>Pre-contractual Phase: A comparison between Dutch law and English law as an indication of an alternative approach for the Indonesian practice<

1. Introduction

This report will focus on the nature of pre-contractual liability in the Civil Law and the Common Law tradition. The discussion on the Civil law’s view on pre-contractual relationship will put the emphasis on Dutch Law, whereas for the Common law on English Law.

The key question would be the nature of the pre-contractual relationship. Do the parties have actionable obligations in law towards each other or is it a noncommittal relationship with no legal consequence whatsoever? If there were actionable obligations in law between the parties, what would than be the legal basis for the action?

In light of the above questions it must be pointed out that both traditions of law subscribe to the notion of freedom of contract which entails that potential contracting parties are free to conclude or not to conclude a contract. It is common practice of negotiations in the pre-contractual phase that parties will continue the negotiation so long as they have sufficient resources and they believe that the intended result, the agreement, will probably be achieved on the terms they consider favorable and within a foreseeable timeframe. On the other hand, if at a certain point of the negotiation the outlook becomes unpromising for whatever reason or that a party has obtained a better bargain with a third party the negotiation will most likely be terminated by the same party. This is a generally accepted practice in almost all jurisdictions and such practice found its root in the nineteenth century’s notion of laissez faire,  posing that the parties are free to explore the range of possibilities to acquire an agreement that is most beneficial to them. However, the notion of freedom of contract may not serve as a free ticket for the negotiating parties to act as they please. Parties must not fail to acknowledge that it is also a concern of law to ensure justice. Consequently, imposing restraint upon the conduct of one party to shield the other party from losses as a result of broken off negotiations would be appropriate. The idea is to lay down a set of rules which would enable the prejudiced party to claim for damages in case of unreasonable negotiation break off. It is the disposition expressed in judgments by and the extent of the expected role of the judiciary in forming and applying this doctrine which will constitute the substance of this report since both systems are very much dependent on the courts decisions to form the rules in respect of pre-contractual dealings.

The underlying thought of choosing comparative law methodology has been the interest in obtaining models on the pre-contractual relationship in order to come to a better understanding of an alternative approach that could serve as an indication of an alternative approach for the Indonesian practice.  This has become more relevant against a backdrop of globalization. International contract negotiations are becoming day-to-day reality; parties to the negotiations often do not share the same view of the legal consequences of their conduct throughout the negotiation process. This difference in legal and judicial tradition will be more problematic in respect of (international) negotiations of large-scale projects. Such negotiations will usually start with the commercial aspects without the involvement of the lawyers. In some cases, the negotiating parties have drawn up a preliminary agreement setting out the code of conduct to be observed the negotiation. After sometime the negotiations could result in an agreement. The agreement need not be the final agreement. It is often the case that at this stage the parties have agreed only upon major issues. The final agreement will only come into existence at a much later point in time after parties, most likely being assisted by lawyers, having agreed on the “ancillaries” of the contract. In the meantime, during the course of negotiating the “ancillaries” of the contract, a party might think that the deal is done. Hence, it would have commenced performing some of its obligations under the “contract”. Whereas hardly any problem may arise if the conclusion of the contract ensues , a major problem will likely surface if the contract fails to crystallize, since the pre-contractual performer would be left without claim under the anticipated contract.

The choice of jurisdiction in addressing the problems, i.e. the Dutch law and the English law, is expedient in that the two jurisdictions represent two very different approaches in respect of the pre-contractual relationship. The Dutch law doctrine of pre-contractual relationship, after the decision of the Netherlands Supreme Court in 1982,  has been considered as the most progressive amongst the civil law countries.  In that case the Netherlands Supreme Court held that as a consequence of the requirement to observe the principle of good faith under Netherlands Law a party breaking off negotiations may be held liable for reliance damages and even expectation damages or otherwise be obliged to continue negotiations in good faith.  On the contrary, absent the general duty to observe good faith, English courts are reluctant to hold a party liable for breaking off negotiations as was upheld by the House of Lords in Walford v Miles  as pronounced by Lord Ackner:

‘However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial 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 misrepresentation. (…). 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 negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason.’

The different approach of the mentioned jurisdictions is of practical importance for Indonesian law practitioners so that they could become aware of the (legal) consequences of pre-contractual negotiations with their counterparts from the common law tradition (as is the case with some of Indonesia’s important neighbouring countries) and in respect of particular international contracts, such as financial contracts, whereto the English law has been commonly declared applicable.

The proceeding of this report will be as follows:

The report will start with the Introduction in Chapter 1.

Part One delineates the boundaries of contract law. In particular, it will look into the later stage of the pre-contractual phase to indicate to what extent both jurisdictions are willing to give contractual force to “incomplete” agreements. Chapter 2 will examine the contract formation in Dutch law and Chapter 3 contract formation in English law.

Part Two examines the pre-contractual phase. Chapter 4 presents the view of both jurisdictions on the relationship between parties, particularly as regards the principle governing such relationship − the question of the applicability of the general principle of good faith − and the risks for the parties in the negotiations process. Chapter 5 will discuss the pre-contractual dealings by means of preliminary or collateral contracts. Although the approach towards such contracts varies between the jurisdictions, it will, nevertheless, provide a means for the judiciary to intervene and control the pre-contractual dealings. Chapter 6 will try to examine the dogmatic view of Indonesian law on pre-contractual relationship and will end the report with some conclusions.

PART I
THE BOUNDERIES OF CONTRACT

This part will ascertain the boundaries of contract law by examining the formation of the final contract: what are the requirements of any such agreement? At first glance it seems that there is little difference between the approach of Dutch and English law on the formation of contract. Beside the additional requirement of consideration on the part of English law, both systems apply the mechanism of offer and acceptance. As the saying is, “appearances are deceiving”, it also hold true in case of contract formation under Dutch and English law. The use of similar concept and general terminology mask the different approach to the formation of contract, in that Dutch law recognizes and designates an important role to the principle of good faith in contract law  whereas English law views a contract as an objective bargain between parties.

The objective of parties engaging in pre-contractual negotiations is the successful conclusion of a final contract.  It marks the beginning of a (often long term) relationship between parties. At the same time, the conclusion of a final contract provides protection to the interests of the parties. First, parties to the contract will most likely have provided stipulations in the contract in respect of their pre-contractual dealings, for example to recoup any cost incurred prior to contract, a party may calculate such cost in the price or by expressly stipulating obligations to be performed by the other party in exchange for the mentioned cost.

Secondly, contract law provides certainty regarding the parties’ rights and obligations. There are a set of rules addressing problems which may rise during the lifetime of the contract, for example if parties do not perform in accordance with the contract or do not perform at all, there are remedies such as damages or specific performance and in case that parties did not foresee a problem at all or foresaw it but still fail to deal with it in the contract, contract law may supply implied terms  or absent such rules to that effect the courts may intervene in order to bring relief by filling in the gaps.

2. The Formation of Contract under Dutch Law

Basic Principles of Contract Formation

Prior to the discussion of contract formation it must be mentioned that Dutch contract law is based on three fundamental principles, i.e.: the principle of freedom of contract, the principle of binding force of contract (pacta sunt servanda) and the principle of consensualism.

The principle of freedom of contract means that parties are free to conclude contracts with whom they choose and on terms they think necessary. As a consequence of this principle, most of the provisions on contract law in the Dutch Civil Code are not mandatory. Parties to the contract may opt not to comply with such rules by expressly stipulating otherwise. However, it has to be pointed out that the principle of freedom of contract finds its limit where it contravenes the public interest (Article 3:40 DCC).

The next principle is that of binding force of contract. It provides that parties to the contract are bound to adhere to the stipulations laid down in the contract. Different from the Old Dutch Civil Code , this principle has not been expressly provided in the current Dutch Civil Code.  There is also limitation to this principle. A contract is binding if it is not void or voidable. Furthermore, contractual stipulations are binding insofar they are not contrary to the standards of reasonableness and equity.

Pursuant to the principle of consensualism no formalities are required  for the creation of a contract. The fact that there is a consensus ad idem between parties will suffice. It has to be noted that despite its long history and acceptance in Netherlands law,  the principle of consensualism has not been unchallenged.  The opposition of this principle rejects the idea that a contract is created by meeting of minds but instead it argues that a contract is a legal relationship which came about through a unilateral legal act by each party directed towards each other (offer and acceptance) which produces binding obligations between them.  Although it seems that the lawmakers have tried to reconcile both arguments by introducing a system in the Dutch Civil Code, which is called wilvertrouwensleer,  as laid down in Articles 3:33 DCC and 3.35 DCC,  the principle of consensualism has, in fact, been renounced since 1961 as stated in the Elucidation to the Draft of New Dutch Civil Code (Toelichting op het Ontwerp voor een Nieuw Burgerlijk Wetboek).

The Requirements under Dutch law

Under Dutch law a contract is formed by an offer and the acceptance of the same (Article 6:217 para. (1) DCC) . Difficulties may arise if we observe the provisions of Article 6:213 para. (1) DCC  and Articles 6:217 para. (2) DCC and 6:218 DCC . Whereas the first describes a contract as a multilateral juridical act, the two latter provisions indicate that a contract comprises of two unilateral juridical acts. In this regard, one cannot but ask whether a contract comprises a multilateral juridical act or two unilateral juridical acts (offer and acceptance). Such inconsistency is a typical remnant of the controversy as mentioned above.  Although Article 6:213 remains in the Dutch Civil Code, it is commonly accepted that a contract comprises two unilateral juridical acts as stated in the following description:

Contract is a legal relation − comprising mutual obligations − between parties, offeror and offeree, which came about through a (unilateral) legal act performed by each party which carries with it a promise to act in a certain manner prescribed by law (Onder een overeenkomst wordt een rechtsverhouding − dat wil zeggen een stelsel van verbintenissen − verstaan, die tussen twee personen, aanbieder en geadresseerde, bestaat, en die tot stand is gekomen doordat die personen ieder één (eenzijdig) rechtshandeling verricht hebben (aanbod, resp. Aanvaarding genaamd), welke een toezegging tot een rechtens relevant handelen inhoudt).

An offer pursuant to Article 219 DCC  is revocable. This is the reverse of the opinion of the doctrine which regards an offer as irrevocable.  Van Dunné refers to a case of 1969 with the following facts:

Lindeboom sent a letter to the Municipality of Amsterdam on 29 July 1964 offering to sell a right of permanent ground lease (voortdurend erfpacht) including building rights thereon, with the condition that the conveyance of such property had to take place between 15 November 1964 and 15 December 1964. On 25 August 1964, Lindeboom received a notice stating that on 21 August 1964 the Mayor had decided to propose to the city council to accept the offer. The council took a positive decision on 28 October 1964 and it was approved by the provincial executive (gedeputeerde staten) on 10 November 1964. Meanwhile, on 18 August 1964, Lindeboom requested the municipality to release him from his promise. The request was rejected by the Municipality. In Lindeboom’s letter dated 13 and 27 October 1964 he informed the Municipality that he had regained his freedom from his (binding) promise. On 11 December 1964, Lindeboom refused to cooperate in executing the deed of conveyance arguing that he has been discharged from his promise after 7 September 1964, which he claimed to be the agreed date of receiving the final decision from the Municipality.

The Netherlands Supreme Court held that ‘indeed he who made an irrevocable offer has deprived himself from the authority to avoid an agreement, which will come about by means of acceptance within the specified timeframe.’ In fact, Lindeboom has made an irrevocable offer for certain period of time by making a condition to his offer stating that the conveyance should take place between 15 November and 15 December 1964. This stance is different from English law which allow an offer to be revoked at any time before acceptance even in a case that a timeframe for acceptance is expressly stated.  Dutch law distinguishes an offer from an “offer made without engagement (vrijblijvend aanbod)”. Although this concept is clearly stated in the Dutch Civil Code,  such offer is regarded by the doctrine as an invitation to offer.  In Hofland v. Hennis  the facts were as follows:

Hennis reacted to an advertisement offering to sell a house in Bussum at a price of f 215.000,-. Hennis contacted his broker to arrange an appointment with Hofland through his broker to view the house. At the time Hennis visited the house there were only Hofland and his wife, both brokers were not present. Following his visit to the house Hennis, again, contacted his agent to inform that the house was sold to him at f 215.000,-. It is not until the brokers started to close the sale when the problem arose: Hofland refused to cooperate with the conveyance process arguing that there was certainly no concluded deal in the first place. The Court of Appeal, following the stipulation of Article 219 para. 2 DCC held that the advertisement was in fact an offer made without engagement which become binding upon the acceptance by Hennis unless it was immediately revoked by Hofland.

The Netherlands Supreme Court quashed the decision of the Court of Appeal based on the following considerations:

(1) To begin with, an advertisement offering to sell a certain property at a certain price must be interpreted as an invitation to negotiate whereby a few matters such as price, additional conditions of the purchase and the prospective buyer may be of importance;
(2) The advertisement at issue stated only a few details such as the lay-out of the house and its quoted price and certain provisions in respect of the intermediary of the sale and inspection and as such it cannot be interpreted as a firm/binding offer;
(3) In light of the preceding, it is evident that the Court of Appeal has had a wrong view of law in assuming that there is an offer without engagement at the ready for an acceptance to create a contract unless it was revoked immediately after the acceptance.

Yet another type of an offer sanctioned under Dutch law is called an offer of reward (uitloving). This type of an offer is very limited in its revocability; it has to be based on a weighty ground, since it is usually addressed to the public at large. Notwithstanding the aforementioned, Article 220 para. (2) DCC  authorizes the courts to award a reasonable compensation to an offeree who has assumed an act in reliance of the promise in case of a revocation or alteration of the reward.
Under Dutch law, an offer must be directed to and cognizable for the offeree (Article 3:37 para. (3) DCC).  An offer must also be sufficiently determinable, in that it has to be formulated in a way that it will immediately create a contract upon acceptance. The question in this regard is whether or not the agreement has included all the terms and conditions needed in order to be qualified as a contract as contemplated by the parties (Article 6:227 DCC).  However, this requirement does not mean that parties must provide a complete arrangement in the contract. Generally, it will suffice if the essential elements are provided for in the agreement. The parties may insert other elements in the future or it can be implied in the contract by virtue of Article 6:248 para (1) DCC.

One may note that there is no general answer in respect of the question what comprises the essentialia of a contract. The answer depends on the nature of the agreement, for example in a sale and purchase of share agreement the price is of cardinal importance. As an illustration of the problem in determining essential elements of a contract, we will consider two cases as follows:

In Bunde v. Erckens  the parties concluded a contract in order to put an end to an expropriation dispute with the assumption that they also agreed upon the tax loss compensation paid for by the Municipality of Bunde. After it became clear that there was no agreement on this point, the Court of Appeal held that it must be assumed that Erckens would not have entered into the contract if it had been clear to Erckens at the execution of the contract that there was no agreement regarding the tax loss compensation. Hence, there was no contract at all. The Netherlands Supreme Court sanctioned the view of the Court of Appeal arguing that a contract cannot be concluded if parties have not reached an agreement as regards an important part of the contract.

In Polak v. Zwolsman  the parties were negotiating an employment contract. The parties have come to an agreement regarding the description and the extent of the job and the remuneration; however, they have not agreed on other things such as pension contributions, house, the amount of lease payment etcetera. The Netherlands Supreme Court is of the opinion that in case there are a number of obligations to be agreed upon by parties to a contract, it is not acceptable to argue that a contract has been formed if parties have only agreed on some obligations. The question whether or not partial agreement in respect of such contracts may constitute an enforceable contract depends on (i) the intention of the parties, as is shown in their agreement, (ii) the intention of the parties to further the negotiation and (iii) the additional circumstances of the case. Furthermore, in any case it has to be established that the existing gap can be filled up by implying obligations from the parties’ intention and the law, in particular Article 1374 and Article 1375 DCC.  It was held in this case that there was no contract.

As stipulated in Article 6:217 para. (1) DCC a juridical act that is of equal importance as the offer in creating a contract is the acceptance of the offer. As a mirror image of the offer, an acceptance must also be directed to and cognizable for the offeror. Accordingly, an acceptance which deviates from the offer shall be deemed as a counter offer and a repudiation of the initial offer.  On the other hand, a small deviation from the offer may not constitute a new offer and a repudiation of the initial offer. Such acceptance will create a binding contract unless the offeror immediately give notice of his objection in respect of the variation in the acceptance.

An acceptance may be in the form of an act (by word or conduct) or refrain from an act (stilzwijgende aanvaarding) . The first is considered to be the common method of acceptance i.e. the delivery of ordered goods, transferring payment of the purchase price et cetera. A particular method of acceptance in the form of an act which is not directly aimed at the offeror can be found in the figure of an offer of reward.  Acceptance by means of refraining from an act will only be permitted under certain circumstances that is if the principle of good faith approves of that type of acceptance, for example if such an act is based on previous transaction or that such an act is considered as a common course of action in a business.

3. The Formation of Contract under English Law

Background

The notions of freedom of contract and individualism remain of great influence over the English rules of contract formation.  They stem from the nineteen century’s laissez faire ideology. It was also the period of the establishment of many important contractual principles as expounded by leading decisions of the courts. The idea of freedom of contract insisted that parties should be given the possibility to explore prospective agreements or bargains which are considered to be most beneficial to them without any restriction or intervention of the state. This thought was clearly illustrated by Sir G. Jessel in Printing and Numerical Registering Company v. Sampson:

‘It must not be forgotten that you are not to extend arbitrarily those rules which say that a given contract is void as being against public policy, because if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contract when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider–that you are not lightly to interfere with this freedom of contract.’

This presumption may, however, be rebutted. In the context of modern world it is accepted that certain contracting parties need to be protected by the law against unjustifiable subordination. There is an obvious difference in (economic) power between large companies and small companies, between corporations and individuals. The stronger party could impose onerous terms in the contract to the detriment of the weaker party. In the last century there was a move towards greater intervention by the courts and the state in regulating economic transactions. A good example of a court decision in favor of protection of a weaker party was rendered in Schroeder Music Publishing Co Ltd v. Macaulay.  The facts were as follows:

Tony Macaulay, the plaintiff, a young and unknown song-writer, entered into agreement with the defendants, a music publishing company, whereby the defendants engaged his exclusive services. Under this agreement, the plaintiff assigned to the defendants all his compositions (existing or future) for a period of five years, with an extension option of five years, in return for royalties on published works. The defendants could at any time terminate the agreement by giving the plaintiff one month’s written notice. There was no corresponding provision in favour of the plaintiff. The defendant was not even any obligation to publish any of the plaintiff’s compositions. The plaintiff sought a declaration that the agreement was contrary to public policy, as being an unreasonable restraint of trade, and void. The defendants contended that the doctrine of restraint of trade was inapplicable to their standard form agreement.

The House of Lords annulled the agreement under the doctrine of restraint of trade, arguing that the weak bargaining position of the plaintiff has led to an unfair agreement affording a combination of a total commitment on the part of the plaintiff with an inappreciable obligation on the part of the defendants.

As alluded to above, the state has also responded in protecting the ‘economic’ equality to prevent that the arguments of freedom of contract being (mis)used as a recipe for exploitation and injustice. An example of such response may be seen in the enactment of Unfair Contract Term Act 1977 which regulates and restricts the use of exclusion clauses even further than had been provided by the courts.

Although there have been perceivable efforts imposing restrictions on freedom of contract, it should not be exaggerated. Many important principles of the law of contract, established by the courts under the influence of laissez faire ideology still survive up to the present time.

The requirements under English law

The word “Agreement” has been commonly used to denote a contract. It should be noted, however, that not all agreements are legally binding under English law, for example, social and domestic agreements are generally not legally binding, unless there is clear evidence of an intention to be legally bound.  Another important element in the English contract law to be legally binding is the existence of consideration. It is a bargain for the exchange of something of value.

“Agreement” also refers to the meeting of minds between parties, which is often described as consensus ad idem. This conception, unlike in the European continent, did not flourish to become consensual doctrine in the common law.   Moreover, it is considered to be misleading to think of the conception as a requirement of an agreement, as there is a tendency in court decisions towards an objective approach to agreement.  To establish that a contract has been formed the court does not look to what is in the minds of the parties, but most likely it will infer from the conduct of the parties. In other words, the court will look for an offer by one party and an acceptance of that offer by the other. In Storer v. Manchester City Council,  Lord Denning stated:

‘In contracts you do not look into the actual intent in a man’s mind. You look at what he said and did. A contract is formed when there is, to all outward appearances, a contract. A man cannot get out of a contract by saying: “I did not intend to contract” if by his words he has done so.’

A complication in the formula of offer and acceptance may arise in a series of communications between parties in the course of negotiations. It may be difficult to ascertain whether a particular statement was an offer, or whether it was part of continuing negotiations between parties.
Under English law a statement will be considered to constitute an offer if it is ‘an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed’.  There is no specific requirement as to the form of the expression; it may be by words or by conduct. In revealing whether or not there is a clear intention to be bound, the courts are more inclined towards an objective approach. In First Energy (UK) Ltd v. Hungarian International Bank Ltd  as per Steyn LJ:

‘The Court must take into account surrounding circumstances which reasonable persons in the position of the parties would have had in mind’.

It is important to distinguish between an offer and an advertisement. Generally, advertisements are invitations to treat, so the person advertising is not compelled to discharge an obligation. In Partridge v. Crittenden , it was held that where the appellant advertised to sell wild birds, was not offering to sell them. Lord Parker CJ commented that it did not make “business sense” for advertisements to be offers, as the person making the advertisement may find himself in a situation where he would be contractually obliged to sell more goods than he actually owned. In certain circumstances however, an advertisement can be an offer, a well known example being the case of Carlill v. Carbolic Smoke Ball Company , where it was held that the defendants, who advertised that they would pay anyone who used their product in the prescribed manner and caught the flu £100 and said that they had deposited £1,000 in the bank to show their good faith, has made an offer to the whole world and were contractually obliged to pay £100 to whoever accepted it by performing the requested acts.

The next aspect that needs to be considered in contract formation is the acceptance, for an agreement is established by the acceptance of the terms of the offer. Here, again we will encounter the problem of assessing whether or not a statement constitutes an acceptance that gives rise to a contract.

In answering the questions we should first establish the definition of an acceptance: ‘a final and unequivocal expression of assent, by words or conduct, to the offer’.  Bearing in mind that the courts take an objective view of agreement, there are three key rules applicable in determining the acceptance.

(i) Correspondence

An acceptance at variance with the terms of the offer will not create a contractual relationship. Instead, the purported acceptance will be regarded as a counter-offer to make a contract on different terms. A counter-offer also rejects the initial offer rendering it insusceptible for acceptance afterwards. This is called the ‘mirror image rule’. In Findlater v. Maan , Lord Justice-Clerk (Ross) stated:

‘the result of sending the counteroffer was that the original offer had fallen and could not thereafter be accepted.’

On the other hand the law allows an enquiry being made to seek clarification of the offer or further information about it without being considered as a counter-offer.

(ii) Nexus

It seems that in English law there is a requirement that an acceptance is made in pursuance of an offer. For example, if someone found a stolen item and returned it to the owner and later finds out that a reward has been offered for the act, he can not claim the award because the act was not performed in exchange for the owner’s promise.
A related issue is that of ‘cross-offer’. That is the case when each party makes an identical offer at the same time. It is argued that in a situation of cross-offer the ‘agreement’ is by chance because neither offer counts as an informed acceptance of the other. Accordingly, it will not give rise to a contract.

(iii) Communication

English contract law requires external evident, beyond a mental resolution, of acceptance to lead to a contractual responsibility: the acceptance must be brought to the offeror’ notice either by words or by conduct. The interpretation of the question what amounts to a communicated acceptance depends on the construction of the contract. In Carlill v. Carbolic Smoke Ball Company  the court held that in respect of a unilateral contract there was no need to notify the offeror of the acceptance of its offer by the offeree prior to performance. Nevertheless, the general rule subscribes to the viewpoint that mere silence is not sufficient to constitute acceptance as expressed in Felthouse v. Bindley .
But the maxim ‘silence does not amount to acceptance’ does have a reverse side, that is, when someone receives merchandise with an accompanying letter stating that ‘if I (the seller) do not hear anything within a certain period, I will consider the goods sold.’ Will the receiver be contractually bound if he does not reject such offer expressly? Generally such practice is not accepted and will not amount to a contract and members of the public are protected from it by virtue of statute law i.e. Unsolicited Goods and Services Ac 1971 as amended in 1975, and Consumer Protection (Distance Selling) Regulations 2000.
The manner in which an acceptance is communicated also plays an important role under English law. If a particular manner of acceptance is specified by the offeror, then the offeree must comply with this specification.

Termination of offers

(i) Revocation

The difference that we will see in respect of an offer between Dutch law and English law is that the general view regards that an offer under Dutch law is irrevocable whereas under English law an offer is revocable so long as it has not been accepted. An offer stating a term for acceptance is also revocable at any time before such term lapses. This is because the term of acceptance expressed by the offeror is not supported by a consideration from the offeree. It is possible, however, that the offeror and the offeree conclude a binding agreement to keep the offer open over a fixed period of time in a separate contract.  This contract will have to fulfill the requirements of a contract as set out above.

In case of revocation, once again, the set formula of communication is applicable, it is not sufficient to revoke an offer merely by change of mind. However, the requirement of communication must not be interpreted as an obligation for the offeror to notify the revocation to the offeree in person. In Dickinson v. Dodds  it was held that ‘An offer to sell property may be withdrawn before acceptance without any formal notice to the person to whom the offer is made. It is sufficient if that person has actual knowledge that the person who made the offer has done some act inconsistent with the continuance of the offer, such as selling the property to a third person.’ As per James LJ:

‘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.”’

(ii) Lapse of Time

As alluded to above an offer may come to an end due to the lapse of time. The basic rule is that whenever an offer stipulates a term for acceptance it must be accepted within the term specified in the offer in order to create a contract. If there is no such stipulation the offer will lapse unless it is accepted within reasonable time. What amounts to a reasonable time will be judged by taking into consideration the nature and circumstances of the offer.  An example of such case can be found in Ramsgate Victoria Hotel Company Limited v. Montefiore  it was held that an application to acquire shares from Ramsgate Victoria Hotel made on June cannot be accepted as late as the following November. The time interval between June and November was unreasonable because of the fluctuating nature of the price in share trade.

(iii) Conditional Offer

An offer can be made subject to certain conditions. English law does not require that the conditions are made explicitly. The courts can also imply conditions upon an offer.  In Financings Ltd v. Stimpson  the facts were as follows:

On March 16, 1961, the defendant signed a document constituting an offer to buy a car. The offer was made on the basis that the car was in good condition, or at all events in the condition in which the hirer had seen it, but before the offer was accepted it was stolen. When it was recovered it was found to be damaged. The plaintiff, arguing that a contract was concluded, sought to recover the price of the motor-car from the defendant.

The court held that the offer made by the hirer was conditional on the motor-car remaining in substantially the same condition as it was in when the offer was made and, having regard to the damage which the motor-car had suffered before the hirer’s offer was accepted by the finance company, that company was not in a position to accept the offer because the condition on which it was made had not been fulfilled and, accordingly, there was no contract.

(iv) Death

The death of prospective contract parties will have the effect of rendering an offer ineffective. An offer cannot be accepted after the offeree’s demise. In case of an offer being accepted by the offeree without knowing of the offeror’s demise the court permits that the resulting contract be performed by the offeror’s successor.

Consideration

Although the doctrine of consideration is of great importance as a means for distinguishing enforceable and unenforceable agreements, it defies any general definition.
The difficulty to find a catch all definition of consideration lies within the nature of its application, that is, the application depends very much on the discretion of the courts in constructing events which satisfy their understanding of the boundary between enforceable and unenforceable agreements.  Consequently, it is not surprising that sometimes the decisions of the courts are not always consistent with one another.

In light of the above we will consider the rules of consideration as follows. The fundamental idea underlying the requirement of consideration is that of exchange. In its traditional form the idea of exchange has been formalized in the so called “benefit-detriment” structure. For example, in Bolton v. Madden , as per Blackburn J:

‘The general rule is, that an executory agreement, by which the plaintiff agrees to do something on the terms that the defendant agrees to do something else, may be enforced, if what the plaintiff has agreed to do is “either for the benefit of the defendant or to the trouble or prejudice of the plaintiff”. If it be either, the adequacy of the consideration is for the parties to consider at the time of making the agreement, not for the Court when it is sought to be enforced.’

In an uncomplicated transaction such as renting of an apartment, the parties satisfy this structure by one party providing housing in return for rent payment. The landlord suffers a detriment by doing so in exchange for the benefit conferred upon him by the tenant. The benefit-detriment’ structure, thus, is based on presumptions of economic value. But then in many instances the courts have held particular considerations which apparently did not have an economic value as good consideration. For example in Ward v. Byham  with the following facts:

After the parents of an illegitimate child had lived together for some years, the father turned the mother out, himself retaining the child. Later the father made an offer to let the mother have the child and to pay an allowance of £1 per week, provided that the child was well looked after and happy. The mother took the child away and maintained it accordingly. When, some months later, the mother married, the father discontinued the payments. The mother brought an action for the allowance of £1 per week promised by the father.

The Court of Appeal held that the mother had provided a good consideration despite the absence of the economic value of such consideration.

A forbearance or a promise to forbear without any evident economic value is also considered as good consideration. ‘If a person promises his son £100 on condition that the son does not smoke for a year the son’s forbearance would not cost him anything in economic terms and yet it is generally thought that this would be a valid contract.’
As seen above the detriment-benefit structure based on the (economic) value of a consideration has not always been able to reconcile the contradiction or inconsistency in the law. A conceivable alternative in reconciling this inconsistency was the “bargain theory”. It was originated in America and has found its proponent in England in Sir Frederick Pollock.  Basically, this theory argued that ‘anything could be a sufficient consideration so long as it was bargained for, and that nothing would be good consideration unless it was bargained for.’

Although in most contracts we could easily establish the element of bargain in respect of the reciprocal promises made between the parties, there are instances whereby the courts have to infer an implied promise so as to enforce a gratuitous promise. This technique is often utilized by the courts in dealing with cases of past consideration.   In principle the law does not recognize an act performed before a promise was made as good consideration. There are, however, exceptions to that rule. An act performed prior to a promise may be regarded as good consideration if it fulfills three conditions : (i) the act was requested by the promisor, (ii) it was understood that the act was performed in exchange for payment and (iii) that the payment must have been legally enforceable without the later promise.

The rule of implied promise has also been applied successfully (as will be observed hereunder) in establishing liability in situations of pre-contractual negotiations which do not result in a contract despite of a discharged promise in the expectation that a contract will ultimately be concluded.

As we have seen from the above examination the rules invoked by the courts to justify consideration as a test of the enforceability of agreements presents a conundrum. Some has even gone further as to contend that the doctrine of consideration should be abandoned due to its unsatisfactory justification. Nevertheless, because of the resourcefulness of the courts and the malleability of the common law the doctrine of consideration will stay in force and provide a mean to establish enforceability.

The Need for Certainty

Notwithstanding the necessity of fulfilling the requirements set out above in order to create a contract, the courts may find certain agreements not enforceable due to lack of certainty. In this context, basically, the courts will look for an objective bargain between parties. In May and Butcher Ltd v. R , Viscount Dunedin stated: ‘a concluded contract is one which settles everything that is necessary to be settled, and leaves nothing still to be settled by agreement between the parties.’

In practice, English courts do not impose such rule rigidly. The courts recognize that in commercial documents parties sometimes expressly record their agreements ‘in crude and summary fashion’  and, therefore, ‘it is accordingly the duty of the Court to construe such documents fairly and broadly, without being too astute or subtle in finding defects.’  It may, for example, not be feasible for parties to restrict themselves to contract terms in an extended period of time. In certain transactions a more flexible approach may be required in order not to undermine the transaction and to avoid undue prejudice suffered by one or both of the parties.

As we will observe, the courts have a broad discretion in assessing the content of a particular agreement and deciding whether there is sufficient certainty to form an enforceable agreement. The courts may hold that the terms of an agreement are too vague to be enforced without adding new terms. In G Scammell and Nephew Ltd v. Ouston  the House of Lords held that an agreement to sell goods subject to hire-purchase term was too uncertain to be enforced. The reason was because there were a large number of hire-purchase agreements comprising different terms and therefore there was uncertainty in the agreement to be legally binding. The same judgment has also been rendered in cases of agreements ‘subject to war clauses’, ‘subject to strike and lockout clauses’, and ‘subject to force majeure conditions’.  The outcome of the judgment would be different if parties to the mentioned agreements could have shown, by reference to previous dealings with the other party or by reference to custom or trade usage, that one particular meaning could be given to the phrase ‘subject to…’ mentioned above.

It must be noted, however, that the courts have discerned two types of vague terms in agreements. First, terms which still have to be agreed upon, such as the ‘subject to hire-purchase’ term. Secondly, terms which are meaningless. The former will almost certainly lead to courts decisions negating a contract, whereas the latter may be ignored. The question whether such meaningless terms vitiate the contract, or can be ignored due to its severability, depends on the importance attached to such terms by the parties. In Nicolene Ltd v. Simmonds  a contract for the sale of a quantity of reinforcing steel bars was expressed to be subject to ‘the usual conditions of acceptance.’ The seller having repudiated the contract was sued for breach of contract. The seller contended that the contract was not concluded because there was no consensus ad idem in regard to “the usual conditions of acceptance”. This argument was rejected by the Court of Appeal. Denning LJ stated:

‘In this case there was nothing yet to be agreed. There was nothing left to further negotiation. All that happened was that the parties agreed that “the usual conditions of acceptance apply.” That clause was so vague and uncertain as to be incapable of any precise meaning. It is clearly severable from the rest of the contract. It can be rejected without impairing the sense or reasonableness of the contract as a whole, and it should be so rejected. The contract should be held good and the clause ignored.’

Another aspect of uncertainty in contract formation is the (in)completeness of an agreement. There are instances where parties have come to an agreement in principle. They have agreed on essential terms and still left detail terms unsettled or expressly require further agreement on certain terms. The answer in respect of the question whether there are enforceable agreements in such instances depends on the nature of the contract and the circumstances. The basic principle under the law is that it is not the role of the courts to make an agreement for the parties where none exists, but they may be able to give effect to contractual intention, for example by implying terms, where there is an agreement which has not been fully expressed.

We will consider the following cases to illustrate how the courts deal with various questions of incompleteness in practice.

In Perry v. Suffields Ltd  an agreement of sale and purchase of freehold licensed premises for ₤7,000 without further stipulations as to commencement of title, the payment of a deposit, and the time for completion was accepted as a contract. In Pagnan S.p.A v. Feed Products Ltd  an ‘Agreement was reached on the cardinal terms of the deal: product, price, quantity, period of shipment, range of loading ports and governing contract terms.’  Despite a lack of agreement on a number of issues such as the rate of loading and the definite loading port, the court held that the agreement was enforceable. In those cases the courts considered that the parties intended to be bound immediately. The fact that further agreements are needed in respect of other significant terms ‘would not invalidate the contract unless without such agreement the contract was unworkable or to uncertain to be enforced.’

Agreements made “subject to contract” will, generally, be considered incomplete and, therefore, will not be regarded as a contract. In Regalian Properties Plc. v. London Docklands Development Corporation  the plaintiff brought an offer to build a residential development. It was accepted by the defendant subject to contract. In fact the project experienced delays and at a certain point it was abandoned by the defendant. The plaintiff made a claim of costs already incurred in relation to the proposed contract. The court rejected this claim by stating ‘that pending the conclusion of a binding contract any cost incurred by him in preparation for the intended contract will be incurred at his own risk, in the sense that he will have no recompense for those costs if no contract results.’
In May and Butcher Ltd v. R , the plaintiff has agreed to buy surplus tentage which might become available’ from the Controller of the Disposals Board. The agreement provide that: ‘The price or prices to be paid, and the date or dates on which payment is to be made by the purchasers to the Commission for such old tentage shall be agreed upon from time to time between the Commission and the purchasers …’.  The court held that because the parties have provided clearly that the price was to be settled by future negotiation between them the provision in the Sale of Goods Act was not applicable, as per Viscount Dunedin:

‘We are here dealing with sale, and undoubtedly price is one of the essentials of sale, and if it is left still to be agreed between the parties, then there is no contract. It may be left to the determination of a certain person, and if it was so left and that person either would not or could not act, there would be no contract because the price was to be settled in a certain way and it has become impossible to settle it in that way, and therefore there is no settlement. No doubt as to goods, the Sale of Goods Act, 1893, says that if the price is not mentioned and settled in the contract it is to be a reasonable price. The simple answer in this case is that the Sale of Goods Act provides for silence on the point and here there is no silence, because there is a provision that the two parties are to agree. As long as you have something certain it does not matter. For instance, with regard to price it is a perfectly good contract to say that the price is to be settled by the buyer.’

In Sudbrook Trading Estate Ltd. v. Eggleton , parties in respect of a lease have agreed on an purchase option given to the tenant of the premises ‘at such price as may be agreed upon by two valuers one to be nominated by the lessor and the other by the lessee and in default of such agreement by an umpire appointed by the … valuers.’  When the landlord refused to appoint a valuer the mechanism failed, yet the court did not view the stipulation of the agreement as uncertain and held that the agreement was enforceable. The House of Lords adopted a two stages approach in resolving the problem. First, it decided that there was an agreement to sell at a reasonable price to be determined by means of valuation process. Secondly, it considered the mechanism of valuation stipulated in the agreement as non-inessential and, accordingly, where such mechanism failed to function the court could substitute other mechanism in order to determine the price.

PART II
PRECONTRACTUAL PHASE

Most, if not all, commercial contracts are preceded by negotiations. Generally, serious problems will not likely arise in case of negotiations of uncomplicated contracts, however, this will be rarely the case in commercial negotiations of a protracted nature that involves many persons and considerable investment in time and money.

As we will see below the Dutch courts are more inclined towards recognizing the enforceability of precontractual dealings. The general obligation of good faith in Dutch law requires that each party to a negotiation takes into account the justified interests of the other party.  Accordingly, a party who arbitrarily breaks off negotiations, especially if the negotiations are at a later stage, may be found liable for certain damages or may even be compelled to further the negotiation with a view to conclude a contract.  On the other hand, English contract law views a contract as an objective bargain between parties, in that it draws a clear line between the negotiation phase, where parties are exposed to the market risks, and the final contract. Against this backdrop, it is accepted that a party may break off negotiation at any time, even at a very late stage when the other party thinks that an inception of a contract is imminent. Likewise, it is accepted that a party embarks in parallel negotiations without notifying its counterparts of such fact.

This part of the report will examine the attitude of both systems towards the negotiation process. It will commence with the examination of the existence of rules regulating the behavior of parties in negotiating a contract as set out in Chapter 4. Another point of discussion in this chapter will be the liability which may arise if a party decides to break off negotiations. In Chapter 5 we will consider the use of preliminary contracts which permit parties to set out matters of negotiations procedure and/or matters on which agreements have been reached and identify further points of contention to be settled.

4. Legal Foundation in Pre-contractual Negotiation

The Dutch Stance: Parties to a Negotiation are Deemed to Have a Legal Relationship Governed by Good Faith

Prior to the court decision of 18 June 1982 (Plas v. Valburg)  the law took the view that parties could not be held liable for damages whenever it decided to break off negotiations. However, this observation should not be exaggerated and it certainly cannot be compared with the English position with its “all or nothing” approach. Basically, in Dutch law, the injured party may claim for damages based on tort or on (implied) contract  by virtue of article 1375 ODCC  (Article 6:248 para. 1 DCC).

As of 1982 the Dutch Supreme Court has established the ‘doctrine of broken off negotiations’, in a series of judgments. The creation of this doctrine was made possible following the judgment of the Dutch Supreme Court in a famous case of 1957 , which held that parties in negotiation engage in a ‘particular legal relation governed by the principle of good faith’. Therefore, parties have to take into account the justified interests of the other party. In that judgment, the court also introduced specific duty in the field of error/mistake imposing a duty to investigate.  We will consider Plas v. Valburg as follows:

Plas Bouwonderneming BV (“Plas”) had submitted a proposal to build an indoor swimming pool in the Municipality of Valburg (“Valburg”) at the request of the secretary of the same municipality. Subsequently, a council committee decided to make an inquiry into the proposal of Plas together with proposals submitted by three other contractors. Following a request from Valburg , Plas seek advice from external experts (a heating system consultant, an electricity consultant, a sound/noise consultant and an architect), all at its own expense. In due course, a small committee, a so called “swimming pool committee”, selected two contractors, including Plas, to continue with the bidding process and later ordered these two contractors to readjust their proposals and submit a price quotation. It came out that Plas had submitted the lowest price quotation and, accordingly, the Bench of Mayor and Aldermen (college van Burgemeester and Wethouders) of Valbrug decided to choose Plas as the contractor to build the swimming pool. The mayor of Valburg informed Plas that it was granted the project subject to the approval from the city council and some minor adjustments to the proposal. Ultimately, to Plas’ surprise, the project was granted to another contractor who submitted a lower quotation than that of Plas. This contractor was not in on the bidding process from the start, it has only presented its price quotation to Valburg after Plas had submitted his readjusted proposal and price quotation. Plas refused to put up with the situation and went to file a claim with the court in Arnhem. Initially, Plas demanded Valburg to fulfill its promise but eventually Plas claimed for the avoidance of the agreement and compensation in the total amount of f 130.00,- (f 60.000,- for the incurred cost and f 70.000,- for lost of  expected profit/gain). The court held that Valburg was acting contrary to the good faith governing the pre-contractual phase and ordered Valburg to pay the compensation. On appeal, Valburg argued that the obligation to pay damages in case of an act contrary to the principle of good faith in pre-contractual phase should not include compensation for expected profit. The Court of Appeal accepted the mentioned objection from Valburg by setting aside the decision of the court of first instance.

The Netherlands Supreme Court held that ‘there is a possibility that a negotiation concerning a contract has reached a certain stage which will render breaking off of the negotiation under the circumstances as an act contrary to good faith as parties might rely on each other that any concluded contract will, in any case, emanate from the negotiation. In such a situation there might be a possibility for an obligation to compensate the lost of expected profit’.  Moreover, the Netherlands Supreme Court considered that an obligation of Valburg to compensate Plas, under certain circumstances, might also arise at an earlier stage prior to the stage wherein parties in good faith are not free to break off the negotiation.

Based on the abovementioned judgment one can discern three successive stages in the pre-contractual phase and their respective liability schemes:

1.    Stage I: each party is free to break off the negotiation without facing the risk to be obliged to compensate the cost incurred by the other party;
2.    Stage II: each party is free to break off the negotiation but there is an obligation to compensate the cost incurred by the other party;
3.    Stage III: each party does not have the freedom to break off the negotiation, since it is contrary to the principle of good faith. In case a party breaks off the negotiation, it will be obligated to pay compensation for the cost incurred by the other party and under certain circumstances, to pay compensation for the cost incurred by the other party and for lost of expected profit suffered by the other party.

Aside from the obligation to pay compensation for the cost incurred by the other party and for lost of expected profit suffered by the other party, a party may be compelled by the court to continue the negotiation in order to come to a concluded contract This idea, however, has been considered controversial and it is still to be seen whether the courts are willing to uphold this position in the future.

The rules laid down in Plas v. Valburg are considered breaking new ground, but it was not particularly clear on their implementation in practice. As will be set out hereunder, there are successive court judgments which are considered to have added refinements and/or clarity in applying the mentioned rules

In VSH v. Shell  the Netherlands Supreme Court has pursued the rule set out in Plas v. Valburg and, in addition, it has made a refinement to the mentioned rule as follows: It stated that a liability will arise in a broken off negotiation if (i) a party (who misses out on the contract)  might reasonably expect  that such kind of a contract will emanate from the negotiation or (ii) it is unjustifiable in connection with other circumstances.

In De Ruiterij v. MBO  a qualification has been introduced by the Netherlands Supreme Court to the rules of Plas v. Valbrug in particular as regards stage 3 of the negotiation which do not allow any party to break off the negotiation because it is contrary to the principle of good faith. In this case the Court has indicated the importance of the impact of unforeseen circumstances on the decision of a party to terminate of the negotiation.

In de Combinatie v. de Staat  the Netherlands Supreme Court asserted that, in connection with the reliance that a contract will be concluded, it is important to establish how the broken off negotiation was judged.

In Centraal Bureau Bouwtoezicht BV v. JPO Projecten BV  the conclusion seems to be that a liability as a result of a broken off negotiation should not be easily assumed.

Following the above we can conclude that although it is clear that under Dutch law parties are not free to break off negotiation it is still difficult to determine a certain method of examination employed by the courts in establishing whether or not a party breaking off negotiation could be held as acting in an unlawful manner towards the other party.

Legal Consequence and Condition Stipulated by Parties

As we have seen from Plas v. Valburg case, there are stages in pre-contractual phase where parties are no longer free to break off the negotiation. By refusing to continue the negotiation parties might expose themselves to the risk of being held liable for certain damages. Sometimes parties will not or cannot except such risk.  Hence, they may provide arrangement in respect of legal consequences if one of the parties decides to break off the negotiation. Basically, we can identify two types of party arrangement: First, parties expressly stipulate the (financial) compensation of incurred cost and/or suffered lost and Secondly, parties expressly stipulate that each party will not be held liable in any way by the other party if it decided to break off the negotiation, this type of arrangements are also commonly referred to as “gentlemen’s agreements”

An example of the first type of arrangement can be found in de Combinatie v. de Staat. The parties agreed in their declaration of intent among others on the following: de Staat shall, in case it decided not to award the contract to de Combinate in spite of a concluded negotiation between them, compensate the cost incurred by de Combinatie up to the amount of f 1 million. In devising such arrangements, one has to be aware of its purpose. Was it intended only to cover the sustained cost or was it also intended to cover the damages in respect of a terminated negotiation? Another possibility may be to consider such arrangements as a penalty provision to discourage a party from terminating the negotiation at will. In any case, however, it would defeat its purpose if parties do not clearly stipulate the purport of such arrangement since it will be then subject to interpretation by the court which may result in a situation where parties are, again, left in uncertainty as to the legal consequences in respect of the termination of the negotiation.

The second type of arrangement, the “gentlemen’s agreement”, is generally regarded as a rather vague arrangement  in that it is intended to be binding but not in a legal sense. It is debatable whether such arrangement is effective to preserve parties from legal claim or that it is only to delay the legal binding force of a certain agreement made by parties , particularly in light of the effect of the principle of good faith laid down in Article 6:248 DCC  or as in Grosheide’s words ‘the fact that the parties declare expressis verbis to stay outside the domain of the law does not mean that the law is of no importance at all’.  It must also be noted in relation hereto the statement of Van Dunné as follows: ‘I would like to plead for the adoption of the English rule in order to determine whether or not a gentlemen’s agreement is legally binding. The rule sets out that, in principle a gentlemen’s agreement made in social and family relation will not give rise to legal relations, save proof to the contrary under the circumstances. On the other hand, a gentlemen’s agreement made in business or commercial province is presumed to give rise to legal relations unless it can be proved otherwise’.

It is not uncommon that parties prescribe a condition in the negotiation phase to underline the non-committal nature of the negotiation  or to delay the inception of the contract.  The same problem as mentioned above also applies here. The party who prescribe such condition must be very careful in the course of the negotiation not to assume a position (by words or conduct) which might be interpreted by the other party as having set aside the mentioned condition. Consequently, in such case, that party may not be able to call upon the condition as an excuse in terminating the negotiation. Besides, such condition under certain circumstance may be held to run counter to the principle of good faith (Article 6:248 DCC).

The first type of condition can be found in the case of Van Engen v. Mirror Group Newspapers  whereby parties agreed to cooperate in fulfilling van Engen’s plan to introduce a new morning newspaper in the Netherlands. Their negotiation was carried out in the period between 1989-1990 and a feasibility study was conducted whereby Mirror Group has made a promise to contribute to the cost of the study (indeed the court ordered Mirror to pay such contribution). As a result of the negotiation, on 16 November 1989 Mirror Group drew up a letter comprising principle terms and conditions of their agreement, among others in the following expressions:

(i) Mirror Group’s participation in the project ‘will be subject to feasibility study being carried out in a manner satisfactory to the Mirror’;
(ii) ‘it will also be subject to the feasibility study resulting in conclusions which are satisfactory to the Mirror (…). This will be decided at the Mirror’s discretion.’;
(iii) ‘all other matters will be dealt with expressly in a binding agreement to be signed by all parties after the results of the feasibility study have become known. The Mirror is not committed to enter into such an agreement.’

Subsequent to the completion of the feasibility study and the negotiation in respect of the structure of the cooperation, on 19 December 1990, Mirror Group sent a fax to Van Engen notifying that it did not longer want to proceed with the cooperation. Thereafter, Van Engen demanded compensation based on a letter dated 27 April 1990 stating that Mirror Group was willing to participate in the initial financing of the project up to the amount of 1.5 million (equal to 30% of the total required initial financing). The Court of Appeal held that Mirror Group’s declaration of willingness to participate in the initial financing could not be construed as a waiver of its stipulated right to withdraw from the project. The Netherlands Supreme Court subsequently sanctioned this decision of the Court of Appeal.

A noteworthy conclusion upon the judgment was made by A-G Hartkamp stating that the stipulated condition may, in the course of events and the circumstances, be outmoded and a claim based on such condition may be considered to be at odds with the principle of good faith.

Conditions with delaying effect can be encountered in stipulations which said ‘subject to Board approval’ or in Plas v Valburg ‘Subject to council approval’. There are two important aspects related to such conditions. First, it must be taken into consideration the extent of involvement of the approving body in the negotiation. If the approving body has been involved intensively in the negotiation or otherwise being updated regularly and timely in respect of the progress of the negotiation it must come up with sound argumentation if it decides not to extend its approval to the concluded agreement.  Secondly, the intensity of the effort exerted by the party who stipulated the condition in order to obtain the approval must be evidently sufficient.

The Legal Basis for Liability

After the decision in Plas v. Valburg  following the decision in Baris v. Riezenkamp  it is generally accepted that the basis for liability in pre-contractual relationship is good faith. However, if looked at the decision in VSH v. Shell  the Netherlands Supreme Court has made a different formulation. It refers to breaking off which is ‘niet gerechtvaardigd, dat wil zeggen onaanvaardbaar is’. This formulation could result in a different interpretation as regards the basis of pre-contractual liability, but in general such formulation is not considered as a change of course from the Netherlands Supreme Court. Probably it was the intention of the Netherlands Supreme Court to formulate it in a broader term as not to preclude other possible sources of liability in the pre-contractual phase.

The English Stance: All or Nothing Approach

The classical view of contract law as a logical corollary of the principle of freedom of contract divides two clearly distinguished relations in the contract formation: First, contractual relationship, where parties have sufficiently comprehensive and clear evidence of an agreement which render such parties legally bound to each other. Second, pre-contractual phase where parties are exposed to the market risk.

Prior to the conclusion of the contract, neither party is under any obligation to the other party aside from the obligation to omit fraud and misrepresentation. Unlike the Dutch stance, one will not encounter any duty to observe good faith in the negotiation,  even if parties have agreed on the ‘duty to carry on negotiations in good faith’ (it was dismissed on the ground that it is ‘inherently repugnant to the adversarial position of the parties when involved in negotiations’ ) or that parties to the negotiation have gone beyond the preliminary stage where an agreement is virtually at hand. On the other hand, once the contract is concluded, each party is fully bound and protected with a well-structured and well-known set of rules and remedies for breach of contract, including the right to claim damages for lost expectations.  However, there have always been some limits to this view. English courts have shown themselves to be capable of being flexible in that the courts have devised certain kinds of legal redress in ensuring justice,  for example: estoppel,  tort,  and the law of restitution which initially were based on quasi-contracts   and subsequently on unjust enrichment.

In certain cases the courts do not have to make use of the abovementioned doctrines to restore justice in respect of the negotiation phase, instead it can utilize certain techniques to find a validly formed final contract:

(i) Custom, trade usage and previous dealings of the parties.

Unclearness may be resolved by custom. For example, a contract to load coal at Grimsby ‘on the terms of the usual colliery guarantee’ was upheld on proof of the terms usually contained in such guarantees at Grimsby.  An undertaking to grant a lease of a shop ‘in prime position’ has similarly been held not to be too uncertain to be enforced since the phrase was commonly used by persons dealing with shop property, so that its meaning could be determined by expert evidence.  An option to purchase timber ‘of fair specification’ has been held by the House of Lords as sufficiently clear by reference to the previous dealings between the parties and the custom of the timber trade.

(ii) Mechanism inherent to and criteria laid down in the agreement.

The leading case in this regard has been the case of Sudbrook Trading Estate Ltd. v. Eggleton . The House of Lords have exercised a great deal of flexibility in rendering a decision on a stipulation conferring an option to a tenant to purchase the at such price as may be agreed upon by two valuers one to be nominated by the lessor and the other by the lessee and in default of such agreement by an umpire appointed by the … valuers.’ When the landlord refused to appoint a valuer the mechanism failed. Yet, The House of Lords constructed the option as an agreement to sell at a reasonable price to be determined by the valuers or on its failure to operate the court can substitute other mechanism. In Hillas and Co Ltd v. Arcos Ltd  a stipulation in determining a price for the option to buy timber by reference to an official price list was held satisfactory to straighten out the uncertainty.

(iii) Reasonableness.

Notwithstanding the attitude of the law in respect of the general principle of good faith as mentioned in Chapter 1 above, the courts have demonstrated on several occasions that a test of reasonableness may be of practical use. In Hillas and Co Ltd v. Arcos Ltd  an interpretation pursuant to the standard of reasonableness was utilized on the agreement for the sale of timber of ‘fair specification’. In other instance, the Court of Appeal held that an objective standard had been set in a clause stating that ‘hire shall be equitably decreased by an amount to be mutually agreed between the owners and charterers’.  The use of the term ‘equitably’ has been found sufficient to establish a ‘fair and reasonable’ agreement of hire since, in light of Sudbrook Trading Estate Ltd. v. Eggleton, the determination of the amount has been left to certain (subsidiary) mechanism and not subject to the future subjective determination of the parties.

(iv) Duty to resolve uncertainty.

In Pagnan S.p.A v. Feed Products Ltd  an ‘Agreement was reached on the cardinal terms of the deal: product, price, quantity, period of shipment, range of loading ports and governing contract terms.’ Despite a lack of agreement on a number of issues such as the definite loading port, it was held that the agreement was not uncertain, in that it amounted to a contract under which the seller was bound to select the port of loading.

(v) Statutory assistance.

English law has shown considerable flexibility in respect of the determination of price in the commercial context of sale of goods  or supply of services.  It must be noted, however, that the applicability of such stipulation depends on the circumstances of each particular case. Where parties have agreed that the price will be fixed by further agreement the Sale of Goods Act will not be applicable. In such case, parties have put themselves in a position blocking the possibility for the Act to proffer relief.

(vi) Severance of meaningless and self-contradictory phrases.

All the abovementioned techniques employed by the courts have basically two common effects to the agreements, that is implying terms in the agreement or provide meaning to an apparently meaningless phrases . However, there may exist certain phrases which are capable of vitiating the agreement. In Nicolene Ltd v. Simmonds  the agreement was expressed to be subject to ‘the usual conditions of acceptance’ in circumstances where there were no such conditions. The court was not able to determine the meaning of such clause and decided to ignore it because ‘It is clearly severable from the rest of the contract.’

Estoppel

Estoppel, based on the reliance model, is considered as a counterpart of the doctrine of consideration. Basically, the doctrine of estoppel provides a (equitable) relief to a negotiating party who has relied on promises/representation made by the other party. It cannot, however, be regarded as an alternative of the doctrine of consideration as a test of the enforceability of a promise as evident from the reticence of its application by the judiciary.  As Atiyah puts it ‘indeed, it is not uncommon to find judges in the same case agreeing on the result, but disagreeing as to whether the decision should be based on contract, or promissory estoppel or yet another analogous principle’,  but generally, the judiciary prefers to ground their decisions on the basis of consideration wherever possible.  A famous case of the application of estoppel is found in Crabb v. Arun District Council  which emphasizes the equity as the basis for enforcing a promise. Accordingly, this equity mitigates the stringent requirement posed on agreements in order to be enforceable. The principle supporting estoppel is expressed by Lord Denning MR as follows:

‘Short of a binding contract, if he makes a promise that he will not insist on his strict legal rights − even though that promise may be unenforceable in point of law for want of consideration or want of writing − and if he makes the promise knowing or intending that the other will act on it, and he does act on it, then again a court of equity will not allow him to go back on that promise… Short of an actual promise, if he, by his words of conduct, so behaves as to lead another to believe that he will not insist on his strict legal rights − knowing or intending that the other will act on that belief − and he does so act, that again will raise an equity in favour of the other, and it is for a court of equity to say in what way the equity may be satisfied.’

The equity as applied in Crabb v. Arun District Council is conventionally termed proprietary/equitable estoppels. Another principle often related to the principle of proprietary estoppel is the principle of promissory estoppel. Although they are both based on equity, there are fundamental differences between them, for example: proprietary estoppel is generally confined to claims related to an interest in a land, whereas promissory estoppels can arise out of any kind of claims.  Another important difference lies in the fact that unlike proprietary estoppel, promissory estoppel does not create a cause of action.  A further distinction which is important is that promissory estoppel operates in cases where there are existing legal relations between the parties. It, therefore, deals with post rather than pre-contractual relations.

In completion of this subject, it should be noted that Collins has recounted four elements indicated by the courts which may be used to establish an enforceable obligation:

(i)    The requirement of a deliberate encouragement of reliance by means of words, conduct or even inaction;
(ii)    A proof that the other party has in fact relied upon the action or inaction by acting to his detriment;
(iii)    The perception that the detrimental reliance was reasonable in all the circumstances; and
(iv)    The consideration whether it would be unfair to permit someone to go back on his first promise or action.

Tort

In the context of the ‘all or nothing’ approach in English law, the law of tort would apparently be the obvious response in the negotiation period where parties could not avail themselves of contractual remedies. However, the courts have been exercising restraint towards tortious intervention prior to contract formation. The origin of such restraint lies in the principle of freedom of contract asserting that ‘parties should stand on their own feet and rely on themselves’.

Under English law of torts the choice are between two types of tort actions, i.e.: deceit/fraud or negligence. Fraud is very difficult to prove in English law and it does not cover negligence.

A more apt alternative is that of negligence. Traditionally an action based on negligence purported only to physical injury/damage on person or property as set out in Donoghoe v. Stevenson,  a case concerning physical illness resulting from a defective product. Lord Atkin stated:

‘You must take a reasonable care to avoid act or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be − persons who are so closely and directly affected my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.’

An important policy rationale against a broader application (in cases of non-physical harm which result in pure economic loss) of the action based on negligence was set out by Lord Denning MR in Spartan Steel and Alloys Ltd v. Martin & Co Ltd.  In his view, such claim would likely to give raise to the so called floodgates problem which would impose enormous compensatory burden on the defendant from multitude of claims. It is only after the famous case of Hedley Byrne & Co Ltd. V. Heller & Partners Ltd  where the House of Lords admits an assumption of responsibility to the defendant of pure economic loss under negligent misstatement in case the claimant can produce evidence of a ‘special relationship’ of proximity with the defendant.  In Caparo Industries Plc. v. Dickman  Lord Oliver of Aylmerton provided further interpretation regarding the ‘special relationship’ of proximity in order to delineate the ordinary claims for physical loss and a limited class of claims based on negligent misstatement. He stated:

‘What can be deduced from the Hedley Byrne case, therefore, is that the necessary relationship between the maker of a statement or giver of advice (‘the adviser’) and the recipient who acts in reliance upon it (‘the advisee’) may typically be held to exist where

(1)    the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given;
(2)    the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose;
(3)    it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry, and
(4)    it is so acted upon by the advisee to his detriment.’

In practice, a claim under so called Hedley Byrne principle can only be employed in cases where no contract between the parties has subsequently ensued. On the other hand, where a contract has ensued the claimant will have a better alternative: a claim of negligent precontractual misrepresentation by virtue of Section 2(1) of the Misrepresentation Act 1967. The mentioned Section stipulates the following:

2-(1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result therof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true.

The advantage of an action based on the Act to the claimant is that a fraudulent misrepresentation from the defendant shall inevitably be inferred if he can prove to have suffered loss due to that misrepresentation. Upon producing such evidence, the burden of proof will immediately be shifted to the defendant, who must, in turn, show that he did not make the fraudulent statement. In other words, the burden of proof is lighter than that under Hedley Byrne principle.

Restitution

Prior to the discussion of the relevance of the law of restitution to the pre-contractual relationship it must be pointed out that the use of the term restitution is not based on a specific legal figure. In fact, it consists of myriads of legal claims such as action of quantum meruit or quantum valebat and actions for money had and received based on common law’s quasi contract, law of torts, remedial constructive trust, et cetera.

The important legal figure covered by the law of restitution which may provide relief to a party which finds himself in an unfair situation in the pre-contractual phase is the figure of unjust enrichment. The important case in support of the doctrine of unjust enrichment can be found in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Limited.  The case concerned the impossibility of delivering textile machinery ordered by Fibrosa, a Polish company, from Fairbairn Ltd, an English company, because the Second World War broke out. Although in this case a contract between parties was already in place, the important issue which is of great influence to the pre-contractual relationship is the pronouncement of the House of Lords as per Lord Wright:

‘It is clear that any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep. Such remedies in English law are generically different from remedies in contract or in tort, and are now recognized to fall within a third category of the common law which has been called quasi-contract or restitution.’

The acceptance of a new remedy of unjust enrichment outside the realm of traditional remedies based on tort or contract did not directly result in a change of attitude of the judiciary in respect of the pre-contractual relationship between parties. The courts are still reluctant to impose obligations to negotiating parties. The difficulty lies in the fact it is not easy to draw a line between the situation which may be categorized as an ordinary course of event where a party would not expect any compensation if the other party breaks off the negotiation (preliminary risk stage) and the situation where a party, in the believe that it would be awarded a contract, has performed work beyond mere preparation. This complexity will be illustrated by the following cases:

British Steel Corp v Cleveland Bridge & Engineering Co Ltd . This case concerned the entitlement to value for a delivery of cast-steel nodes requested by Cleveland Bridge & Engineering Co Ltd (Cleveland) for use in the construction of a building for which it had successfully tendered. Cleveland had approached British Steel. After having had some discussions as to the specifications and technical requirements, Cleveland sent a letter of intent requesting an immediate commencement of work and proposing that the contract would be in accordance with its standard form. British Steel did not agree with the proposed term and it also did not reply to Cleveland. Instead, it started the production of the nodes in the belief that at a later date it would be possible to draft an agreement with more favourable terms. Subsequently, the parties continued the negotiations on the technicalities but failed to reach a final agreement on, among others, progress payment and liability for loss arising from late delivery. The dispute began when Cleveland refused to make any payment and sent a claim for late delivery. British steel, thereupon sued for the value of the nodes on a quantum meruit.

Goff J was of the opinion that there was no contract between the parties, for although British Steel had commenced the contract work, it was only intended to expedite performance. Both parties were still in the negotiation to eventuate a final contract. Consequently, contractual analysis could not be applied for determining the case in question. Following this observation, he stated that ‘the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as has been done pursuant to that request, such an obligation sounding in quasi contract or, as we now say, in restitution.’

In contrast, the case of Regalian Properties Plc. and Another v. London Docklands Development Corporation  presented a situation where parties have not left the preliminary risk stage. In this case, Regalian brought an offer to build a residential development. It was accepted by London Docklands ‘subject to contract’. In fact the project experienced delays and at a certain point it was abandoned by London Docklands. Regalian made a claim in restitution on the basis of the authority set out in the abovementioned case of costs already incurred in relation to the proposed contract. The court rejected this claim as per Rattee J:

‘I appreciate that the English law of restitution should be flexible and capable of continuous development. (…) where, however much the parties expect a contract between them to materialise, both enter negotiations expressly (whether by use of the words “subject to contract” or otherwise) on terms that each party is free to withdraw from the negotiations at any time. Each party to such negotiations must be taken to know (as in my judgment Regalian did in the present case) that pending the conclusion of a binding contract any cost incurred by him in preparation for the intended contract will be incurred at his own risk, in the sense that he will have no recompense for those costs if no contract results.’

Consequently, if parties expressly stipulated that they would be subject to the risk of negotiation until the final contract is formed restitutionary remedy is considered inappropriate.

5. Preliminary or Collateral Agreements

Dutch Law: “Een overeenkomst heeft niet alleen de door partijen overeengekomen rechtsgevolgen, maar ook die welke, naar de aard van de overeenkomst, uit de wet, de gewoonte of de eisen van redelijkheid en billijkheid voortvloeien”

As stated in Chapter 2 under the general principle of good faith Dutch courts will not hesitate to enforce preliminary agreements. If necessary, provided that a minimum level of certainty is reached,  Article 6:248 para. 1 DCC may be used to fill in gaps by means of terms implied by law, usage or good faith.

Following a division made by Van Dunné these preliminary agreements can be divided into two sub-categories: (i) agreements which intend to bind parties to further their negotiation in order to conclude the ultimate contract and (ii) agreements which are striving to record the essential parts of parties’ agreement during the negotiation with the view to conclude the ultimate contract after having worked out the details.

Practically, both types of agreements have one thing in common, that is the obligation for the parties to continue the negotiation with due observation of the principle of good faith aiming at the conclusion of the ultimate contract. However, there is an important difference as to the basis of the obligation to continue the negotiation. As concerns the first type of preliminary agreements, also commonly termed procedural pre-contractual agreements, the mentioned obligation is contractual (indirect effect), whereas in the second type of agreements or substantive pre-contractual agreements the obligation directly emanates from the principle of good faith (direct effect).

(i) Procedural pre-contractual agreements

(a) Basic agreement or letter of intent : Generally, this kind of agreement purports that the parties shall commit themselves to continue the negotiation. Letter of intent can vary in respect of its content, i.e. it can be in the form of a brief letter stating the intention of a party to negotiate or it can, besides stating an intention to negotiate, also consist of the negotiation procedural agreement.  The consequence of such agreement is that the parties will be bound to carry on the negotiation under the duty of good faith. This duty to negotiate in good faith in Dutch law has been translated in several obligations such as obligation to uphold confidentiality, to refrain from parallel negotiation, not to break off the negotiation without legitimate reason et cetera.
In connection herewith, it must be mentioned that parties may want to provide an agreement with regard to their respective liability in case of a broken down negotiation or that they may even leave out any liability. This kind of agreement is permitted under Dutch law but if the negotiation breaks down the legal consequence will not always be the same as agreed upon between parties  since it will be assessed pursuant to the standard of good faith. Accordingly, it may result in an obligation to compensate the incurred cost and/or the lost profit.

(b) Contract to contract (pactum de contrahendo): this is in fact a regular contract . Such contract comprises provisions regarding the negotiation to conclude the final contract. The difference with the abovementioned agreement is not always clear, but generally contract to contract provides detailed provisions of the negotiation procedure. Hence, parties are contractually bound to continue the negotiation.

(ii) Substantive pre-contractual agreements

(a) ‘Trunk’ agreement (rompovereenkomst): an example of such agreement is the building contract (aannemingscontract/UAV/Uniforme Administratieve Voorwaarden) which normally is a final contract. Sometimes parties still have to fill in some minor terms to make the contract complete.

(b) Tentative agreement (voorlopige overeenkomst): this kind of agreement is commonly used to designate a final contract wanting an approval.

(c) Frame contract (raamovereenkomst): this is an agreement which may serve as a basis to continue the formation of the final contract.

In practice, Dutch doctrine and case law do not view the types of preliminary agreements as separate legal figures. Preliminary agreements are agreements in pursuance of a final contract and will be judged pursuant to the norms imposed by the principle of good faith. This view has been stated by Van Dunné as follows: ‘The Dutch courts are prepared to go to considerable lengths to construe a contract with open terms, basically a binding, final contract, if that seems justified under the circumstances of the case. It is fair to say, that the existence of a preliminary agreement of some sort, is a stepping-stone to contract.’

English law: an Aperture towards the Recognition of Preliminary Agreements

Notwithstanding the all or nothing approach of the English courts in the formation of contract, they have shown some degree of flexibility in allowing contractual force to certain kind of preliminary agreements. We will examine the courts’ decisions in a chronological manner First in Hillas and Co Ltd v. Arcos Ltd  Lord Wright had stated that ‘in strict theory, there is a contract (if there is good consideration) to negotiate.’  In Foley v. Classique Coaches Ltd  the Court of Appeal held that there is a valid petrol supply contract despite of the fact that the price was ‘to be agreed by the parties in writing and from time to time’. In this case the courts has taken into consideration that the parties had performed the contract for three years and that parties have stipulated as arbitration clause which may be of use to resolve any problem caused by an incomplete contract. It is not too long after the mentioned decisions that the court reversed its attitude towards preliminary agreements in favor of the established view in English law that ‘an agreement to agree’ cannot constitute a valid contract. In Courtney & Fairbairn Ltd. V. Tolaini Brothers (Hotels) Ltd.  Lord Diplock repudiated Lord Wright’s dictum in Hillas and Co Ltd v. Arcos Ltd by stating that ‘though an attractive theory ‘it should ‘in my view be regarded as bad law’.

Similar to Foley is the case of Didymi Corporation v. Atlantic Lines and Navigation Co. Inc   where ‘parties were in a close and continuing contractual relationship for five years and the issue concerns one relatively minor aspect of their relationship’.  The Court of Appeal held that an objective standard had been set in a clause stating that ‘hire shall be equitably decreased by an amount to be mutually agreed between the owners and charterers’.  The use of the term ‘equitably’ has been found sufficient to establish a ‘fair and reasonable’ agreement of hire since, in light of Sudbrook Trading Estate Ltd. v. Eggleton, the determination of the amount has been left to certain (subsidiary) mechanism and not subject to the future subjective determination of the parties.

Another noteworthy development in respect of preliminary agreements is the acceptance of lock-out or collateral agreement. In Walford v. Miles  the defendant had agreed to deal with the plaintiff exclusively and to terminate current negotiation between the defendant and other competing purchaser provided that the plaintiff furnished within three days a “comfort letter” from the plaintiffs’ bankers confirming that the necessary financial resources were available to complete the purchase. Lord Ackner stated that there is clearly no reason in the English contract law why a collateral agreement should not be permitted, particularly when it can be clearly identified that there are certain good commercial reasons to minimize the risk of spending time and money in preparing an offer without any commitment from the other party. Nevertheless, in Lord Ackner’s view, the agreement in question was uncertain because it does not specify for how long it is to last. This view on lock-out agreement was affirmed in the subsequent case of Pitt v. P.H.H. Asset Management Ltd. as the Court of Appeal accepted the validity of a lock-out agreement for a period of two weeks.

In light of the cases set out above we can, therefore, assume that in principle there is no obstacle to preliminary agreement provided that the basic rules of contract formation and the rules of certainty can be fulfilled. Much will depend on the attitude of the courts in considering the individual cases to find an intention to create legal relation.

To wrap up the discussion in this chapter, it is worth considering an example of a preliminary agreement which is called the Letters of Intent. Lake and Draetta define them as ‘a precontractual written instrument that reflects preliminary agreements or understandings of one or more parties to a future contract.’   They are considered as an aid to a complex and elaborate negotiation to prepare an equally complicated contract where parties can set down their wishes and record the progress of the negotiation. Especially in the light of the internalization of business which leads to transactions involving parties that are foreign to each other. Since parties may not have any idea how the (legal) consequence of their negotiation would be, it is understandable that parties involved will try to reduce the uncertainty of and to control the outcome and/or the effect of their negotiation by employing a written instrument. On the other hand, most letters of intent are drafted vaguely using equivocal terms so as to preserve a penalty free emergency exit from negotiation at any time. Here, we should note that different legal systems produce different outcomes as to the binding force of letters of intent and preliminary agreements in general; the outcome depends very much on the rules and stipulations laid down in the relevant contract law and the attitude of the relevant judiciary.

6. Pre-contractual Relationship under Indonesian Law (?) and Conclusion

Indonesian Law

Before embarking upon a discussion on the pre-contractual relationship under Indonesian law, I would like to make the following observations in respect of Indonesian contract law:

1. Indonesian contract law as part of the Indonesian Civil Code is in fact a copy of the Old Dutch Civil Code that is declared to be operative by virtue of Article I of the Transitional Provision of the Fourth Amendment of the 1945 Constitution;

2. The official language of the ICC is Dutch and there is no official translation;

3. To my knowledge, there has not been any significant and elaborate study made by Indonesian scholars in respect of pre-contractual phase;

4. The general perception in practice in respect of the pre-contractual phase, partly because of the influence from the neighbouring common law jurisdictions, tends to be in favor of an ‘all or nothing approach’ as in English law

5. The judiciary has not been very helpful in providing reference to the development of the doctrine of pre-contractual relationship because there are no structured publications on the court decisions of the subject of pre-contractual relationship, particularly that of the Indonesian Supreme Court, which could serve as basis for the discussion of the doctrine. This lack of publication could be a result of the fact that there is no dispute on the mentioned subject which is brought before the court due to the perception as mentioned in point 4 above or because parties simply do not want to start proceeding based on business considerations.

In light of the above, I would like to suggest that it is appropriate to explore the Dutch doctrine in respect of the pre-contractual relationship as a guidance for understanding and interpreting Indonesian contract law. As we have seen from the discussion of Dutch law, particularly in the Netherlands Supreme Court decision in Plas v. Valburg case,  there are two important issues established in the pre-contractual phase: that parties in negotiation have (i) a legal relationship with each other which is (ii) governed by the principle of good faith.  The key question is whether we could derive or come to a similar conclusion by examining the legal provision in the ICC.

As regard the notion of a legal relationship in the pre-contractual phase, I would like to refer to the argumentation brought forward by Van Dunné  as follows:

If we examine Article 1235 ICC  it is clearly stipulated that in an obligation to give something is involved the obligation to preserve the condition of the object until the moment of delivery. Here, the obligation lies in the realm of contractual relationship, for Article 1233 ICC  stipulates that all obligations originate from agreements or the law. Accordingly, in case of a default, a claim could be brought forward based on breach of contract. Upon further analysis, one must note that the agreed condition/quality of the object of the contract as mentioned above was already established from the moment of/during the process of negotiation,  that is, prior to the conclusion of the contract.

Further, if we consider the Usury act of 1938 , although it purports to safeguard justice in a contractual relationship, it implies that parties prior to the contract formation have to act pursuant to the standard of reasonableness (after all it has to be “aannemelijk ” that the disadvantaged party had fully foreseen the consequences of the concluded contract and such party had not acted with frivolity, inexperience or in distress.)

Conclusion

In the discussions as set out above, I believe that I have managed to explicate the principle difference of view towards pre-contractual relationship between English law (common law) and Dutch law (civil law) and, therefore, presenting an indication of an alternative approach for the Indonesian practice. Although both jurisdictions have different views towards the risks the parties are bearing in the pre-contractual phase, one can establish a concurrent effort of both jurisdictions to ensure justice between negotiating parties, say it through the interpretation of the general obligation to observe good faith in Dutch law or through inventing and employing practical solutions in English law. I would also like to add that the purpose of this report was to provide a factual constellation on how both jurisdictions function in respect of pre-contractual phase may serve as a reference for Indonesian lawyers in conducting pre-contractual negotiation with their counterpart from common law jurisdictions.

As to the attitude and development of Indonesian law with respect to the pre-contractual phase one must note that there is still much work to do, both by scholars and the judiciary to, at least, lay down some basic reference or rules regarding the pre-contractual phase and that in such endeavor they must seriously take into consideration the root of Indonesian law of obligations.