Indonesia: Pre - Contractual Liability On Quasi-Contracts: A Comparative Study

Last Updated: 28 February 2016
Article by Jono Yeo

INTRODUCTION

In a common law system, the principles of certainty and predictability are fundamental elements in concluding a contract. Contracting parties are deemed to have the ability to assess the possible risks relating to transactions, and provide sufficient terms in a contract to regulate their relationships and allocation of risk.

In comparison, a contract under civilian tradition is made not only on the terms agreed by the parties, but is also subject to certain principles and governing laws of the contract. Civilian courts often employ doctrines and applicable codified rules to interpret, integrate or even rectify the contract so as to ensure justice for the contracting parties. In other words, a contract executed under civil law is subject to interference by the governing law (e.g. it shall be interpreted in the light of implied principles of good faith), while a common law contract excludes any interference. Unlike civil law, common law judges tend not to interfere with the contracting parties' agreed terms, but their role is only to enforce what the parties have agreed on, instead of creating justice on a different basis. Hence, the divergent philosophical thinking of both legal systems has been a major influence and serves as a basis for their formation of a contract respectively.

LEGAL CHARACTERISTIC OF QUASI-CONTRACTS

A contract, under common and civil law, requires a meeting of minds between contracting parties. In other words, it contains two essential elements, namely (i) an offer from an offeror and (ii) an acceptance of the offer from an offeree. However, both legal systems remain split on various features of contract law. One of their fundamental divergences is in their approach to the conclusion of a definite contract. Common law tends to place greater emphasis on when a contract starts to have legal effects by establishing what point in time a valid contract was born. As a result, it focuses on the analysis of three essential elements in a contract, namely: offer, acceptance and consideration. On the contrary, a contract, under civil law, stresses the presence of the contracting parties' free will by addressing four essential features for creating a contract, namely (i) consent, (ii) capacity, (iii) an object forming the subject matter, and (iv) a lawful cause. During the process of forming a contract, there is often a protracted negotiation period in which the parties negotiate the contract's terms, especially for large-scale or complex transactions. Before concluding a contract, negotiating parties may sometimes need to invest their time and efforts, including providing necessary information, expert opinions, legal counsel fees, commencing preliminary work or receiving offers from their sub-contractors. This phase is recognised as a 'quasi-contract' and the liability arising during this period is usually regarded as a 'precontractual liability'. Unlike a contract, which the obligation is based upon a voluntarily consent, a quasi-contract is not a contract. Instead, it is an obligation that the law creates in the absence of any contract. In other words, a quasicontract is a situation in which there is an obligation, as if there was a contract, although the technical requirements of a contract, in fact, have not been fulfilled (e.g. the consent of contracting parties).

It is widely recognised that the legal obligations may arise out of, either (i) the will of the contracting parties / contract or voluntary obligations or (ii) imposed by operation of law or involuntary obligations. Non-performance of contractual obligations under a valid contract may result in breach of contract whilst the violation of legal obligations imposed by the mandatory law may trigger tort or delict liability. In respect of the pre-contractual phase, it is difficult to determine the nature of legal liability and the applicable law towards the pre-contractual phase since it is the crux of the issue whether the pre-contractual liability may arise out of a contract or law. Theoretically, there are a number of possible characteristics of the pre-contractual liability. Some jurisdictions classify a quasi-contract as contractual in nature, since a legal relationship during the pre-contractual stage is to be encapsulated in a contract. Therefore, the non-performance of it creates contractual liability. Others categorize a quasi-contract as part of an obligation imposed by law, and the defaulting party may hold tortuous liability. Moreover, some others contend it as an independent kind of liability, deriving its force and effect from the law. While other jurisdictions (such as Portugal) adopted a hybrid form where, in some instances, precontractual liability can be characterized as contractual while in others it can be considered as tortuous.

COMMON LAW PERSPECTIVE

Traditionally, freedom of negotiation was a tenet of contract law, which was embodied in the common law system. Under this principle, contracting parties were free to negotiate contractual terms without facing the risk of pre-contractual liability. This view was known as the 'aleatory view' of negotiation which was based on a notion that a party to negotiation should bear the risk of loss results in the event of breaking off negotiations by the other party. This "all or nothing" approach was applied by Sheppard J in Sabemo Pty Ltd v North Sydney MC:

"It has long been the law that parties are free to negotiate such contract as they may choose to enter into. Until such contract comes about, they are in negotiation only. Each is at liberty, no matter how capricious his reason, to break off negotiations at any time. If that occurs that is the end of the matter and, generally speaking, neither party will be under any liability to the other." [Sabemo Pty Ltd v North Sydney Municipal Council [1977] 2 NSWLR 880, 900].

However, current common law courts (such as USA courts) attempted to apply pre-contractual liability by utilising a variety of doctrines, such as the principles of restitution (unjust enrichment), misrepresentation and promissory estoppel. The American Restatement of the Law of Restitution: Quasi Contracts and Constructive Trusts, 1937 defines the principle of unjust enrichment as "a person who has been unjustly enriched at the expense of another is required to make restitution to the other". There are three key elements contained in the unjust enrichment: (i) the defendant must have been enriched by the receipt of a benefit; (ii) that benefit must have been gained at the plaintiff's expense; and (iii) it would be unjust to allow the defendant to retain that benefit.

Promissory estoppel is an equitable principle whereby parties to a transaction who have conducted their dealings in reliance on an underlying assumption as to a present, past or future state of affairs, or on a promise or representation by words or conduct, will not be allowed to go back on that assumption, promise or representation when it would be unfair or unjust to do so. This principle was applied by Denning J in Central London Property Trust Ltd v High Trees House Ltd by stating that "a promise to accept a smaller sum in discharge of a large sum, if acted upon, is binding notwithstanding the absence of consideration". In principle, promissory estoppel is similar to the common law principle of waiver. Further, misrepresentation is a false statement of fact or law, which is made by one party (representor) to another party (representee), so as to induce the representee to enter into a contract.

CIVILIAN TRADITION

Unlike a common law system, a civil law system recognised a doctrine of Culpa in Contrahendo ('fault in negotiation') which was rooted in German contract law and was widely adopted by the majority of civil law countries. Pursuant to this doctrine, contracting parties had the obligation to act in bona fide during negotiations; therefore, if a party who acted in bad faith by preventing from concluding a contract was liable to an injured party.

The doctrine of Culpa in Contrahendo has been adopted by the Private International Law of European Union as enshrined in Article 12 of Regulation (EC) No. 864/2007 of the European Parliament and of the Council of 11 July 2007 on the Law Applicable to Non-Contractual Obligations (usually known as Regulation Rome II), which clearly stipulates: "The law applicable to a non-contractual obligation arising out of dealings prior to the conclusion of a contract, regardless of whether the contract was actually concluded or not, shall be the law that applies to the contract or that would have been applicable to it had it been entered into". Upon enacting this provision, debate has arisen since on one hand, it treats the Culpa in Contrahendo as non-contractual in nature. While it requires that the law applicable must be the law of contract.

INTERNATIONAL LEGAL INSTRUMENTS' APPROACH

Increasing the interdependence of world economies has resulted in the rapid growth of cross-border transactions. To facilitate this, harmonised and unified legal instruments would seem to be required. A number of organisations or states have attempted to formulate various legal frameworks to be used in international trade. These legal instruments have been designed either at an international level (e.g. the United Nations Convention on Contracts for International Sale of Goods - 'CISG' and the UNIDROIT Principles of International Commercial Contracts - 'PICC'), continental level (e.g. the Principles of European Contract Law) or national level (e.g. the United States Uniform Commercial Code - 'UCC'). The primary objective of these instruments is to harmonise and promote uniformity in contractual practice in order to enhance legal certainty and predictability. However, in practice, this is extremely difficult to achieve since uniform legal instruments tend to be interpreted differently by various jurisdiction courts. In harmonising substantive contract laws, drafters would face certain concepts of contract laws, which are different from one country to another country, especially between civil law and common law countries, including the concept pre-contractual liability.

It would seem that the CISG is deliberately silent on the issue of pre-contractual liability since it, in fact, had never been proposed, but instead it was rejected. Even though the pre-contractual liability was not encapsulated in the CISG, some scholars argued that good faith under Art 7(1) is not only applied for interpreting the CISG, but it would seem to be one of the general principles that can be used to impose pre-contractual liability on a blameworthy party. In contrast, Art 2.1.16 of the PICC clearly provides that a party who receives information which is treated as confidential and the other party; therefore, has a duty not to disclose or use that information, even if the contract is not concluded. In breach of this duty, the defaulting party is liable to pay a remedy to the injured party (PICC, Art 2.1.16).

PRACTICE IN INDONESIA

As a result of experiencing a long colonial history under Dutch rule, the Indonesian legal system longs to the civil tradition which emphasises the written law instead of case law. Some of Indonesian commercial laws which were originally derived from Dutch law, for instance Civil Code and Commercial Code, are still applicable today. Since the independence of Indonesia in 1945, the Indonesian Civil Code ("ICC"), which is a replica of the 1838 Dutch Civil Code and was promulgated in Indonesia in 1848, pursuant to the concordancy principle has remained substantially unchanged. The principles and provisions governing a contract can be found in Book III of the ICC. One of the fundamental contract law principles enshrined in the ICC is good faith. Pursuant to Article 1338 para (3) of the ICC provides that "An agreement must be performed in good faith". Even though it seems that this provision only applies during the performance of a concluded contract, does it also apply during the negotiation of a contract? Some scholars tend to interpret this provision broadly which cover for both the formation and the performance of a contract. On the other hand, others contended that the principle of good faith, as stipulated in Article 1338 para (3), only applies for the stage of contract performance. In respect of pre-contractual liability, a prominent Indonesian scholar, Fred. B.G. Tumbuan pointed out it is worth considering that Article 2(1) of the Usury Act (Woeker-ordonnantie) of 1938 may be relevant in order to impose the pre-contractual liability. Article 2(1) of the Usury Act provides that:

Whenever between the reciprocal obligations of the parties to a contract from the outset there is such a difference in value so that, in view of the circumstances, the disproportion of such obligations is excessive, the judge may then at the request of the disadvantaged party or even ex officio mitigate the obligations of such party or declare the contract void, unless it is reasonable 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.

Therefore, albeit there is no clear regulation on precontractual liability in Indonesia. It is likely that the court may consider using the broad interpretation of Article 1338 para (3) of the ICC supplemented by applying Article 2(1) of the Usury Act in order to impose the pre-contractual liability against the party who acts in bad faith.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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