A few practical notes for contract handlers

Most lawyers would probably agree that the new Civil Code had generally brought more flexibility to business needs. On the other hand, some particular aspects are now regulated somewhat stricter when compared with the regulations as per the old “Commercial Code”. So let’s perhaps look into a few examples for each of the two categories. Note that anyone in your business dealing with contracts should be aware of these basic rules.

Form of the contract

Most contracts do not require a written form. The very few exemptions include contracts transferring ownership title to real estate, rent of an apartment or a business agency. So even a business premises lease must no longer be in writing (although this would be somewhat unusual in practice). Also note that where the contract was made in writing, its changes may be made per, for example, a telephone call or a text message or a through a “handshake” unless the written form was strictly agreed as the only possible mechanism for any contract changes. So when you are in charge of contracts of your business, always make sure that your contract was not actually inadvertently or unwillingly changed based on a quick call or an email. Where in doubt, always confirm your understanding of the deal and send it to the other party per email at least.

Weaker parties’ protection

The new law puts more emphasize on the protection of the so-called “weaker parties”. The problem is that the term itself is not defined. In most cases though, whoever deals with other party outside his or her own business field should meet the weaker party test (let’s say when you visit a barber or deal with your bank or the various utilities and telecommunication services providers). This kind of protection would also apply in other situations where a party provides another party with various types of “take or leave” conditions. The actual protection of weaker parties may have taken the form of an extended period during which a customer may rescind a contract, prohibition of excessive interest rates on late payment or prohibition of the liability caps in certain circumstances etc.

General terms and conditions (GTC)

GTC remain a very important part of business life and the new legislation does not change the concept, at least not fundamentally. However, a few new rules have been introduced. So for example, to make GTC binding and enforceable against your business partner, you would have to attach them to your offer or otherwise be able to prove that your partner or a customer was indeed made aware of them. This only would not be required if the GTC are actually contained in some common standards reflected in terms universally accepted within your business line or industry in which your partner is active.

In particular, those GTC that contain provisions that could not be reasonably anticipated or are illegible or otherwise misleading will not be enforceable unless specifically accepted by the other party. In case of conflicting GTC provided by parties, only those parts that are not inconsistent would be applied and the rest would have to be ignored – again, unless the application of this interpretation rule would be specifically excluded by the agreement of the parties.

In certain businesses, a unilateral change of the GTS is still allowed but the other party must be given the opportunity to terminate the contract without any sanction if it does not wish to accept such change (typically used with telecommunication companies or banks).

Future contracts

In a majority of cases, it is no longer required that a future contract must be in writing (an exception applies to, for example, selected real estate transactions). Also, a detailed content of the future contract must no longer be included in it – rather a basic description of the main parties’ rights and duties should now suffice. In addition, in the past, parties had to state an exact deadline within which the “hard” contract had to be executed but no specific additional request to sign the contract was required. Now, within the agreed deadline, the entitled party must first request the other party to execute the contract and if it fails to make such a formal request, it loses its right to have the contract executed. So if you deal with future contracts, make sure that you include this action item to your checklist.

Pre-contractual liability

The new law now specifically regulates this aspect of potential liability. In simple terms, it covers two scenarios.

The first scenario involves the situation where the parties are almost at the end of negotiation and are on the verge of signing the contract. One party (that initially indeed wanted to complete the deal) refuses to sign while it has no justifiable reason for this. This may lead to the other party using their right to seek damages (including coverage of legal fees).

But damages may also be requested by a party who is able to prove that the other party actually never intended to complete the transaction and only pretended its interest (for example, in order to get valuable or even confidential information or simply just to disincentive another party to close a good deal).

Thus, once you commence to negotiate the transaction, make sure that before you decide to quit the deal, you are “equipped” with sufficient reasoning that would justify this step. Also, the sooner the other party is informed, the lesser the chances of any successful damages claim.

Contractual fine

It is no longer required that the obligation to pay the contractual fine is stated in writing though it is highly advisable to insist on this approach. Also, the fine itself does not necessarily mean that it has to be stated and paid in cash (for example, a car may be taken instead). But the key conceptual change is that it is no longer required that the party actually breaches its obligation – it is now sufficient that the contract is not fulfilled and whether or not the party’s failure was caused by the breach of the contract or not is now irrelevant. Thus only the outcome matters…

Note that a court, where asked, may actually step in and decrease the amount of the fine if apparently unreasonable or unjustifiable.

Assignment of a contract

Previously rights and obligations had to be carved out of a contract and transferred separately. The new law, however, allows for an assigning of the entire contract. Nevertheless, the other contractual party’s consent is still required and where agreed as a rule, such consent must be in writing. Also note that only this part of the contract which has not yet been fulfilled may be assigned.

Rescission from a contract

Formerly, unless agreed otherwise in the contract, a party could only rescind if it first allowed the other party to rectify the breach and this rule had applied whether or not the breach was substantial. Under the new Civil Code, in case of a substantial breach, the affected party may now rescind immediately, without any warning. Note that the term “substantial” breach means a breach which is so material to the other party that it would not enter into the contract had it known that such breach would occur. But also keep in mind that this is a statutory rule that applies only if the parties are silent on this issue and that may be changed or even dis-applied by the agreement of the parties.