Xinyu Corp decided to rebrand the
mall and reopen it. Up to this point, ownership was not yet properly
registered under the store owners name, and it was Xinyu Corp’s contrac-
tual obligation to complete such registrations. This effort involved restruc-
turing the premises and tearing down the existing stores. Xingyu Corp
managed to terminate all the then-existing sales agreements and compen-
sated the store owners for the breach of contract. Most of the store owners
agreed to terminate the contract and be compensated for the damages
incurred from Xingyu Corp’s delay in completing the registration. Feng
Yumei refused and demanded continued performance. In alternative, Feng
asked for a 80 m2 store in a similarly situated area or the same store on the
exact same premises. Xingyu Corp tore down a partial glass wall and
removed pipeline connected to the store. Feng argued that she is entitled
to continued performance of the contract and that the closing down of the
mall and rebranding was due to Xinyu Corp’s mismanagement and ill-
planned strategy. It was Xinyu’s fault. Yet for Xinyu to claim there has
been a change of circumstances, the change must be an unforeseeable
circumstance that is neither a commercial risk nor due to anyone’s fault.
In afﬁrming the trial court’s decision to terminate the contract, the appel-
late court, Nanjing Intermediate Court, reasoned that “[a]lthough the contract
is valid and breach of the contract is indisputable, nevertheless the duty to
continue performance is excused when the cost is prohibitively high. To
require continued performance will inhibit the planning and operation of
Times Square and disturb the balance between the interests of the parties.
Consequently, damages are to be awarded in lieu of speciﬁc performance.”

c. Liquidated Damages
English Law
Edwin Peel, The Law of Contract (14th edn., London, 2015), 1199
“A contract may provide for the payment of a fixed sum on breach, or
some other sanction. Such a provision may serve the perfectly proper
purpose of enabling a party to know in advance what his liability will be;
and of avoiding difficult questions of quantification. On the other hand, the
courts have been reluctant to allow a party, under such a provision, to
recover a sum which is obviously and considerably greater than his loss.
They have therefore divided such provisions into two categories: penal
clauses, which are invalid, and liquidated damages clauses, which will
generally be upheld.”

Law in the United States

Restatement (Second) of Contracts
§ 356. LIQUIDATED DAMAGES AND PENALTIES
(1). Damages for breach by either party may be liquidated in the
agreement but only at an amount that is reasonable in light of the antici-
pated or actual loss caused by the breach and the difﬁculties of proof of loss.
A term ﬁxing unreasonably large liquidated damages is unenforceable on
ground of public policy as a penalty.

French Law
French Civil Code
ARTICLE 1231–5
When a contract provides that the party who fails to execute an
obligation will pay a certain sum as damages, the other party will not be
allowed a greater or less sum. Nevertheless, the judge can, even on his own
initiative, moderate or augment the penalty thus agreed if it is manifestly
excessive or derisory.

German Law
German Civil Code
§ 340 PROMISE OF A PENALTY FOR FAILURE TO PERFORM
If the debtor has promised a penalty in the event he fails to fulﬁl the
obligation, the creditor may demand the penalty in lieu of fulﬁllment.
§ 343 REDUCING THE PENALTY
If the forfeited penalty is disproportionately high, the debtor may obtain
a judicial decree reducing it to a reasonable amount. In the determination of
reasonableness every legitimate interest of the creditor shall be taken into
consideration, not only his economic interest (Vermögensinteresse).

Chinese Law
Chinese Civil Code
ARTICLE 585
The parties may agree that a party, when breaching the contract, shall
pay a certain amount of liquidated damages to the other party according to
the circumstances of the breach, and they may also stipulate the method
for calculating the amount of damages arising from the breach.
If the agreed liquidated damages are lower than the loss incurred, the
parties may apply to the people’s court or arbitral institution for an
increase; if the agreed liquidated damages are excessively higher than
the loss incurred, the parties may apply for an appropriate reduction.

When parties agree on an amount of liquidated damages for delayed

performance, the party owing the performance is still bound to perform
after paying the liquidated damages.

Supreme Court’s Judicial Interpretations II of Contract Law

(2009)
ARTICLE 28
When parties request an increase in liquidated damage, the increased
total amount cannot exceed the actual damage.
ARTICLE 29
When reducing liquidated damage, courts shall base the amount of
reduction on the actual damage and take into consideration the perform-
ance of the contract, faults of the parties and the foreseeable interest. The
decision shall be based upon the principles of fairness and good faith.
Liquidated damage amount set by the parties is deemed excessive
when it exceeds the 30% of the actual damage.

XY Renovation Corp. v. Hu Shujuan & Xu Chunhong, 胡素娟、许春红

诉襄阳市房屋租赁修缮公司房地产买卖合同纠纷（2014）民申字第227号
(2014) Min Shen Zi No. 227
Plaintiff appellees Hu Shujuan (Hu SJ) and Xu Chunhong (Xu CH)
entered into a real estate sales agreement with the defendant appellant
Renovation Company (R Corp) for the sale of a house. Upon the signing of
the contract, a down payment of RMB 3.01 million yuan was paid in
accordance with the agreement. The defendant never tendered the house.
The plaintiff sued for breach and asked for the liquidated damages in the
amount of RMB 1,722,640 yuan, which was 40 percent of the contract price.
The defendant argued that the liquidated damage clause was set too high
and should be avoided as obviously unfair.
The Supreme Court held that “R Corp. did not submit any evidence
proving that Hu and Xu prevented the performance of the contract.
Moreover, the parent company was not privy to the contract. The liquid-
ated damage clause was not set too high as it is comparable to the prevail-
ing rate in the private loan transactions. Consequently, R Corp is liable for
liquidated damage as stipulated in the contract.”

d. Recovery for Non-Economic Harm

English Law
Jarvis v. Swans Tours Ltd., [1973] 1 Q.B. 233
“The defendants, a ﬁrm of travel agents, issued a brochure of winter
sports holidays for 1969–70 in which one of the holidays was described as a
‘Houseparty in Morlialp’, Switzerland, with ‘special resident host’. The
brochure stated that the price of the holiday included the following
house-party arrangements: ‘Welcome party on arrival. Afternoon tea and

cake . . . Swiss Dinner by candlelight. Fondue-party. Yodler evening . . .

farewell party.’ It also stated that there was a wide variety of ski runs at
Morlialp; that ski-packs, i.e. skis, sticks and boots, could be hired there;
that the houseparty hotel was chosen by the defendants because of the
‘Gemutlichkeit’, i.e. geniality, comfort and cosiness, that the hotel owner
spoke English, and that the hotel bar would be open several evenings a
week. The brochure added, ‘. . . you will be in for a great time, when you
book this houseparty holiday’. The plaintiff, a solicitor aged about 35, who
was employed by a local authority, preferred to take his annual fortnight’s
holiday in the winter. He looked forward to his holidays and booked them
far ahead. In August 1969, on the faith of the representations in the
defendants’ brochure, he booked with the defendants a 15 day houseparty
holiday at Morlialp, with ski-pack, from 20th December 1969 to 3rd
January 1970. The total cost of the holiday was £63.45. The plaintiff
went on the holiday but he was very disappointed. In the first week the
houseparty consisted of only 13 people, and for the whole of the second
week the plaintiff was the only person there. There was no welcome party.
The ski-runs were some distance away and no full length skis were avail-
able except on two days in the second week. The hotel owner did not speak
English and in the second week there was no one to whom the plaintiff
could talk. The cake for tea was only potato crisps and dry nutcake. There
was not much entertainment at night; the yodler evening consisted of a
local man in his working clothes singing a few songs very quickly, and the
hotel bar was an unoccupied annexe open only on one evening.”
Lord Denning. “What is the right way of assessing damages? It has
often been said that on a breach of contract damages cannot be given for
mental distress. Thus in Hamlin v Great Northern Railway Co1 Pollock CB
said that damages cannot be given ‘for the disappointment of mind occa-
sioned by the breach of contract.’ And in Hobbs v London & South Western
Railway Co2 Mellor J said that ‘. . . for the mere inconvenience, such as
annoyance and loss of temper, or vexation, or for being disappointed in a
particular thing which you have set your mind upon, without real physical
inconvenience resulting, you cannot recover damages’. The courts in those
days only allowed the plaintiff to recover damages if he suffered physical
inconvenience, such as, having to walk five miles home, as in Hobbs’s case3;
or to live in an overcrowded house: see Bailey v Bullock.4
I think that those limitations are out of date. In a proper case damages
for mental distress can be recovered in contract, just as damages for shock
can be recovered in tort. One such case is a contract for a holiday, or any
other contract to provide entertainment and enjoyment. If the contracting
party breaks his contract, damages can be given for the disappointment,
the distress, the upset and frustration caused by the breach. I know that it
is difficult to assess in terms of money, but it is no more difficult than the
assessment which the courts have to make every day in personal injury

1. (1856) 1 H & N 408 at 411. 3. (1875) LR 10 QB 111, [1874–80] All

2. (1875) LR 10 QB 111 at 122, [1874–80] ER Rep 458.
All ER Rep 458 at 463. 4. [1950] 2 All ER 1167.

cases for loss of amenities. Take the present case. Mr Jarvis has only a
fortnight’s holiday in the year. He books it far ahead, and looks forward to it
all that time. He ought to be compensated for the loss of it.”

Law in the United States

Restatement (Second) of Contracts
§ 353
Recovery for emotional disturbance will be excluded unless the breach
also caused bodily harm or the contract or the breach is of such a kind that
serious emotional disturbance was a particularly likely result.

Deitsch v. The Music Company, 6 Ohio Misc. 2d 6 (Mun. Ct. 1983)

“This is an action for breach of contract. Plaintiffs and defendant
entered into a contract on March 27, 1980, whereby defendant was to
provide a four-piece band at plaintiffs’ wedding [reception on November
8, 1980]. The reception was to be from 8:00 p.m. to midnight. The contract
stated ‘wage agreed upon $295.00,’ with a deposit of $65, which plaintiffs
paid upon the signing of the contract.
Plaintiffs proceeded with their wedding, and arrived at the reception
hall on the night of November 8, 1980, having employed a caterer, a
photographer and a soloist to sing with the band. However, the four-piece
band failed to arrive at the wedding reception. Plaintiffs made several
attempts to contact defendant but were not successful. After much wailing
and gnashing of teeth, plaintiffs were able to send a friend to obtain some
stereo equipment to provide music, which equipment was set up at about
9:00 p.m . . .
The court holds that in a case of this type, the out-of-pocket loss, which
would be the security deposit, or even perhaps the value of the band’s
services, where another band could not readily be obtained at the last
minute, would not be sufﬁcient to compensate plaintiffs. Plaintiffs are
entitled to compensation for their distress, inconvenience, and the dimin-
ution in value of their reception. For said damages, the court ﬁnds that the
compensation should be $750.”

French Law
Boris Starck, Henri Roland and Laurent Boyer, Obligations 1.
Responsabilité délictuelle (4th edn., 1991), § 1437
“The elements of damage which are recoverable are the same in the
area of contracts as in the area of torts: material damage (dommage
matériel), that is to say, the loss that was suffered and the gain that was
missed under art. 1149 [now art 1231–2] of the Civil Code; injury to
physical integrity and life in contracts that carry with them an obligation
of safety; non-economic harm (dommage moral, a category which includes
pain and suffering) in the different senses of this term; loss of a chance;

harm that occurs because of harm to another (dommage par ricochet).”

[footnotes omitted]

Tribunal de commerce de la Seine, February 20, 1932, Gaz. Pal.

1932.1.895
“[P]ursuant to agreements dated in Paris, April 9, 1930, the
Etablissements [J.] Haïck engaged Mlle. Devillers to shoot a film, ‘The
Sweetness of Love,’ with Victor Boucher as a partner – this, in accordance
with certain clauses and conditions which were contained in the said
agreements;
[R]esisting the claim for the payment of the sum of 15,000 francs and
an astreinte of 1,000 francs per day of delay until the wall posters and
placards are modified to conform to the contract, the Etablissements J.
Haïck claims that this demand is unjustified; [I]t is appropriate to recall
that according to the complaint and facts brought forward by Mlle.
Devillers that one of the clauses of the agreements already mentioned
provides that this artist would have the female lead and that, in all
publications in which Victor Boucher was mentioned, she would have
letters two-thirds the size of those with his name;
[I]t appears from the argument and from the documents submitted
that from the beginning of the publicity campaign undertaken for ‘The
Sweetness of Love,’ the Etablissements J. Haïck violated the provision
just described . . . [I]ndeed, numerous omissions occurred in the announce-
ments, in the placards, in the programs, and in the posters . . . [W]ith the
help of documents, the Tribunal was able to determine either that the
name of Mlle Devillers did not appear alongside that of Victor Boucher or
that it did not appear in letters of the size contractually specified . . .
[B]ecause of the failure of Etablissements J. Haïck to perform its
obligations, Mlle Devillers suffered commercial disturbance and a certain
non-economic harm (préjudice moral) for which the Etablissements J.
Haïck must be held to make compensation . . .
The Etablissements cinématographiques Jacques Haïck is adjudged to
pay the sum of 15,000 francs definitively and not provisionally as damages,
and an astreinte is imposed of 100 francs per day of delay for a month so
long as the wall posters and placards are not modified as provided in the
contract . . . .”

German Law
Read §§ 847 and 253 of the German Civil Code below p. 324.

Oberlandesgericht, Saarbrücken, July 20, 1998, NJW 1998, 2913

The plaintiff sought assistance with the costs of her action against the
defendant for damages for pain and suffering. She had contracted for a
room with a ﬁreplace in defendant’s hotel that could accommodate twelve
people for the evening of her marriage which was to take place on June 27,

1997. Due to a mistake of the defendant, that room had already been
reserved for that night by another party. Because an appropriate alterna-
tive was not available, the evening celebration of her marriage did not take
place. Because of this “disaster” she “cried for days on end,” “her nerves
reached their utter limit,” and she suffered “psychological shock.” She
claimed damages for pain and suffering of 3000 DM. The trial court dis-
missed her request for assistance on the grounds that her action could not
succeed as she had suffered no physical harm and could not recover dam-
ages for pain and suffering for breach of contract. The Oberlandesgericht
agreed.
“In the present case, the plaintiff’s claim against the defendant for
damages for pain and suffering could not be taken into account according to
§ 847 of the Civil Code unless the defendant, together with the breach of
contract for which he is responsible – the failure to reserve the room – also
caused a result that falls within § 823(1) of the Civil Code in the form of an
injury to her body or health. But the allegations of the plaintiff do not go far
enough to raise such a claim.
We need not consider here whether and to what extent an interference
with the psychological state of contracting party through a breach of
contract is included within the protective purpose of § 823. Even if that
question were to be answered in the affirmative, which would contradict
the trial court’s opinion, the plaintiff still would not have sufficiently
alleged the factual basis for a claim for damages for pain and suffering.
At the outset, the plaintiff has failed to make a sound claim that the
defendant’s breach of contract caused an injury to her body or health. It is
true that a person who harms another must answer for the psychological
effects of the conduct for which he is responsible, and also that a mere
interference caused by this conduct with the psychological state of the
party who is affected can constitute an injury to body or health (BGH,
NJW 1991, 2337 . . .). In a case like the present, however, for the interfer-
ence with the psychological state of the injured party caused by the conduct
of the party responsible for the harm to give rise to liability, the type,
intensity and duration of the psychological interference must so clearly
surpass the reactions normally present in life to disagreeable events that
one can at least compare them to the effects of an illness. (see Palandt/
Heinrichs, BGB, before § 249 no.71 . . .) That this happened to the plaintiff
as a consequence of the defendant’s breach of contract is shown neither by
her contention that she ‘cried day after day after this disaster’ and ‘was not
able to speak about this event for weeks without crying fits,’ nor by her
opinion that her nerves reached their ‘utter limit,’ and she suffered ‘psy-
chological shock,’ an opinion which cannot be understood without more
commentary on the facts.
Nevertheless, even if, according to these allegations, the interference
with plaintiff’s psychological state had reached the requisite degree of
severity, her claim would be defective insofar as the fault of the defendant
is concerned, for it must be considered that this fault must encompass, not
only the breach of contract constituted by his failure to reserve the room,
but also the psychological interference with the plaintiff caused by this

failure which would be the basis for liability. Certainly, in using the
appropriate degree of care, the hotel keeper must consider that the result
of neglecting to reserve the room requested by the bride for an evening
wedding dinner will be a negative psychological reaction, perhaps a serious
one. But absent contrary indications, he could not foresee that, under
normal circumstances, the type, intensity and duration of this reaction
would be so severe as to constitute an injury to body or health.”

Bundesgerichtshof, October 10, 1974, BGHZ 63, 98

The plaintiff, the owner of a clothing factory, contracted with the
defendant, a travel agent, for a package tour for himself, his wife, and
their two children for a ﬁxed price of 2,322 DM which would take them to
the coast of the Black Sea in Romania for two weeks. He had many
complaints about the hotel accommodations, the food, and the opportun-
ities for swimming at the beach. He sued the defendant for damages for 60
percent of the amount he had paid for the package tour as well as a further
1,500 DM as compensation for wasted vacation time.
“The damages sought by the plaintiff for ‘wasted vacation time’ were
refused by the appellate court. In its opinion, the loss of vacation time did
not as such constitute a diminution in the value of plaintiff’s assets which
could be the object of a claim for damages . . .
Here the question is whether the free time spent on vacation, and
therefore the vacation as such does have an asset value (Vermögenswert)
so that its loss can constitute material harm when it is spent uselessly
(‘wasted’).
The prevailing, and, indeed, the dominant opinion answers that ques-
tion in the afﬁrmative taking into account that by current commercial
views a vacation is a large extent ‘commercialized.’ [many citations
omitted]
Those who oppose this opinion see in the useless expenditure of vac-
ation time only non-material harm for which compensation could be due
only under the particular provisions of § 847 of the Civil Code. [many
citations omitted]
The Bundesgerichtshof has not yet determined whether a vacation has
an asset value. Yet a decision pointing in this direction is found in the ‘sea
trip’ case (BGH NJW 1956, 1234, 1235) in which damages for the interfer-
ence with the enjoyment of a trip were granted because a traveller’s
luggage was not made available to him. In this opinion, it was considered
decisive that the ‘purchased enjoyment of a vacation’ could not be fully
realized without the luggage.
The Senate follows the dominant opinion, according to which the
vacation as such possesses an asset value . . . .”
Note. Results in cases like this one eventually received legislative
sanction in what is now § 651f(2) of the German Civil Code: “If a trip is
frustrated or seriously disrupted, the traveller can also recover an appro-
priate compensation in money for uselessly expended vacation time.”

Chinese Law
Chinese Civil Code
A R T I C L E 996
Where one party’s breach of contract caused harm to the other party’s
personality rights and caused signiﬁcant mental harm, the victim’s claim
for breach of contract does not preclude his claim for mental distress.

e. Recovery for Unforeseeable Harm

i. Origins
One change that the Emperor Justinian made in his compilation of
Roman law was to place a limit on the damages that a party could recover
in contract:
In all cases which have a certain quantity or nature . . . damages are
not to exceed twice the quantity; however, in other cases which appear
to be uncertain judges are to require that the damages which was truly
incurred be paid for.1

This rule was followed where Roman law was adopted in medieval and
early modern Europe. There was much dispute about what it meant to
speak of “cases which have a certain quantity or nature” or “cases which
appear to be uncertain.” As Reinhard Zimmermann notes, “[g]enerations of
lawyers have been mystiﬁed by the terms of this poorly drafted
enactment.”2
In the sixteenth century, the French jurist Molinaeus (or, in French,
du Moulin) thought he had discovered the rationale behind the rule:
The rationale on which all the law is based is the dislike of enormity
and so the particular rationale of the limitation in the cases of what is
certain is that most likely it was not foreseen or thought that greater
damage would be suffered or that there was a risk beyond the principal
object than the principal object itself.3
He noted that it would be equally equitable to limit the damages recover-
able in the cases that concern what is uncertain.
As Zimmermann has noted, in the eighteenth century “Pothier gener-
alized this idea and detached it from the speciﬁc provisions” of the Roman
text. He said that “the person who owes a performance is only liable for the
damages that one could have foreseen at the time of the contract that the
party owed a performance would suffer.”4

1. C. 7.47.1. 3. Carolus Molinaeus, Tractatus de eo

2. Reinhard Zimmermann, The Law of quod interest (1574), no. 60.
Obligations: Roman Foundations of the 4. Robert Pothier, Traité des obligations,
Civilian Tradition (1990), 828. no. 160, in Oeuvres de Pothier 2 (Bugnet, ed.,
2nd edn., 1861), 497.

For instance, suppose I sell a person a horse which I am obliged to

deliver in a certain time, and I cannot deliver it accordingly: if in the
meantime horses have increased in price, whatever the purchaser is
obliged to pay more than he would have given for mine, in order to
procure another of the like quality, is a damage for which I am obliged
to indemnify him, because it is a damage . . . which only relates to the
thing that was the object of the contract, and which I might have
foreseen; the price of horses like that of all other things being subject
to variation. But if this purchaser was a canon, who for want of having
the horse that I had engaged to deliver to him, and not having been
enabled to get another, was prevented from arriving at the place of his
beneﬁce in time to be entitled to his revenue, I should not be liable for
the loss which he sustained thereby, although it was occasioned by the
non-performance of my obligation; for this is a damage which is foreign
to the obligation, which was not contemplated at the time of the
contract, and to which it cannot be supposed that I had any intention
to submit . . . .5
He recognized one exception: full damages could be recovered if the per-
formance was due to wilful misconduct (dol).

ii. Modern Law

In reading the following cases, consider when the courts are chieﬂy
concerned with whether a loss is foreseeable or when they are concerned
instead or in addition, as in Roman law, with the disproportion between the
loss suffered and the contract price.

French Law
French Civil Code
ARTICLE 1231–3
(modifying Article 1150 of the original Code)
A debtor is bound only to damages which were either foreseen or which
could have been foreseen at the time of conclusion of the contract, except
where non-performance was due to a gross or dishonest fault.
Note. Article 1231–3 modiﬁed Article 1150 of the original Code by
providing an exception to the requirement that damages be foreseen or
foreseeable when non-performance was due “to a gross or dishonest fault.”
Article 1150 provided that the exception must be due to “willful miscon-
duct” (dol).

Cour de cassation, 1e ch. civ., May 11, 1982, Gaz. Pal. 1982.2.612
“[A]ccording to this text [art. 1150, now art. 1231–3] one who owes a
contractual obligation is only liable for the damages which were foreseen or

5. Ibid. no. 159 (W. Evans trans., 1806).

could have been foreseen at the time of the contract as long as his nonper-
formance was not due to wilful misconduct . . .
[B]y a decision of 21 April 1978 . . . M. Roche, a roofing and plumbing
contractor, was held contractually responsible on account of his negligence
for a fire caused by the use of a blowtorch which partially destroyed a
chateau belonging to the married couple Galliaud whose roof Roche was
engaged in repairing . . .
[T]he decision challenged here, rendered on 1 October 1980 . . .
required M. Roche to pay various indemnities including an amount of
60,000 francs representing the interest on a loan that the proprietor con-
tracted to undertake the initial expenses of putting the building that
burned into shape and a sum of 70,000 francs for loss of rent of the premises
on the first floor of the chateau . . .
[I]n requiring M. Roche to pay damages of these two kinds, even
though no wilful misconduct or gross negligence had been imputed to
him, on the grounds that his failure to perform a contractual obligation
coincided with a fault in tort in that it constituted culpable negligence, and
that therefore he was obligated to repair even the harm that was not
foreseen at the time of the contract, the Cour d’appel misunderstood the
principle that the victim of a harm for which the perpetrator is contractu-
ally responsible cannot hold the perpetrator to the rules of delictual liabil-
ity . . . .”

Cour de cassation, ch. civ., December 29, 1913, D.P. 1916.1.117

“[I]n conformity with art. 1150 [now art. 1231–3], and except in case of
wilful misconduct, a carrier is only liable for damages which were foreseen or
which could have been foreseen at the time of the contract . . . [N]o provision
in the list of changes and fees imposes an obligation on passengers to declare
the content of the baggage which accompanies them, and as a result, rail-
road companies must foresee that certain travelers will be carrying objects of
a more or less considerable value in their baggage . . . [I]n any event, in case
of loss and of argument over the amount of damages, it pertains to the courts
to limit the liability of these companies by the principles just mentioned
according to the circumstances of each case, taking into account the quantity
and the value of the objects a traveler would normally bring with him,
having regard to his profession, his ﬁnancial condition, the object of the
trip and the price of a ticket . . .
[A]ccording to the decision under appeal, on May 23, 1908, at the
railway station at Cannes, Rouquier checked, as baggage to accompany
him to his destination at Courthézon (Vauclussse), a box weighing 30 kg
[66 pounds] containing three cans of essence of neroli worth 725 francs per
kilogram . . . [T]his box, left in the station where the train arrived, was
stolen on the night of May 29–30 . . . [I]t was discovered the next day but it
was missing 5 kg 650 g. of the essence it had contained . . . [A]s compensa-
tion for the damage he suffered, Rouquier demanded from the Paris-Lyon-
Mediterranean Railroad Co. a payment of 4096 francs 25 centimes, reﬂect-
ing the price of the essence, and 2000 francs of [other] damages . . . [T]he

Company responded with an offer of compensation of 100 francs, maintain-

ing that there was no way it could foresee that merchandise worth 16,000
francs was contained in a box checked as ordinary baggage which bore no
indication of the sort that would enlighten the transporter as to the value of
its contents, and which had been abandoned in the baggage claim of a tiny
railway station for six days without any notice given to the employees . . .
[N]evertheless, the Cour d’appel of Nîmes, afﬁrming the decision of the
Tribunal de commerce of Avignon, held that compensation must be made
for the entire sum demanded for the value of the essence that was lost and
100 francs additional damages, declaring that, as force majeure was not
present in this case, the Company could not invoke any legal limitation to
its harm, ‘art. 1150 of the Civil Code having in view only the damages due
in the event that delivery is delayed, but not dealing with compensation for
a box for which the traveler has established the value’ . . . [I]n ruling in this
way, according to a distinction which does not belong to the article . . . the
decision violated [the Civil Code] . . . .”

Cour de cassation, ch. civ., July 7, 1926, D.P. 1927.1.119

When plaintiff’s merchandise was shipped, its value was declared to be
475 francs. It was lost. Plaintiffs sued for 16,685 francs which, they
claimed, was 70 percent of its true value. The court below awarded 475
francs. The Cour de cassation afﬁrmed. “[A]ccording to the appeal (pour-
voi), in all cases, the compensation must be in accord with the real value,
and not the presumed value of the merchandise . . . [I]n effect, within the
meaning of art. 1150 [now art. 1231–3], the party who does not fulﬁl his
obligation is held, if he was in good faith, to the integral reparation of the
harm as long as the cause of the harm could have been foreseen . . . but . . .
this text does not make any reference to the foreseeability of the cause of
the harm, and, far from charging a party who acted in good faith with
damages which surpass in amount what he could have foreseen, it expli-
citly declares that except in cases of wilful misconduct, that party is liable
only for the damages which could have been foreseen at the time of the
contract.”

English Law
Hadley v. Baxendale, (1854) 9 Ex. 341, 156 Eng. Rep. 145
“At the trial before Crompton, J., at the last Gloucester Assizes, it
appeared that the plaintiffs carried on an extensive business as millers at
Gloucester; and that, on the 11th of May, their mill was stopped by a
breakage of the crank shaft by which the mill was worked. The steam-
engine was manufactured by Messrs. Joyce & Co., the engineers, at
Greenwich, and it became necessary to send the shaft as a pattern for a
new one to Greenwich. The fracture was discovered on the 12th, and on the
13th the plaintiffs sent one of their servants to the ofﬁce of the defendants,
who are the well-known carriers trading under the name of Pickford & Co.,
for the purpose of having the shaft carried to Greenwich. The plaintiffs’

servant told the clerk that the mill was stopped, and that the shaft must be
sent immediately; and in answer to the inquiry when the shaft would be
taken, the answer was, that if it was sent up by twelve o’clock any day, it
would be delivered at Greenwich on the following day. On the following day
the shaft was taken by the defendants before noon, for the purpose of being
conveyed to Greenwich, and the sum of £2, 4s. was paid for its carriage for
the whole distance; at the same time the defendants’ clerk was told that a
special entry, if required, should be made to hasten its delivery. The deliv-
ery of the shaft at Greenwich was delayed by some neglect; and the conse-
quence was, that the plaintiffs did not receive the new shaft for several
days after they would otherwise have done and the working of their mill
was thereby delayed, and they thereby lost the profits they would other-
wise have received . . . .” In a divided opinion, the court held that the
plaintiff could not recover lost profits.
Parke B. [speaking to counsel]. “The sensible rule appears to be that
which has been laid down in France, and which is declared in their Code
Civil, liv, iii, tit. iii. ss. 1149, 1150, 1151, and which is thus translated in
Sedgwick [on Damages, p. 67]: ‘The damages due to the creditor consist in
general of the loss that he has sustained, and the profit which he has been
prevented from acquiring, subject to the modifications hereinafter con-
tained. The debtor is only liable for the damages foreseen, or which might
have been foreseen, at the time of the execution of the contract, when it is
not owing to his fraud that the agreement has been violated. Even in the
case of non-performance of the contract, resulting from the fraud of
the debtor, the damages only comprise so much of the loss sustained by
the creditor, and so much of the profit which he has been prevented from
acquiring, as directly and immediately results from the non-performance
of the contract.’ If that rule is to be adopted, there was ample evidence in
the present case of the defendants’ knowledge of such a state of things as
would necessarily result in the damage the plaintiffs suffered through the
defendants’ default . . . .”
Alderson, B. “Now we think the proper rule in such a case as the
present is this: Where two parties have made a contract which one of
them has broken, the damages which the other party ought to receive in
respect of such breach of contract should be such as may fairly and reason-
ably be considered either arising naturally, i.e., according to the usual
course of things, from such breach of contract itself, or such as may reason-
ably be supposed to have been in the contemplation of both parties at the
time they made the contract, as the probable result of the breach of it. Now,
if the special circumstances under which the contract was actually made
were communicated by the plaintiffs to the defendants, and thus known to
both parties, the damages resulting from the breach of such a contract,
which they would reasonably contemplate, would be the amount of injury
which would ordinarily follow from a breach of contract under these special
circumstances so known and communicated. But, on the other hand, if
these special circumstances were wholly unknown to the party breaking
the contract, he, at the most, could only be supposed to have had in his
contemplation the amount of injury which would arise generally, and in the

great multitude of cases not affected by any special circumstances, from

such a breach of contract. For, had the special circumstances been known,
the parties might have specially provided for the breach of contract by
special terms as to the damages in that case; and of this advantage it
would be very unjust to deprive them. Now the above principles are those
by which we think the jury ought to be guided in estimating the damages
arising out of any breach of contract. It is said, that other cases such as
breaches of contract in the non-payment of money, or in the not making a
good title to land, are to be treated as exceptions from this, and as governed
by a conventional rule. But as, in such cases, both parties must be supposed
to be cognisant of that well-known rule, these cases may, we think, be more
properly classed under the rule above enunciated as to cases under known
special circumstances, because there both parties may reasonably be pre-
sumed to contemplate the estimation of the amount of damages according
to the conventional rule. Now, in the present case, if we are to apply the
principles above laid down, we find that the only circumstances here
communicated by the plaintiffs to the defendants at the time the contract
was made, were, that the article to be carried was the broken shaft of a mill,
and that the plaintiffs were the millers of that mill. But how do these
circumstances shew reasonably that the profits of the mill must be stopped
by an unreasonable delay in the delivery of the broken shaft by the carrier
to the third person? Suppose the plaintiffs had another shaft in their
possession put up or putting up at the time, and that they only wished to
send back the broken shaft to the engineer who made it; it is clear that this
would be quite consistent with the above circumstances, and yet the
unreasonable delay in the delivery would have no effect upon the inter-
mediate profits of the mill. Or, again, suppose that, at the time of the
delivery to the carrier, the machinery of the mill had been in other respects
defective, then, also, the same results would follow.”

Koufos v. C. Czarnikow, Ltd., [The Heron II] [1969] A.C. 350

(H.L. 1967)
Lord Reid. “By charter party of Oct. 15, 1960, the respondents char-
tered the appellant’s vessel, Heron II, to proceed to Constanza, there to
load a cargo of three thousand tons of sugar; and to carry it to Basrah, or, in
the charterers’ option, to Jeddah. The vessel left Constanza on Nov. 1. The
option was not exercised and the vessel arrived at Basrah on Dec. 2.
The umpire has found that ‘a reasonably accurate prediction of the length
of the voyage was twenty days.’ But the vessel had in breach of contract
made deviations which caused a delay of nine days.
It was the intention of the respondent charterers to sell the sugar
‘promptly after arrival at Basrah and after inspection by merchants.’ The
appellant shipowner did not know this, but he was aware of the fact that
there was a market for sugar at Basrah. The sugar was in fact sold at
Basrah in lots between Dec. 12 and 22 but shortly before that time the
market price had fallen partly by reason of the arrival of another cargo of
sugar. It was found by the umpire that if there had not been this delay of

nine days the sugar would have fetched £32 10s. per ton. The actual price
realized was only £31 2s.9d. per ton. The charterers claim that they are
entitled to recover the difference as damage for breach of contract. The
shipowner admits that he is liable to pay interest for nine days on the value
of the sugar and [plaintiff’s cable] expenses but denies that fall in market
value can be taken into account in assessing damages in this case . . .
There is no finding that the charterers had in mind any particular date
as to the likely date of arrival at Basrah or that they had any knowledge or
expectation that in late November or December there would be a rising or a
falling market. The shipowner was given no information about these mat-
ters by the charterers. He did not know what the charterers intended to do
with the sugar. But he knew there was a market in sugar at Basrah, and it
appears to me that, if he had thought about the matter, he must have
realized that at least it was not unlikely that the sugar would be sold in the
market at market price on arrival. And he must be held to have known that
in any ordinary market prices are apt to fluctuate from day to day: but he
had no reason to suppose it more probable that during the relevant period
such fluctuation would be downwards rather than upwards – it was an
even chance that the fluctuation would be downwards.” [Held: that the
charterers can recover damages for the fall in market value.]

Law in the United States

Restatement (Second) of Contracts
§ 351. UNFORESEEABILITY AND RELATED LIMITATIONS ON DAMAGES
(1). Damages are not recoverable for loss that the party in breach did
not have reason to foresee as a probable result of the breach when
the contract was made.
(2). Loss may be foreseeable as a probable result of a breach because it
follows from the breach.
(a). in the ordinary course of events, or
(b). as a result of special circumstances, beyond the ordinary
course of events, that the party in breach had reason to know.
(3). A court may limit damages for foreseeable loss by excluding recov-
ery for loss of profits, by allowing recovery only for loss incurred in
reliance, or otherwise if it concludes that in the circumstances
justice so requires in order to avoid disproportionate
compensation.
Illustrations 17. A, a private trucker, contracts with B to deliver to B’s
factory a machine that has just been repaired and without which B’s
factory, as A knows, cannot reopen. Delivery is delayed because A’s truck
breaks down. In an action by B against A for breach of contract the court
may, after taking into consideration such factors as the absence of an
elaborate written contract and the extreme disproportion between B’s
loss of profits during the delay and the price of the trucker’s services,
exclude recovery for loss of profits.

18. A, a retail hardware dealer, contracts to sell B an inexpensive

lighting attachment, which, as A knows, B needs in order to use his tractor
at night on his farm. A is delayed in obtaining the attachment and, since no
substitute is available, B is unable to use the tractor at night during the
delay. In an action by B against A for breach of contract, the court may,
after taking into consideration such factors as the absence of an elaborate
written contract and the extreme disproportion between B’s loss of proﬁts
during the delay and the price of the attachment, exclude recovery for loss
of proﬁts.

The Draft Common Frame of Reference

ARTICLE III. 3:703: FORESEEABILITY
The debtor in an obligation which arises from a contract or other
juridical act is liable only for loss which the debtor foresaw or could reason-
ably be expected to have foreseen at the time when the obligation was
incurred as a likely result of the non-performance, unless the non-perform-
ance was intentional, reckless or grossly negligent.

The Unidroit Principles of International Commercial

Contracts
ARTICLE 7.4.4 FORESEEABILITY OF HARM
The non-performing party is liable only for harm which it foresaw or
could reasonably have foreseen at the time of the conclusion of the contract
as being likely to result from its non-performance.

COMMENT

The concept of foreseeability must be clariﬁed since the solution con-

tained in the Principles does not correspond to certain national systems
which allow compensation even for harm which is unforeseeable when the
non-performance is due to wilful misconduct or gross negligence. Since the

present rule does not provide for such an exception, a narrow interpret-
ation of the concept of foreseeability is called for. Foreseeability relates to
the nature or type of the harm but not to its extent unless the extent is such
as to transform the harm into one of a different kind. In any event, foresee-
ability is a flexible concept which leaves a wide measure of discretion to the
judge.
What was foreseeable is to be determined by reference to the time of
the conclusion of the contract and to the non-performing party itself
(including its servants or agents), and the test is what a normally diligent
person could reasonably have foreseen as the consequences of non-per-
formance in the ordinary course of things and the particular circumstances
of the contract, such as the information supplied by the parties of their
previous transactions.
Illustrations
1. A cleaning company orders a machine which is delivered five
months late. The manufacturer is obliged to compensate the com-
pany for lost profit caused by the delay in delivery as it could have
foreseen that the machine was intended for immediate use. On the
other hand the harm does not include the loss of a valuable gov-
ernment contract that could have been concluded if the machine
had been delivered on time since that kind of harm was not
foreseeable.
2. A, a bank, usually employs the services of a security firm for the
conveyance of bags containing coins to its branches. Without
informing the security firm, A sends a consignment of bags contain-
ing new coins for collectors worth fifty times the value of previous
consignments. The bags are stolen in a hold-up. A can only recover
compensation corresponding to the value of the normal consign-
ments as this was the only kind of harm that could have been
foreseen and the value of the items lost was such as to transform
the harm into one of another kind.

German Law
German Civil Code
§ 254. CONTRIBUTORY FAULT
If the fault of the injured party contributed to causing the injury, the
obligation to compensate the injured party and the extent of the obligation
depend upon the circumstances, and especially on the extent to which the
injury was caused by one party or the other.
This provision also applies if the fault of the injured party con-
sisted of an omission to call the attention of the party owing perform-
ance to the danger of an unusually serious injury of which that party
neither knew nor should have known, or of an omission to avert or
mitigate the injury.

Note. Paragraph 2 of § 254 was added, so to speak, at the last minute

when the draft was before the legislature. Previous drafts had contained
provisions like the following:
The liability for failure to perform of the person owing performance
does not extend to compensation for harm the occurrence of which lay
beyond the realm of probability given the awareness of the circum-
stances which that person had or must have had.1
The change was made because this provision appeared to be too restrictive,
and yet it was felt that some limitation was necessary.2

Oberlandesgericht, Hamm, February 28, 1989, NJW 1989, 2066

“The plaintiff entrusted the defendant with the task of translating a
brochure concerning parts that would improve the suspension of motor-
cycles into the Dutch, French, English, Spanish and Italian languages.
Claiming that the printed brochures were unusable due to faulty transla-
tion, the plaintiff seeks damages in the amount of 21,398.15 DM . . .
There was fault on the part of the plaintiff . . . within the meaning of
§ 254(2) sentence 1 of the Civil Code because, in violation of its duty, the
plaintiff failed to inform the defendant of the danger of an unusually severe
harm as a consequence of the error in translation. After all, the damage
that threatened, and which occurred, was forty times as large as the fee for
translation. Such a relationship between the payment for translation on
the one hand and the consequences of mistakes on the other lies outside the
normal course of experience in commercial translations.
According to the evidence presented . . . the defendant neither actually
knew nor should have known of the possibility that these unusually high
damages would occur. Such a state of knowledge does not follow from the
use of the word ‘brochure’ in their contract. Certainly, the defendant must
have inferred that use would be made of its translation. But, on the other
hand, it need not have expected that the plaintiff would have the transla-
tion immediately printed in full for its customers in the Netherlands
without any proofreading.”

Bundesgerichtshof, January 29, 1969, NJW 1969, 789

Plaintiff was a jewellery salesman who stayed in defendant’s hotel. He
gave his car key to the night porter so that his car could be left in a garage,
not owned by the hotel, but which, by arrangement with its owner, the
defendant used to provide parking for his guests. A valuable collection of
jewellery, which plaintiff had left locked in his trunk, was stolen during the

1. § 218 in Protokolle der Kommission für Bürgerlichen Gesetzbuchs Recht der

die zweite Lesung des Entwurfs des Schuldverhältnisse 1 (H.H. Jakobs and W.
Bürgerlichen Gesetzbuchs (1897), 292. Schubert, eds., 1978), 117–18.
2. “Antrag von Enneccerus in der XII.
Kommission” no. 134 in Die Beratung des

night. The trunk showed no signs of damage. Plaintiff sued for the value of
jewellery.
“The decision of the present case . . . depends on whether the defendant
can assist himself by pointing to a fault [the plaintiff] within the meaning
of § 254 BGB and so avoid, in whole or in part, liability for damages . . .
It must be considered, in the ﬁrst place, that [the plaintiff] left his
collection in the trunk of his car without informing the porter or any other
personnel of relevance to the defendant of its value and hence the danger of
an abnormally high loss (§ 254 BGB par. 2 sentence 1).”
[The court remanded for a ﬁnding on contributory fault.]

Wolfgang Grunsky, Münchener Kommentar zum Bürgerlichen

Gesetzbuch (H. Heinrichs, ed., 3rd edn., 1994), § 254 nos. 40–1
“The duty to warn of the injured party presupposes that the injurer
neither knew nor must have known about the danger. If the injurer and the
injured had equally good possibilities of knowing, then a warning need not
be given (BGH VersR 1963, 14). If through negligence neither the injurer
nor the injured party know of the danger, then the injurer bears the risk.
The harm is not to be divided as in § 254 . . .
The duty to warn is supposed to give the injured party the opportunity
to take counter measures. If such measures are no longer possible, then the
duty to warn disappears.”

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