Khóa luận tốt nghiệp: Conditions in the law of contract: a comparative perspective and implications for VietNamese legal reform

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VIETNAM NATIONAL UNIVERSITY SCHOOL OF LAW

GRADUATION THESIS

CONDITIONS IN THE LAW OF CONTRACT:

A COMPARATIVE PERSPECTIVE AND IMPLICATIONS FOR VIETNAMESE LEGAL REFORM

Author:

NGUYEN MINH CHAU

Supervisor:

NGUYEN THI PHUONG CHAM

A thesis submitted in partial fulfillment of the requirements for the degree of Bachelor of Laws

May 2022

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I am also grateful to many friends who have supported me during my undergraduate life and this research project in particular. They are anh Tôm, chị Quanh (Vietnam National University), who have loved me unconditionally and supported me during my four-year undergraduate studies; it is em Cự (Vietnam National University), who has spent time carefully reading earlier drafts of my thesis and giving me insightful comments, and my dearest Tuấn (National University of Singapore), who has helped me access valuable resources from his school’s library and has provided mental support for me.

Finally, I would like to take the opportunity to express my heartfelt gratitude to my father for his relentless encouragement and unconditional support for my studies, to my mother for her soft and sweet care for the family, to my brother for not teasing me when I am writing this thesis, and to my sister-in-law and baby Miso for bringing joy to the family.

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1.2. RESEARCH OBJECTIVES AND QUESTIONS ... 2

1.2.1. Research Question 1: To What Extent Does Vietnamese Legal Framework Provide an Appropriate Legal Regime for Conditions? ... 3

1.2.2. Research Question 2: How Should the Regime on Conditions in Vietnam be Reformed? ... 3

1.3. RESEARCH METHODOLOGY ... 3

1.3.1. Doctrinal Research ... 3

1.3.2. Comparative Research... 4

1.4. LITERATURE REVIEW ... 5

1.4.1. Research on Conditions in Foreign Jurisdictions ... 5

1.4.2. Research on Conditions in Vietnam ... 7

1.5. THESIS STRUCTURE ... 8

CHAPTER TWO THEORETICAL ANALYSIS OF CONDITIONS IN THE LAW OF CONTRACTINTRODUCTION ... 10

2.1. CONTRACT AND ITS LEGAL EFFECT ... 10

2.1.1. Contract As A Basis Giving Rise to Obligations ... 10

2.1.2. The Concept of Legal Effect ... 12

2.1.3. Time for the Arousal of Legal Effect ... 14

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2.1.3.2. Time Agreed by the Parties ... 15

2.1.3.3. Time Imposed by the Law... 16

2.1.4. Time for the Performance of Contractual Obligations ... 17

2.1.5. Bases for the Termination of Legal Effect ... 17

2.1.5.1. Termination by the Completion of the Contract ... 18

2.1.5.2. Termination by the Parties’ Agreement ... 19

2.2.2.2. Early Modern Concepts of Conditions ... 26

2.2.3. The Significance of Conditions ... 30

2.2.4. Classification of Conditions ... 31

2.2.4.1. Suspensive Conditions - Resolutory Conditions ... 31

2.2.4.2. Express Conditions – Constructive Conditions ... 32

2.2.4.3. Promissory Conditions – Contingent Conditions ... 33

2.2.5. Subsidiary Obligations Pending the Fulfillment of the Conditions ... 34

2.2.5.1. The Obligation Not to Withdraw from the Agreement ... 34

2.2.5.2. The Obligation Not to Prevent the Occurrence of Conditions ... 36

2.2.5.3. The Obligation to Make Reasonable Efforts... 36

2.2.5.4. Legal Consequences of the Failure to Perform Subsidiary Obligations ... 37

2.2.6. Non-fulfillment of Conditions and Its Legal Consequences ... 40

2.2.6.1. Consequences for Non-fulfillment of Conditions ... 40

2.2.6.2. Mitigating the Consequences of the Non-fulfillment of Conditions 41 CHAPTER CONCLUSION ... 44

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CONDITIONS IN INTERNATIONAL CUSTOM AND IN DIFFERENT JURISDICTIONS

3.1.1.1. Introduction to PECL and DCFR ... 46

3.1.1.2. Concept of Conditions in PECL and DCFR ... 47

3.1.1.3. Interference with Conditions in PECL and DCFR ... 48

3.1.1.4. Effect of the Fulfillment of Conditions in PECL and DCFR ... 49

3.1.2. UNIDROIT Principles of International Commercial Contracts 2016 ... 51

3.1.2.1. Introduction to the UNIDROIT Principles of International Commercial Contracts 2016 ... 51

3.1.2.2. Concept of a Condition ... 51

3.1.2.3. Effect of Conditions ... 53

3.1.2.4. Interference with Conditions ... 55

3.1.2.5. Obligations Pending Fulfillment of a Condition ... 56

3.1.2.6. Restitution in Case of Fulfillment of a Resolutive Condition ... 57

3.2. CONDITIONS IN NATIONAL LEGAL SYSTEMS ... 58

3.2.1. United States’ Restatement (Second) of Contracts ... 58

3.2.1.1. Introduction to the Restatement (Second) of Contracts ... 58

3.2.1.2. Concept of a Condition ... 58

3.2.1.3. Classification of Conditions ... 59

3.2.1.4. Effects of the Non-occurrence of a Condition ... 60

3.2.2. German Civil Code ... 62

3.2.2.1. Concept of a Condition ... 62

3.2.2.2. Subsidiary Obligations before the Fulfillment of Conditions ... 63

CHAPTER CONCLUSION ... 63

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CONDITIONS IN THE CONTRACT LAW OF VIETNAM

INTRODUCTION ... 65

4.1. CONDITIONS IN THE VIETNAMESE CIVIL CODE ... 65

4.1.1. The Historical Development of The Regime on Conditions in The Vietnamese Legal Framework ... 65

4.1.2. Conceptual Framework of Conditions ... 67

4.1.2.1. Conditional Contract: Two Contrasting Approaches ... 67

4.1.2.2. Conditional Performance of Obligations: Are They Synonymous with Conditional Obligations? ... 69

4.1.3. Requirements of a Condition ... 70

4.1.4. Categorisation of Conditions ... 70

4.1.4.1. Suspensive Conditions – Resolutory Conditions ... 70

4.1.4.2. Express Conditions – Conditions Implied by Law ... 71

4.1.5. Interference with Conditions ... 71

4.2. CONDITIONS IN VIETNAMESE TRIAL PRACTICE ... 72

4.2.1. Cases Before the Advent of Precedents ... 72

4.2.1.1. Hung v. Dung and Huyen: Failure to Perform Obligations After the Occurrence of Suspensive Conditions ... 72

4.2.1.2. That v. Thoa: Effect of the Occurrence of Resolutory Conditions .. 73

4.2.1.3. Tai Nguyen LLC v. TPBank: Conditional Performance of Obligations ... 74

4.2.1.4. Xa v. Ngo: Requirements of a Condition ... 75

4.2.2. Precedent No. 14/2017/AL: When Conditions Are Not Provided in the Contract ... 77

4.2.2.1. Case Summary ... 77

4.2.2.2. Contributions of the Precedent to the Formal Expression of Conditions ... 77

4.2.2.3. Limitations of the Precedent ... 78

4.2.3. Precedent No. 39/2020/AL: Legal Consequences of the Non-occurrence of Conditions ... 79

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4.2.3.2. Contribution of the Precedent to the Effect of the Occurrence of

Suspensive Conditions ... 79

4.2.3.3. Contribution to the Assessment of the Condition Fulfillment ... 80

4.2.3.4. Limitation of the Precedent: The Theory of Voidness and Why the Precedent Should Not Void the Contract ... 80

4.3. CONDITIONS IN VIETNAMESE ARBITRATION PRACTICE ... 82

4.3.1. Contract Enforcement before the Fulfillment of Conditions ... 82

4.3.2. Contract Enforcement with the Interference with Conditions ... 83

CHAPTER CONCLUSION ... 84

CHAPTER FIVE PROPOSAL TO REFORM THE REGIME ON CONDITIONS IN THE CONTRACT LAW OF VIETNAM INTRODUCTION ... 86

5.1. REDEFINE THE CONCEPTUAL FRAMEWORK OF CONDITIONS 86 5.1.1. Refining the Definition of ‘Conditional Contract’ From a Single Approach ... 86

5.1.2. Construing ‘Conditional Obligations’ from the Provision on ‘Conditional Performance of Obligations’ ... 87

5.1.3. Elaborate on the Characteristics of a Condition ... 87

5.2. ADOPT A SUITABLE TREATMENT FOR SUBSIDIARY OBLIGATIONS BEFORE THE FULFILLMENT OF CONDITIONS ... 88

5.2.1. Supplement Other Subsidiary Obligations Pending the Fulfillment of Conditions ... 88

5.2.2. Adopt the ‘Awarding Damages’ Approach for Breach of Subsidiary Obligations ... 89

5.3. CLARIFY THE LEGAL CONSEQUENCE FOR THE OCCURRENCE OF CONDITIONS ... 89

NON-5.3.1. Short-term Solution: Explain About the Legal Consequence of The Occurrence of Conditions in Precedent No. 39/2020/AL ... 89

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Non-Consequence of the Non-occurrence of a Suspensive Condition ... 90

5.4. RECOGNISE THE RESTITUTION IN CASE OF THE OCCURRENCE OF A RESOLUTIVE CONDITION ... 91

CHAPTER CONCLUSION ... 91

CLOSING CONCLUSIONS... 92

BIBLIOGRAPHY ... 93

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LIST OF FIGURES

Figure 1- Three Possible Points for A Contract to Come into Effect ... 14

Figure 2- Time for The Performance of Obligations ... 17

Figure 3- Bases for the Termination of the Legal Effect of a Contract ... 18

Figure 4- When Is A Condition? ... 21

Figure 5- The History of Conditions in The Contract Law of Vietnam ... 67

Figure 6- The Approach to Conditional Contracts Under Article 402 ... 67

Figure 7- The Approach to Conditional Contracts Under Article 120 ... 68

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LIST OF ABBREVIATIONS

UNIDROIT International Institute for the Unification of Private Law

UNIDROIT Principles UNIDROIT Principles of International Commercial Contracts 2016

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CHAPTER ONE: INTRODUCTION

1.1. RESEARCH BACKGROUND

The contract life cycle can be outlined as follows: First, preliminary inquiries and negotiations with no legal consequences; second, a communication by one party called an offer - an act operating to create a legal power in the offeree while usually leaving the offerer with a power of revocation; third, acceptance by the offeree, resulting in what we call a contract; fourth, performance or breach; and finally, discharge.

The topic of this thesis is within the scope of the fourth head - performance or breach. Acceptance makes a contract, and it creates a bunch of legal relations. However, in these relations, we may not find an immediate duty of performance. Some significant facts, human behaviour or other events may be a condition precedent for such obligations. Therefore, a contract whose effect is dependent upon such conditions is known as a conditional contract. These days, parties to complex and high-value business transactions such as Share Purchase Agreements and Loan Agreements that involve prolonged negotiations frequently provide for the “Conditions Precedent” clause, listing conditions that must be satisfied at a certain point in time.

Widely used as it is, however, the concept of a condition is still open to debate. The scholars have remained divided on whether a conditional contract means (i) a contract has been formed, yet its performance is suspended until the condition is fulfilled or (ii) one which has not yet been constituted as a contract at all, such constitution depending upon the occurrence of an uncertain future event.1 As to its characteristics, jurisdictions seem to differ on whether a condition needs to be a future and uncertain event and to what extent can an event be considered a condition.

In Vietnam, it was not until the 1995 Civil Code that the conditional contract was recognized.2 However, the regime back then was still rudimentary and lacked

1 Martin Hogg, Obligations: Law and Language (Cambridge University Press 2017) 77.

2 The 1995 Vietnam Civil Code, Art. 134.

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provisions on several problems revolving around a conditional contract. The 2005 Civil Code made a progressive move as it stipulated the interference with conditions3

based on the principle of good faith, and this provision has undergone little change in the 2015 Civil Code. Fortunately, with the advent of the precedent in Vietnamese jurisdiction,4 especially Precedent No. 14/2017-AL and Precedent No. 39/2020-AL have begun to fill the gap in the Civil Code.

In the context where the concept of a condition has yet been unanimously affirmed, what is the appropriate concept that can be adopted in Vietnam's legal framework? Given the current Vietnam Civil Code and newly enacted precedents, is it necessary to follow other countries’ models? Seeking a suitable approach, one needs to look at international best practices and other jurisdictions. Thus, the thesis focusing

on “Conditions in the Law of Contract: A Comparative Perspective and

Implications for Vietnamese Legal Reform” aims to fill the conceptual gap of

conditional contracts and propose a suitable solution to better this regime in the Vietnamese context.

1.2. RESEARCH OBJECTIVES AND QUESTIONS

This research project set out two purposes. The first is academic: to facilitate investigation and discussion of the condition – an area of contract law that is of great importance and in equally great confusion. The second is pragmatic: to examine the effectiveness of the Vietnamese regulations on conditional contracts and to consider appropriate solutions which may improve it. To achieve those objectives, this thesis addresses the two following research questions:

3 The 2005 Civil Code, Art. 125.

4 The precedent marked its official recognition in Vietnamese jurisdiction in the 2015 Civil Code, the 2015 Procedure Code, and the Resolution No. 04/2019/NQ-HDTP. This comes from the fact that Vietnam is not an exception to the global diffusion of precedents - the signature of the common law system - into civil law

and socialist law jurisdictions. See Harlan Grant Cohen, ‘Theorizing Precedent in International Law’ in Andrea

Bianchi, Daniel Peat and Matthew Windsor (eds), Interpretation in International Law (Oxford University Press

2015).

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1.2.1. Research Question 1: To What Extent Does Vietnamese Legal Framework Provide an Appropriate Legal Regime for Conditions?

There is a growing use of conditions in contracts, especially in complex and high-value business transactions under the ‘Conditions Precedent’ clause. However, there has been little research on conditions, and conditions are often mistaken for obligations in the negotiation process. Therefore, the first research question is directed at the efficacy of Vietnamese law on conditional contracts. It examines the approach to conditions in the 2015 Civil Code of Vietnam and some follow-up precedents, compares these legal instruments to international best practices, and critically analyses the law.

1.2.2. Research Question 2: How Should the Regime on Conditions in Vietnam be Reformed?

The regime on conditions has been well-developed in western countries. However, whether their approach to conditional contracts could simply be transplanted to Vietnam - a country with a significantly different socio-cultural, legal and commercial context remains unanswered. Thus, the second question considers the suitability of other jurisdictions’ regimes on conditional contracts to the Vietnamese context and proposes a legal reform to Vietnamese regulations on conditional contracts.

5 Definition by Pearce Committee cited in Terry Hutchingson, ‘Doctrinal Research’ in Dawn Watkins

and Mandy Burton (eds), Research Methods in Law (Routledge 2013) 10.

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Thus, the doctrinal method is a two-part process because it involves both finding the law and interpreting and analysing the document or text. In the first step, the researcher is attempting to determine an ‘objective’ reality. The law can be broadly categorised as primary data into which the researcher must delve. After that, academics who are conducting doctrinal research need to clarify whether the law in question is coherent and consistent or not. At this stage, secondary sources such as academic commentary and writing are studied to provide an in-depth discussion.6 In short, a doctrinal research project can be summarised in two steps: (i) Locating and analysing primary materials and (ii) Locating and analysing background commentary. In Chapter Two and Four, doctrinal legal research methodology has been applied in order to analyse in-depth legal provisions through primary and secondary sources of law, which involves vertical and horizontal comparisons and critical analysis. Applying doctrinal research in Chapter Two can help the researcher answer the question as to what the condition is. In the meantime, employing doctrinal research in Chapter Four also helps the author to review and assess the efficacy of Vietnam’s laws on conditional contract through primary and secondary sources.

1.3.2. Comparative Research

Comparative analysis is the second research method in this study. Comparative law can be simply understood as “the comparison of the different legal systems of the world”7 , but it means more than a research method. In terms of content, it has the property of being regarded as an academic discipline that examines law from a new perspective.8

A comparative study can be categorised as (i) a macro-comparison or (ii) a micro-comparison. While the former is a complete comparison of different legal systems to learn about their legal styles, cultures, ways of thinking, and procedures,

6 Michael McConville and Wing Hong Chui (eds), Research Methods for Law (Second edition,

Edinburgh University Press 2007) 162–163.

7 Konrad Zweigert, Hein Kotz and Tony Weir, Introduction to comparative law (Oxford University

Press 1998) 2.

8 Pierre Legrand, ‘Comparative Legal Studies and Commitment to Theory’ (1995) 58 The Modern Law Review 262.

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the latter deals with specific areas of law.9 Macro-comparison begins with the presumption of difference that identifies the legal mentality of compared legal systems; in contrast, micro-comparison presumes the similarity to seek the best solutions.10 The latter method bears a resemblance to the doctrinal analysis as they both separate a set of rules from their context or purposes to study.

The thesis will employ the comparative research methodology in Chapter Three, Four, and Five. Chapter Three incorporates international practices and national legal systems on conditional contracts; thus, it will be examined from a micro-comparative perspective to assess each solution to a specific problem. Chapter Four also employs micro-comparative research methodology to compare Vietnam’s provisions on conditional contracts with international practices. In Chapter Five, to answer the question of whether it is necessary to adopt other countries’ solutions to Vietnam, the thesis will use macro-comparison to examine whether other common law models could be transplanted in Vietnam – a country with different socio-cultural, legal, and commercial contexts.

1.4. LITERATURE REVIEW

1.4.1. Research on Conditions in Foreign Jurisdictions

During the Romanian era, the research on conditions was found in Justinian’s Institute (533 AD) in which it divided obligations into three types: absolute obligations, postponed obligations, and conditional obligations. The Digest later clarified on the characteristics of these conditional obligations in disconnected passages written by Ulpian11 and Julian.12 However, these passages only presented a few specific cases without tackling other matters of conditional contracts.

From the middle of the 19th century until the first part of the 20th century, contract law was dominated by a school of thought known as classical contract law, which found its central inspiration in Christopher Columbus Langdell, Oliver

9 Zweigert, Kotz and Weir (n 7) 2.

10 Geoffrey Samuel, An Introduction to Comparative Law Theory and Method (Bloomsbury

Publishing 2014) 53–57.

11 Digest, Book 44, Sec. 7, Para. 42. 12 Digest, Book 45, Sec. 1, Para. 57.

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Wendell Holmes Jr., and Samuel Williston.13 As to the definition of a conditional contract, while Langdell (1880) insisted that a condition needed to be future as well as uncertain,14 Harriman (1901) and Williston (1908) argued that uncertainty in the minds of parties was enough.15 Following their predecessors, Costigan (1907)16 and Corbin (1919)17 presented a more comprehensive study of conditions. However, it should be noted that these studies were heavily affected by the classical contract law, which was a rigid instrument responsive to neither the actual objectives of the parties, the actual facts and circumstances of the parties’ contract, nor the dynamic character of contracts.18

In the present day, contract law has been transformed from classical to modern, and the modern contract-law reasoning is justified by social needs more than by doctrines.19 Therefore, contemporary studies on conditions are mostly based on this school of thought; however, that does not mean the viewpoints on conditions cease to diverge. UNIDROIT Drafting Committee (2010) has agreed on the concept of a condition that disregards the acts of parties as conditions. However, Melvin A. Eisenberg (2018), in her publication, devoted a chapter to express conditions20 in American law, stating that conditions can also be acts within the control of parties. Martin Hogg (2017), in his research on obligations,21 presented the ongoing debate revolving around their conditionality and contingency. However, this book, as its title may suggest, focused more on the confusion caused by languages rather than addressing the legal problem.

13 Melvin Aron Eisenberg, Foundational Principles of Contract Law (Oxford University Press 2018)

25.

14 Christopher Columbus Langdell, A Summary of the Law of Contracts (Little, Brown, 1880).

15 Edward Avery Harriman, The Law of Contracts (Little, Brown, 1901).

16 George P. Costigan Jr., ‘Conditions in Contracts’ (1907) 8 Columbia Law Review 151. 17 Arthur L. Corbin, ‘Conditions in the Law of Contract’ (1919) 28 The Yale Law Journal 739. 18 Melvin Aron Eisenberg, Foundational Principles of Contract Law (Oxford University Press 2018)

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1.4.2. Research on Conditions in Vietnam

Before 1995, no official study or research had been conducted on conditional contracts. It was not until 1995 when the Civil Code recognised the conditional contracts that follow-up studies started to emerge, i.e. Pham Cong Lac (1995).22

The 2005 Civil Code continued to recognize the conditional contracts and added more detailed provisions on the interference with conditions, leading to many more research projects. For example, Tran Thi Thu Quynh (2011), in her LLM thesis on conditional civil transactions,23 argued that unilateral acts could not be conditional, thus, she suggested excluding unilateral acts from the bases giving rise to conditional contracts. However, in my opinion, unilateral acts can also be conditional, and this will be discussed in Chapter Four of this thesis.

The provisions on conditional contracts mostly remained unchanged in the 2015 Civil Code. As to the definition of a condition, Le Thi Diem Phuong (2020), in her article, has criticized it for its ambiguity.24 However, the article only cited various concepts of the condition in different jurisdictions without stating the hypothesis. Truong Nhat Quang (2020), in his publication on the law of contract,25 provided a practitioner’s view on clauses named ‘Conditions Precedent’, which include acts by parties, the accuracy of one party’s representations or warranties, and other events that are outside the control of parties. However, despite the terminology used by the parties, not all the events referred to as ‘Conditions Precedent’ are true conditions as defined by internationally accepted standards, and Chapter Two of this thesis will discuss this problem. Do Van Dai (2020), in his book, argued that fulfilling a condition will only give rise to the existence of a contract instead of giving rise to the

22 Pham Cong Lac, ‘Ve “dieu kien” trong cac hop dong co dieu kien’ [Conditions in Conditional Contracts] (Luat hoc 1995); Pham Cong Lac, ‘Gop y cho du thao Bo luat dan su ve giao dich dan su co dieu kien’ [Recommendations for the Drafting of the Civil Code on Conditional Contracts] (Luat hoc 1995).

23 Tran Thi Thu Quynh, ‘Conditional Contracts’ (LLM thesis, Vietnam National University 2011). 24 Le Thi Diem Phuong, ‘Khai Niem Ve Dieu Kien Trong Loai Hop Dong Co Dieu Kien’ [The conception of a condition in a conditional contract] (2020) Tap chi Toa an < accessed 20 March 2022.

25 Truong Nhat Quang, Phap Luat Ve Hop Dong: Cac Van De Phap Ly Co Ban [Contract Law:

Fundamental Legal Issues] (Artbook 2020).

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contract’s effect.26 However, if this view is to be adopted, a party may withdraw their offer at any time before the condition is fulfilled, despite the other party using all reasonable efforts to bring about the fulfillment of the condition.

1.5. THESIS STRUCTURE

The thesis is divided into five chapters.

Chapter One is the introductory chapter providing the background, the objectives of the research, the research questions, the research methodology, the literature review, and a brief outline of the content of this thesis.

Following this chapter, Chapter Two outlines the theoretical framework for understanding conditions in the law of contracts. In this theoretical framework, to answer the conceptual question, I first approach the contract and then examine the condition as a contractual term, thereby providing a foundation for further research in the thesis. Moreover, this chapter also examines the historical evolution of conditions, which provides an understanding of the development of conditions.

The three following chapters concentrate on a closer analysis of the legislation in different jurisdictions as well as in Vietnam. These chapters lead to a conclusion that Vietnam requires a legal reform to better the provisions on conditions in the law of contracts.

Chapter Three investigates the provisions on conditions in international practices, i.e. UNIDROIT Principles and Principles of European Contract Law, and in national legal systems, namely The Restatement (Second) of Contracts in the United States and the German Civil Code. By studying conditional contracts in different jurisdictions, this chapter paves the way for the answer to the first research question: to what extent does the Vietnamese legal framework on conditional contracts come close to the international best practices and other well-developed legal systems?

26 Do Van Dai, Luat Hop Dong Viet Nam - Ban an va Binh luan ban an (Tap 1) [Contract Law in

Vietnam – Cases and Commentaries (Volume 1)] (Vietnam National University - Ho Chi Minh City Publishing House 2020) 260.

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Chapter Four critically reviews the substantive law on conditional contracts in Vietnam. It discusses the conception, the historical evolution, the classification, the effect, and the legal consequences of the non-occurrence of conditions. On top of that, the chapter will also provide a practical perspective by looking at the most recent precedents on conditional contracts to assess whether these precedents can fill the gap in the 2015 Civil Code. This analysis answers the first research question by arguing that the Vietnamese law on conditions has many inappropriate provisions that need to be amended.

The final chapter includes the recommendations for the reform of Vietnamese law on conditional contracts. Following previous chapters that compare the Vietnamese law with other jurisdictions to assess its appropriateness, this chapter will come to the answer to the final question: How should the regime on conditional contracts in Vietnam be reformed?

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CHAPTER TWO: THEORETICAL ANALYSIS OF CONDITIONS IN THE LAW OF CONTRACT

INTRODUCTION

This chapter aims to answer the question as to the concept of a condition by providing a theoretical framework for the condition in the law of contract. Therefore, in the first section, the chapter will approach fundamental principles of contract law to provide a foundational basis for the conceptual framework of the condition. Legal issues relating to the condition will be mentioned, including the contract and its legal effect, to later examine how a condition interacts with the contract’s legal effect. Accordingly, the chapter will examine the condition along with various issues revolving around it, including its concept, its impact on the contract’s legal effect, its history of development, its classification, and its effect of non-occurrence.

2.1. CONTRACT AND ITS LEGAL EFFECT

2.1.1. Contract As A Basis Giving Rise to Obligations

A contract is an agreement giving rise to obligations that are enforced or recognised by law.27 This proposition remains generally true, and the justifications for which will be examined below.

The agreement to be legally bound gives rise to a contract

The first requisite of a contract is that the parties should have reached an agreement. Generally speaking, an agreement is made when one party accepts an offer made by the other.28 However, an agreement is not as binding as a contract if it was made without any intention of creating legal relations. The question of whether the parties had the intention to be bound can be answered by differentiating between which promises should be made legally enforceable and which should only be considered moral obligations.

Sometimes, people exchange promises with the mutual understanding that either party may withdraw from the promise, and such promises are not legally

27 Peel E and Treitel GH, The Law of Contract (Sweet & Maxwell 2015) para. 2-001.

28 Ibid.

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enforceable. The moral principle that all promises must be kept cannot be applied in this case, as revoking a promise that both parties understood to be revocable is not immoral. For example, some promises are made based on the assumption that people would prefer to rely on social (rather than legal) dispute settlement to determine the implicit obligations of the promise. It would be surprising if the promise to have lunch with a friend the following week would require that the promise be kept at any cost. And even if this promise would impose an obligation on one person to notify the other if their plans changed, it would be surprising if the obligation to inform the other party would result in legal sanctions. That is because neither party to the relationship would want or expect the legal intervention to determine the terms of their relationship.29

In contrast, a contract will only be formed if both parties intend their agreement to create legal relations between them, that is if they intend the agreement to grant legal rights to and impose legal obligations upon each of them.30 The test of an intention to create legal relations is an objective one. It may be that the promisor never expected that the promise would give rise to any legal obligation, but if a reasonable person would consider there was an intention so to contract, then the promisor will be bound.31 The courts have also developed a number of presumptions as to the parties’ intent. For example, if an express agreement is concluded in a commercial context, it is presumed that the parties did intend to create legal relations.32

A contract gives rise to obligations

The second requisite of a contract is that it gives rise to obligations. A promise, which is legally binding, is called an obligation; and if both parties intend their agreement to create legal relations, they agree to impose legal obligations on each of them.

Therefore, from the above analysis, the contract can be understood as an agreement giving rise to obligations that are enforced or recognised by law. This conception is broadly adopted in different jurisdictions. In common law countries, for example, the United States interpreted the contract as a “total legal obligation that

29 Peter M Gerhart, Contract Law and Social Morality (Cambridge University Press 2021) 119.

30 Janet O’Sullivan and Jonathan Hilliard, The Law of Contract (Oxford University Press 2006) 47.

31 Carlill v Carbolic Smoke Ball Co (1893) EWCA Civ 1; British Airways Board v Taylor (1976) 1

All ER 65.

32 Edwards v Skyways Ltd (1964) 1 WLR 349.

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results from the parties' agreement”,33 and the classic Deluxe Black’s Law Dictionary also introduced a similar definition: “An agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law”.34 In civil law countries, the French Civil Code defined a contract as “an agreement by which one or several persons obligate themselves to one or several others to give, to do, or not to do something”35, while the Civil Code of Quebec (Canada) explained that “a contract is an agreement of wills by which one or several persons obligate themselves to one or several other persons to perform a presentation”.36 These conceptions all share the same characteristics of a contract: (i) it is the result of parties’ agreement, and (ii) it creates obligations.

2.1.2. The Concept of Legal Effect

The previous section has indicated that the contract is a source of obligations; however, not all of them can give rise to obligations, but only enforceable ones can. Its enforceability is also known as the legal effect of a contract.

The legal effect (or enforceability) of a contract is a complex issue, yet no clear-cut definition has been given to this matter. The Dictionary of Legal Jargons has interpreted the ‘legal effect of a contract’ as ‘the binding performance of obligations that contracting parties must undertake’.37 This view was also adopted by Nguyen Ngoc Dien: “A contract must be appropriately and fully performed. A legally concluded contract imposes binding obligations to contracting parties”.38 From a broader perspective, in addition to the domain of performance, the legal effect issue may involve various domains, including (i) the domain of contract formation (to determine which promise gives rise to legal obligations), (ii) the domain of interpretation (to determine what a legal obligation entails), and (iii) the domain of excuse and illegality (to determine whether an otherwise enforceable promise will be excused or deemed unenforceable.39

37 Dinh Van Thanh, Pham Cong Lac, ‘Thuat Ngu Luat Dan su’ [Civil Law Jargons] in Dictionary of

Legal Jargons (Public Security Publishing House, 1999) 65.

38 Nguyen Ngoc Dien, Giao trinh Luat Dan su II [Textbook on Civil Law II] (Vietnam National

University Ho Chi Minh City Publishing House 2018) 107.

39 Peter M Gerhart, Contract Law and Social Morality (Cambridge University Press 2021) 107.

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Looking at various legal instruments in different countries, it appears that the former view on the definition of the contractual effect has prevailed. For instance, the French Civil Code states that “Agreements lawfully entered into having the force of law for those who have made them. They may be revoked only by their mutual consent or for causes allowed by law. They must be performed in good faith”40. Russia also embraces a similar concept: “The contract shall come in force and shall become obligatory for the parties from the moment of its conclusion.”41 In Vietnam, the concept is of no difference: “From the effective date of the contract, contracting parties must mutually exercise rights and perform obligations as agreed. A contract may be amended or terminated as agreed by the parties or prescribed by law.”42 These concepts all point out the fact that the legal effect of a contract gives rise to an obligatory performance of obligations.

Why obligations should be made enforceable can be explained by moral and economic reasons. Morally speaking, it is right that promises should be kept. Promises are often made in exchange for a benefit, so when A has done what he said he would do while B withdraws his promise, it will create a state of injustice. Meanwhile, if everyone keeps their promise, it would enhance the reliance in the society, thus promoting transactions and the societal civilization. On an economic note, the exchange of promises is treated as a deliberate risk allocation device, which enables a business to shift the risk of a particular loss to someone who is better able to take the risk or avoid it; thus, keeping promises would promote the commercial transactions, thereby upholding the operation of the market economy.43

However, it is noteworthy that the effect of a contract is different from that of an obligation. The effect of a contract is what gives rise to an obligation, yet when we mention an ‘obligation’, it is not always attached to a contract. Those attached to a contract are called ‘contractual obligations’, which are a subset of ‘civil obligations’. In fact, a contract is just one of the sources giving rise to obligations, besides other judicial events giving rise to civil obligations such as unjust enrichment, tort,

40 French Civil Code, Art. 1134. 41 Russican Civil Code, Art. 425.

42 The 2015 Civil Code of Vietnam, Art. 401.2.

43 Oughton, Sourcebook on Contract Law (Cavendish Publishing 2000) 91.

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unilateral acts, etc. Therefore, the obligation should not be examined from the contractual approach but rather be analysed as a separate regime.44

2.1.3. Time for the Arousal of Legal Effect

As analysed above, the legal effect renders a contract legally binding, thus imposing obligatory performance upon contracting parties. The next question is, when does a contract incur its legal effect? Answering this question, the 2015 Civil Code of Vietnam has listed three possible points when a contract could come into effect:

2.1.3.1. Time of Conclusion of the Contract

To provide a default rule to pinpoint the time when a contract comes into force, the 2015 Civil Code of Vietnam has recognized that the time of conclusion of the contract to be simultaneous with the time when a contract comes into effect, providing that “a contract legally entered into shall take effect from the time when it is entered into unless otherwise agreed or otherwise provided by law.”45

By this provision, the Vietnam Civil Code has differentiated between two different points of time: (i) the time of conclusion of the contract and (ii) the time when the contract takes effect. This is an intriguing point as other national civil codes46 or international customs47 all automatically assume the time of the conclusion of the contract is as same as the time when a contract comes into force without

44 Vu Van Mau, Viet Nam Dan Luat Luoc Khao [Vietnamese Civil Law – Book II: Contracts and

Obligations] (Bo Quoc Gia Giao Duc Xuat Ban 1963) 241. 45 The 2015 Civil Code of Vietnam, Art. 401.1.

46 Including French Civil Code, German Civil Code, Russian Civil Code, and Japanese Civil Code. 47 Including the 2016 UNIDROIT Principles of International Commercial Contracts.

Three possible points for a contract

to come into effect

Time of conclusion of the contractTime agreed by the

Suspensive conditionsTime imposed by the

Figure 1- Three Possible Points for A Contract to Come into Effect

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elaborating further on the effect of the contract. In Vietnam, to determine the time of the contract conclusion, one must examine the means through which parties expressed their intentions. For example, if the parties have agreed that silence shall constitute an acceptance within a time limit, the contract shall also be deemed to be entered into when such time limit has expired; if parties choose an oral contract, the contract is entered into when the parties have reached agreement on the contents of the contract; if parties agree on a written contract, it is then entered into when the last party signs the contract or by other forms of written acceptance.48

Providing a default rule as to the time when a contract comes into force like this can fill the gap where parties have yet to agree on the time for the legal effect of the contract. On top of that, this provision is also compatible with other jurisdictions and international practices at the time when a contract takes effect.

2.1.3.2. Time Agreed by the Parties

In principle, a contract shall take effect from the time it is entered into; nevertheless, parties can negotiate to set another point that will give rise to the effect of the contract.49 This provision is based on the freedom of contract principle: parties are free to set out the contents of the contract, including the time when the contract shall take effect.

In practice, the right to choose a time from which the contractual effect arises is frequently used. For instance, the terms and conditions of the “Healthier 100” product provided by AIA Insurance Vietnam LLC set out the effective date of the contract as follows: “if the application is accepted, the effective date of the contract shall be the date when customers complete the application form and pay an initial premium in full.”50 In addition to the insurance contract, parties to the conditional contract also agree on the point when the contract shall come into force. This is because parties are free to decide when a contract shall take effect as well as what conditions would make a contract become effective. A contract containing such conditions is called a conditional contract. As will be elaborated further in the following sections, in conditional contracts, parties would agree upon certain events

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that shall give rise to the legal effect of the contract. The time when this contract shall take effect can only be agreed by the parties – a distinctive feature from two other points when other contracts can also come into force.

2.1.3.3. Time Imposed by the Law

As to certain contracts that emphasize the formality, the time when they come into force shall be the time when all formal requirements are satisfied. Such requirements generally consist of writing, sometimes with additional requirements, e.g. those of authentication by a notary.

Such a requirement may serve one or more of several purposes. First, it promotes certainty, as it is usually relatively easy to tell whether the required form has been used. A requirement of writing also simplifies the problem of ascertaining the contents of the agreement. Secondly, form has a cautionary effect: a person may hesitate longer before executing a deed than he would before making an oral promise. Thirdly, the form has a protective function: it is used to protect the weaker party to a contractual relationship by ensuring that he is provided with a written record of the terms of the contract.51

In Vietnam, high-value and complex transactions are often contracts that will only come into effect if their formal requirements are met. For example, the requirement for contracts for gifts of property sets out that: “A gift of immoveable property must be recorded in writing and notarized or certified, and must be registered if the law on an immoveable property requires registration of ownership.”52

51 Edwin Peel and GH Treitel, The Law of Contract. (Sweet & Maxwell 2015) para. 5-002.

52 The 2015 Civil Code of Vietnam, Art. 459.1.

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2.1.4. Time for the Performance of Contractual Obligations

The previous section has examined the legal effect of a contract, which gives rise to the duty of performance that contracting parties must undertake. The next question is: when will this duty of performance fall due? Scholars addressed this question by distinguishing three circumstances relating to whether, and if so when, the duty of performance under an obligation will fall due, these circumstances being: (i) pure obligation (an obligation, existing at present, is also due for performance at present, (ii) future obligation (an obligation, existing at present, will not fall due for performance until some certain point in the future, and (iii) conditional obligation (an obligation, existing at present, will not give rise to a duty of performance unless some uncertain future event occurs).53

2.1.5. Bases for the Termination of Legal Effect

As analysed above, there are three points of time that shall give rise to the legal effect of a contract, among which the suspensive condition falls into the realm of the time agreed by the parties.54 The next question is, when does a contract terminate its legal effect (or when does a contract comes to an end)? Answering this question would help clarify the legal basis for the resolutive condition that will be analysed later in section 2.2.4. The bases for the contract termination listed in the 2015 Civil Code of Vietnam55 could be classified into three groups:

53 Hogg (n 1) 75.

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2.1.5.1. Termination by the Completion of the Contract

To assess whether the contract has been completed, the principle of substantial performance has prevailed over perfect performance. Substantial performance, stemming from the common law system, is used to mean that it is unnecessary to perform to the minute detail of the contract.56 The formulation of this principle arises from the fact that parties can rarely perform their obligations perfectly, and the law needs to recognise that fact.57 This approach renders contract performance more feasible, and at the same time ensure that the principle of good faith is preserved. When it comes to determine whether the contract has been substantially performed, Robert W. Emerson and John W. Hardwick suggest that it is important to consider contractual provisions, and, if they have been performed, the contract would be considered to have been substantially performed.58 Looking from a different angle, A. James Barnes, Terry Morehead Dworkin, and Eric L. Richards observes that some types of contractual obligations are more difficult to be performed perfectly because of their nature and the limit of human capabilities, i.e. construction contracts, contracts of a personal or professional nature, and merger and acquisition cases. However, the doctrine of substantial performance will only come to play when the party has sincerely attempted to perform its obligations perfectly, yet due to its lack

56 Robert W Emerson, Business Law (Simon and Schuster 2016) 122.

57 Lawrence S Clark and Peter D Kinder, Law and Business (McGraw-Hill 1988) 254.

58 Emerson (n 56) 122. Three bases for the termination of legal effect

Termination by the completion of the contractTermination by the parties'

Resolutive conditionsTermination by breach

Termination by the law

Figure 3- Bases for the Termination of the Legal Effect of a Contract

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of ability or some external factors, the performance of contract leaves some minor defects.59

2.1.5.2. Termination by the Parties’ Agreement

The contract rests on the agreement of the parties: as it is their agreement which binds them, so by their agreement they may be terminated.60 The termination of a contract should be distinguished from the cancellation and the voidness of contract. While the former retains the legal effect of the contract until it is terminated, the other two set aside the contract from the beginning.61 Thus, when a contract is either cancelled or void, the parties are reverted to their original state as if there was no contractual relationship.

This is the case with resolutive conditions in which parties agree on a basis (the occurrence of resolutive conditions) that shall make an effective contract come to an end. In such cases, the contract only loses its legal effect from the point when the resolutive condition occurs, and the parties need not to return what they have received.

2.1.5.3. Termination by Breach

In a contractual relationship, if one party fails to perform the principal obligations of the contract or commits a fundamental breach of contract, the contract is commonly referred to as being ‘discharged by the breach.’ Although convenient, the expression is not entirely accurate. A breach does not automatically result in a discharge;62 it may, however, explain the innocent party's decision to see itself as absolved or discharged from further contract performance. It does not automatically discharge the innocent party's obligation since that party can choose to treat the contract as continuing or to regard itself as released as a result of the other party's violation.63 The termination of the contract in such a case is considered as a sanction for the breach of contract by the other party.

61 Vu Van Mau, Viet Nam Dan Luat Luoc Khao [Vietnamese Civil Law – Book II: Contracts and

Obligations] (Bo Quoc Gia Giao Duc Xuat Ban 1963) 245. 62 Beatson, Burrows and Cartwright (n 60) 508. 63 ibid.

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2.2. CONDITIONS IN THE LAW OF CONTRACT 2.2.1. Concept of a Condition

Discussions of this topic are made difficult by the fact that in the law of contract, the word ‘condition’ bears many senses: it is “a chameleon-like word which takes on its meaning from its surroundings”.64 The word ‘condition’ has been used variably, including: as a contract term; as a necessary component element in the constitution of an obligation; as a future event whose occurrence is uncertain; and as a pre-requisite for the occurrence of something else. The latter two senses will be discussed in this chapter.

To answer the conceptual question as to what a condition is, there are three sub-questions we should ask: (i) What can be made conditional?, (ii) When is a condition? and (iii) What events qualify as conditions while the others do not?

What can be made conditional?

A glance at the international practices and some jurisdictions shows variable results as to whether only obligations or contracts or both of them can be made conditional. While PECL only provides for conditional obligations,65 the German Civil Code recognises conditional transactions,66 DCFR ambiguously implies the possibility of both conditional obligations and conditional contracts,67 the UNIDROIT embraces both of them.68 From the author’s observation, both contracts and obligations can be made conditional, and a distinction between them should be made.

Conditional obligation and conditional contracts are two distinctive matters. A contractual obligation can be made conditional by suspending its performance until an uncertain event occurs; meanwhile, the contract giving rise to that obligation may have come into effect and has given rise to other unconditional obligations. On the other hand, the contract made conditional only refers to its suspended contractual effect, and it shall not give rise to any contractual obligation until the condition is met.

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The answer to this question, in fact, depends on the parties, on what they would have intended it they had anticipated subsequent events, and on what the interests of society require. However, in an attempt to set a default rule for the existence of a condition, scholars were divided on two possibilities:

(1) A condition exists after there has been an obligation, but under which performance will not fall due unless the condition occurs; or

(2) A condition exists before an obligation has been formed, and such formation depending on the occurrencee of the condition

Figure 4- When Is A Condition?

Those who support the second viewpoint suggest that an obligation is essentially no more than a duty of performance, and to say that the duty of performance is suspended is synonymous with saying that the undertaking of the obligation is suspended.69 In Vietnam, Do Van Dai submitted that the occurrence of a condition should give rise to a contract’s existence rather than to the effect of the contract, as the Supreme People’s Court argued.70 However, if this view is to be adopted, the equilibrium between parties will not be achieved as the offeror can withdraw from the agreement any time before the fulfillment of the condition, despite the other party having performed substantially to facilitate the occurrence of the condition.

69 Martin Hogg (n 1) 79.

70 Do Van Dai, Luat Hop Dong Viet Nam - Ban an va Binh luan ban an (Tap 1) [Contract Law in

Vietnam – Cases and Commentaries (Volume 1)] (Vietnam National University - Ho Chi Minh City Publishing House 2020) 260.

Contractual Obligation

Duty of Perfomance

The Existence of The Contract

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Therefore, it would be more reasonable to side with the view that there is already an existing obligation, and the occurrence of a condition will give rise to the duty of performance under that obligation. To recognize that there is a contractual tie between parties is of great significance as it would impose subsidiary obligations (i.e. one not to withdraw, not to prevent the occurrence of the condition, or to make reasonable efforts to bring it about) on parties when the fulfillment of the condition is still pending (as will be discussed in section 2.2.5). This approach is compatible with the theory on the legal effect of contracts as mentioned above: the point of time when a contract comes into effect needs not to be simultaneous with when the parties enter into the contract. At the same time, it ensures the rights of parties before the condition is fulfilled and goes hand in hand with the principle of good faith.

The effect of fulfilling a condition is also a criterion to differentiate conditions from obligations that a party must perform first. While the breach of an obligation may trigger various remedies (i.e., claim for damages, termination, cancellation, etc.), the non-fulfillment of conditions is treated in a distinctive way by either the ‘fictional fulfillment’ approach or by awarding damages in case the non-fulfillment was caused by the party’s bad faith (as will be discussed in section 2.2.5.4).

What events qualify as conditions?

An uncertain event: In order to be qualified as a condition, an event needs to

be uncertain. This is the decisive factor in differentiating conditional obligations from ‘pure’ and ‘future’ obligations.71 Thus, the mere passage of time, as to which there is no uncertainty, is not a condition, and duty is unconditional if nothing but the passage of time is necessary to give rise to a duty of performance.

A condition needs to be an uncertain event, but uncertain to what extent?

Whether a party will do what it said it would do or whether the event beyond the

parties’ control will occur both relate to uncertainties in the future. However, some opinions suggest treating a promised performance as not strictly an uncertain matter, while others regard both events that are within or outside the parties’ control as conditions. A typical example of the former view can be found in UNIDROIT Chapter on Conditions, whereas the latter is inspired by the Restatement (Second) of Contract in the US.

71 See 2.2.1.

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On the one hand, American law and English law adopt a broader scope of conditions. American law includes acts of parties, acts of the third party, and natural events as conditions. English law adopts a similar stance but classifies conditions as either ‘promissory’ or ‘contingent’. Promissory conditions are those in which an obligation of A to do something is conditional upon the performance by B (which is analogous to acts of parties as in the American law); in contrast, contingent conditions relate to an uncertain event that is not the performance of the parties, but to some event external to their performances72 (i.e. acts of the third party or natural events in the American law)

On the other hand, UNIDROIT Drafting Committee limits the scope of conditions to only events that are outside the control of parties. The group illustrated the consequences of adopting too broad a definition by an example given by R. Goode.73 There was a case in England of an FOB sales contract requiring the buyer to give the seller notice of appropriation so that the seller could make arrangements for loading the goods on board the vessel. The buyer failed to give notice of appropriation, and the seller did not deliver the goods but nevertheless tried to recover the price. If the provision on the interference with conditions was applied in this case, the buyer failing to give such notice would make the condition be deemed to be fulfilled under PECL;74 thus, the buyer would have to pay for the goods even though the goods had not been delivered.

However, the problem disturbing the UNIDROIT Drafting Committee was related to the interference of conditions rather than a conceptual problem. The example that Goode raised could be addressed by modifying the provisions on interference with conditions rather than by limiting the conceptual scope. In fact, this ‘fictional fulfillment’ approach towards the interference with conditions has been criticised for its punitive element, which is unsuitable for contractual relations (as will

72 Peel E and Treitel GH, The Law of Contract (Sweet & Maxwell 2015) para. 2-103.

73 Working Group for the Preparation of PICC, Summary Records of the 1st session (UNIDROIT 2006)

Misc.26, para. 222.

74 PECL, Art. 16:102

“(1) If fulfilment of a condition is prevented by a party, contrary to duties of good faith and fair dealing or co-operation, and if fulfilment would have operated to that party's disadvantage, the condition is deemed to be fulfilled.

(2) If fulfilment of a condition is brought about by a party, contrary to duties of good faith and fair dealing or co-operation, and if fulfilment operates to that party's advantage, the condition is deemed not to be fulfilled.”

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be discussed further in section 2.2.5.4). Therefore, it would be more appropriate to find an alternative to this approach rather than modify a firmly rooted definition.

The approach adopted in the American law appears to be more reasonable for

two following reasons. First, it is adaptive to the real-life demand of society. Complex

and high-value transactions often incorporate the ‘Conditions Precedents’ clause, which includes various acts such as acts of parties as well as acts of the third party or natural events. Requiring businesses to radically transform their firmly rooted ‘Conditions Precedents’ clause to only acts that are outside the parties’ control would

be a risky move for no significant meaning. Second, it fits with the intention of parties

when using conditions rather than promises because neither party is willing to make

a commitment that the relevant state of affairs will or will not occur. Third, the degree

of uncertainty, from the author’s perspective, needs not strictly exclude the performance of parties. This is because the party merely undertake to use reasonable efforts to bring about the event without absolutely promising that his attempt will succeed, and there is uncertainty as to the success of his efforts. By suggesting that acts by parties are, in fact, obligations that the parties have agreed to fulfil before the formal conclusion of the transaction,75 UNIDROIT has gone against the purpose of the parties. An obligation is a commitment whose breach would lead to a sanction; in contrast, parties often opt for conditions because they are not commitments, thus incurring no sanction even if the condition is not fulfilled.

A future event – an unnecessary component: While the uncertainty of the

event is codified in most of the civil codes and international principles, whether an event needs to take place in the future has yet to be answered. On the one hand, the European view recognizes ‘future’ as a characteristic of a condition, which is codified in the French Civil Code76 and in the PECL.77 In contrast, the US adopted a different definition to only include the ‘uncertainty’ while excluding the ‘future’ characteristic.

77 Principles of European Contract Law, Art. 16:101: “A contractual obligation may be made

conditional upon the occurrence of an uncertain future event […]”.

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This point of view embodies the laws on conditions in Louisiana78, California,79 and South Dakota.80

Although it is common that a condition often refers to some future events, the author side with the view that an event needs not, in order to be a condition, be one that is to occur after the making of the contract. An event may relate to the present or even to the past, as is the case where a marine policy insures against a loss that may already have occurred. In fact, the significance of excluding the ‘future’ characteristic has yet to be proven; meanwhile, there is a practical demand to recognise that an event occurring in the past or at present can also be a condition (as in the case of insurance). Furthermore, the exclusion of this feature does not infringe on the fundamental principles of contract law and even embodies the principle of freedom of contract. Therefore, it is unnecessary to include the ‘future’ characteristic as a component of a condition.

To summarize, a condition is an uncertain event upon which an obligation is conditional so that the obligation takes effect only if the event occurs or comes to an end if the event occurs. It is noticeable that the author chooses the phrase “the

obligation takes effect” rather than “the obligation arises” to imply that an obligation has already existed, yet its legal effect (the binding performance of the obligation) is

suspended until a condition is fulfilled. Thus, a conditional contract is an agreement that is expressed to be subject to the occurrence of some event that is not certain to occur.

2.2.2. History of Conditions 2.2.2.1. Roman Origins

The classification between pure, future, and conditional obligations (as mentioned above) stems from Roman law.

Justinian’s Institutes, in discussing ‘stipulationes’ (obligations), categorising

them as being absolute, postponed, or conditional (which are now equivalent to the

78 Louisiana Civil Code, Art. 1767: “A conditional obligation is one dependent on an uncertain event”.

79 California Civil Code, Art. 1434: “An obligation is conditional, when the rights or duties of any

party thereto depend upon the occurrence of an uncertain event.”

80 South Dakota Codified Laws, Sec. 20-2-1: “An obligation is conditional when the rights or duties

of any party thereto depend upon the occurrence of an uncertain event”.

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pure, future, and conditional obligations).81 An obligation can be made conditional by making it dependent on the happening of some uncertain events, and the result is that the obligation is only triggered if the event occurs or does not occur.82

Digest, as one would expect, offered a more detailed treatment of conditional

obligations. Answering the question as to the legal position of each party before the fulfillment of conditions, a passage from Ulpian suggests that, in the case of a conditional stipulation (obligation), the stipulator is “a creditor even while the condition is pending”.83 This approach supports the hypothesis I identified earlier: a conditional obligation means an obligation exists, but under which performance is conditional. The problem relating to the impossibility of fulfilling a condition is also

mentioned in Digest: If a conditional stipulator died before fulfulling the condition,

the stipulation bound the heir.84 However, in modern law, this problem would be addressed within the domain of the contract frustration rather than touching upon the

conditionality domain. Another issue brought up in the Digest was the interference

with conditions: what if a party prevents the condition from happening? The solution back then was quite simple: the stipulator “is nonetheless bound”.85

Although Roman law does not expressly answer the question relating to when a condition exists, it can be inferred that Roman texts support the hypothesis that a condition exists after the constitution of obligations and before the duty of performance. As to the uncertainty of a condition, despite lacking a detailed analysis,

the Institutes embrace a definition that is close to the modern conception of the

condition: an uncertain event.

2.2.2.2. Early Modern Concepts of Conditions

The Roman law was then reproduced in the early modern law of Scotland. In

Stair’s Institutions of the Law of Scotland (1681), he expressed his view on conditional obligations: “Conditional Obligations are such as to depend upon a Conditional, and so are but Obligations in hope, till the condition be existent; but Obligations to a day, are such as are presently binding, but the effect or execution thereof is suspended to a day, betwixt which there is this main difference, that in

81 Institutes 3.15.2,4.

82 Institutes 3.15.4.

83 Digest, Book 44.7.42.

84 Digest, Book 45.1.57.

85 Digest, Book 45.1.85.7.

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conditional Obligations, the condition must necessarily be uncertain, either as being in the power of mans will, or an accidental”.86 It should be noted that a conditional

obligation is “but a hope” until the condition is satisfied, suggesting that there exists

no obligation until the fulfillment of the condition. If this approach is to be followed, an offer can also be called a conditional obligation since the fulfillment of the

condition is subject to the act of the offeree, and this is exactly what Stair offers: “An offer hath the like implyed condition of the other parties acceptance, and in that it differs from an absolute Promise; so that if the acceptance be not adhibit presently, or within the time exprest in the Offer; in which the other party hath Liberty to accept; There ariseth no Obligation”.87 Discussion of offer within the legal framework of conditions conveys the view that the fulfillment of a condition only gives rise to the obligation’s existence rather than a duty to perform that obligation. However, in later texts, he elaborates on other types of conditions that impact only the performance of an already formed obligation.88 It should be noted that Stair’s conceptions mentioned here are of suspensive conditions rather than resolutory ones.

At around the 17th century, there was little evidence of research on conditions in English law. One short description of conditions is recorded in John Rastell’s

Terms de la Ley (or Certain Difficult and Obscure Words and Terms of the Common Lawes and Statutes of this Realm): “[a condition is] a restraint or bridle annexed to a thing, so that by the non performance or not doing of it, the party to the condition shall receive prejudice and loss, and by the performance and doing of it, commodity and advantage”.89 He was probably the pioneer of what was to become a

classification of conditions into suspensive and resolutory ones (as will be discussed in section 2.2.4). However, his discussion was not put in the context of general contract law but rather in the context of property, with conditions precedent (also

known as suspensive conditions) being “going before the estate, and […] executed” and conditions subsequent (also known as resolutory conditions) being “following after the estate, and executory”. This observation was later reproduced in Bacon’s The Elements of the Common Lawes of England (1630).

86 James Dalrymple Stair, The Institutions of the Law of Scotland (1681) I.iii.7.

87 Ibid, I.iii.8.

88 Ibid, I.x.

89 John Rastell, Les Termes de La Ley, Or, Certain Difficult and Obscure Words and Terms of the

Common Lawes and Statutes of This Realm Now in Use, Expounded and Explained (J Streater 1659).

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In the 18th century, Commentaries on the Laws of England (1765–9) by

Blackstone adopted a similar stance to that of Rastell and Bacon as both analyzed conditions within the context of estates.90 Additionally, Blackstone examined conditions in correlation with the conditional bond, with a bond being known as a formal document which stated that a debtor was to pay an amount of money to the creditor if the debtor fails to fulfill a performance.91 Such conditional bonds had grown as an informal way of promoting the performance of obligations at the time when the limits of the common law proceedings made it difficult to enforce obligations directly; therefore, a conditional bond was preferred since a breach of conditions offered an easy remedy.

Besides contemporary scholars, Lord Mansfield also set out a conception of

conditionality in Kingston v. Preston (1773),92 stating that the condition precedent was an important undertaking that had to be fulfilled before the other party could be requested to perform its performance. What is new in this type of definition is that ‘condition precedent’ is understood as B’s performance is conditional upon A’s first performing its obligations. This approach seems to diverge from Roman and Scottish concepts of conditions, in which the condition is interpreted as an uncertain future event rather than a prior performance of the other party’s performance. One way to reconcile such divergence is, from the author’s perspective, to consider the performance of a contracting party as an uncertain event (the uncertainty as to whether the party would do what it has promised).

Erskine, in his Institute of the Law of Scotland (1773), characterized conditions

as a means to suspend not only the duty of performance but also ‘the obligation itself’:

“A conditional obligation, or an obligation granted under a condition the existence of which is uncertain, has no obligatory force till the condition be purified; because it is in that event only that the party declares his intention to be bound, and consequently no proper debt arises against him till it actually exist: so that the condition of an uncertain event suspends not only the execution of the obligation, but the obligation itself.”93 However, it differs from Stair’s view since the party cannot

withdraw from the agreement once it is conditionally bound, despite no obligation

90 William Blackstone, Commentaries on the Laws of England (1765-1769), Vol. 2, ch. 10.

91 Ibid, Vol. 2, appendix no. 3.

92 Kingston v Preston (1773) 2 Doug KB 689.

93 John Erskine, An Institute of the Law of Scotland (1773) para. 24.

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existing: “Such obligation is therefore said in the Roman law to create only the hope of a debt. Yet the granter is in so far obliged that he hath no right to revoke or withdraw that hope from the creditor which he had once given him.”94 It can be said

the Erskine’s description of conditions ranges in the middle between the ‘no obligation existed’ point and the ‘existed obligation yet the performance of which is suspended’ point. It is almost like an offer in German law, in other words, a juridical act that is not yet a binding contract but which cannot be withdrawn by the maker of it.95

In the 19th century, with the publication of Pothier’s A Treatise on the Law of Obligations, or Contracts (1806), the civilian conception of conditionality within the

context of contract law was first introduced. Pothier divided obligations into ‘pure and simple’ or ‘conditional’,96 with conditional obligations being explained as “those which are suspended by a condition under which they were contracted, and which is not yet accomplished”. Pothier even took a leap to classify conditions as being either

suspensive or resolutory (also known as conditions precedent and conditions subsequent in English law), and these concepts are quite close to that of modern law.

While Blackstone’s Commentaries on the Laws of England only restricted the

discussion of conditions in the realm of estates, and Mansfield only focused on the order of performance justifying the suspension of performance on the other side, then Pothier built a civilian concept of an obligation to perform, conditional upon some

uncertain events. Following Pothier, Colebrooke’s Treatise on Obligations and Contracts (1818) adopted a similar classification and concept, with conditional obligations being “made to depend on an uncertain event”, and is classified into

either ‘precedent and suspensive’ or ‘subsequent and resolutory’.97

From the historical perspective, it can be seen that for most of the period, the condition is defined as an uncertain event giving rise to the duty of performance (or sometimes to the existence of the obligation itself). Yet it pointed to the fact that conditions played a pivotal role in the pre-modern world as well as in the early modern societies, and they would continue to do so in the modern world.

94 Ibid.

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2.2.3. The Significance of Conditions

The first reason why parties may prefer conditions to promises is that neither party is willing to commit in case they are unsure about whether relevant events will or will not happen. The normal sanction for breach of a promise is contractual remedies; meanwhile, the normal sanction for the nonfulfillment of a condition shall not apply those remedies, because neither party has promised that the condition will be fulfilled.98 Share Purchase Agreements, and Loan Agreements are typical examples demonstrating the intention of parties to be legally bound only if certain events occur. Such events are referred to as “Conditions Precedent”, usually including the receipt of all necessary written consents from the Board of Members/Partners, the permit of state authority, the admittance to trading on a stock exchange, and the submission of a tax certificate evidencing that no taxes are due by the party concerned, etc. In such cases, the buyer/the creditor does not intend to be bound by the contract unless the business situation of the targeted company has been confirmed to be in good condition; thus, a condition act as an effective means to prevent the buyer/creditor’s purchase duty from coming into existence.

The second reason why conditions are used can be explained by their allocation purpose. For example, the insurance company wants the payment of premiums. One way to secure this desired item is to get a promise to pay premiums from the insured. Failure to pay will result in legal sanctions. However, in reality, insurance contracts rarely include such a promise; the payment of premiums is secured in a more effective way than that. The insurance company does its own duty to pay the insurance amount conditional upon the payment of premiums. Here is no express promise of the insured creating a duty to pay premiums, but there is an express condition precedent to his right to recover on the policy. Payment by the insured is obtained not by holding a lawsuit over him but by hanging before him a purse of money to be reached only by climbing the ladder of premiums.99 Instead of entering into bilateral contracts, which breach would lead to sanctions, and the insurance company would have to go through various steps in pursuit of a lawsuit to force the insured to perform its obligation, using conditional contracts appears to be a more

98 Merritt Hill Vineyards, Inc. v. Windy Heights Vineyard, Inc. (1984) 460 N.E.2d 1077.

99 Arthur L Corbin, ‘Conditions in the Law of Contract’ (1919) 28 The Yale Law Journal 739, 746.

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