Understanding Anglo-American contract models (part 3)

16 september 2020

Businesses involved in international transactions should be aware of the distinction in common law between law and equitable principles. In particular, when drafting and reviewing remedies for a breach of contract. Parties blindly following the text of their model contract may deprive themselves of their primary right to get the very thing they bargained for.

A lack of understanding of the distinction between law and equity generally causes issues where a commercial sales contract is governed by civil law, but the nature of the contract clauses is predominantly common law or vice versa. This may occur where parties use a standardised international commercial contract and where the strongest party, located in a common or civil law jurisdiction, ‘forces’ the other party to use a contract model that is not based on principles of the same nature as the law governing the contract.

Law and equity and the relevance of understanding the distinction

Our third blog deals with the relevance of the distinction between law and equity in Anglo-American contract models. More specifically, the focus is on the ability of the courts to provide the parties to a commercial sales contract with the very thing they bargained for by ordering the promisor to specifically perform its obligations.

This is relevant for a multitude of non-monetary obligations. For example, an international retailer (buyer), located in a civil law jurisdiction, enters into a commercial sales contract with a wholesaler (seller), located in a common law jurisdiction, for the delivery of 100,000 custom-produced goods. The wholesaler refuses to deliver the goods and offers monetary compensation. The aggrieved buyer declines the offer and brings a claim to court because it has a special interest in delivery of the goods. While civil law provides the buyer with a statutory right to delivery of the goods, the common law tradition only allows for enforcement of the seller’s (contractual) delivery obligation in specific circumstances and in the absence of counter-exceptions. Put differently, the default remedy under common law is damages for a breach of contract and not to force the defaulting party to perform. Only in very specific situations, the courts are allowed to rely on the equitable remedy of enforced performance.

In Anglo-American contract models, the term equitable remedies is sometimes used to clarify the parties right to performance of their obligations. However, such a clause does not affect the discretionary powers of common law courts to order damages. Moreover, civil law courts could interpret the term equitable remedies as an invitation to apply general considerations of fairness. Hence, it is of paramount importance to have a full understanding of the distinction between law and equity when using Anglo-American contract models for cross-border transactions.