CHAPTER 32

Scope of the Law of the Contract

W
HEN the law governing a contract, or a group
of contracts, has been ascertained, what problems
does it cover? In principle, notwithstanding the
theories that would split the contract into segments, it should
embrace all incidents of the contractual relationship. 1 Special
rules regarding form 2 and those concerning the application
of a personal law to capacity to contract,8 have been treated
earlier in this work.
This chapter, however, will discuss doubts and objections
that have been raised to the rule of a unitary law for the
problems arising on a contract. This discussion cannot be
exhaustive, since questions of classification originate with the
consideration of each special type of contract. Moreover,
such topics as acts of parties modifying the obligation or
transferring rights or duties, and the whole doctrine respect-
ing limitation of actions and termination of contractual rights,
cannot be expounded at this juncture.
While American conflicts literature is accustomed to ask
whether lex loci contractus, or lex loci solutionis, or lex fori
applies to a problem, we have here to speak in terms of
the law of the contract, of a second law applicable to special
problems, and of public policy opposing foreign law. This
divergency of method causes some difficulties in the effort
of comparing the solutions.
1 See particularly the comparative survey as of 1917 by KosTERS 773-779·
t Supra Chapter 31.
1 Vol. I (ed. 2, 1958) Chapter 4·

520
 SCOPE OF THE LAW OF THE CONTRACT 521

I. FoRMATION OF THE CoNTRACT

r. Consent in Form
The problem. The municipal laws provide diverse solu-
tions for questions such as whether an offer binds the offeror
and, if so, for what length of time; whether acceptance must
be declared, dispatched, arrive, or be perceived, to conclude
the consent, and whether perfection of the contract has retro-
active effect. Many particulars, too, vary. 4
What law to apply to these questions, is a matter of both
practical and theoretical interest. 5
Illustrations: (i) Binding force of offer. Lorenzen6 has
presented the following example: A resident of New York
having made an ordinary offer, without time limit or other
qualification, by letter to a German in Germany, revokes
it by cable a few hours after the letter is received. The
addressee, knowing that under German law the telegraphic
withdrawal is inoperative, at once accepts the offer. Under
New York law, the offer is revocable until dispatch of
acceptance and the contract fails to come into existence. If,
according to Lorenzen's suggestion, the lex fori were to
apply, the parties would be held to the contract in any
German court but not in any American court.
(ii) Acceptance by silence. A seller in New York offers
merchandise to a firm in Liverpool with which he frequently
has business relations and which had declared a desire for
these particular goods. The addressee does not answer. Courts
in the United States, and decidedly many Continental courts,
are more inclined than English courts to imply acceptance
by silence. In an analogous case, a Swiss seller and a French
buyer had negotiated through the seller's agent in Paris;
the agent had no authority to conclude the bargain, and
4 For comparative law see RABEL, I Recht des Warenkaufs 69-108; International
Institute for the Unification of Private Law, De Ia formation des contrats entre
absents, Etude Preliminaire (mimeographed) S. d. N.-U. D. P. 1935, Etude XVI.
6 EDuARD WAHL, 3 [Link]. (1929) 775; AcHENBACH, Der briefliche und tele-
graphische Vertrag im vergleichenden und internationalen Privatrecht (Ham-
burg 1934); FERID, Zum Abschluss von Auslandsvertragen (Sonderdruck der
Studiengesellschaft fUr privatrechtliche Auslandsinteressen, No. 10, 1954).
6 LoRENZEN, 31 Yale L. J. (1921) at 53·
 522 CONTRACTS IN GENERAL
the seller failed to give an express confirmation. The Swiss
Federal Tribunal nevertheless held the contract to have been
completed under Swiss law as the lex loci contractus. 7
(iii) Loss of letter of acceptance. A merchant in Paris by
letter to a firm in New York offers to buy certain goods; the
letter of acceptance is lost in the mail. The New York seller
sues on the basis of a contract perfect under New York law.
The French party denies the contractaccordingtoFrenchlaw.
(iv) Delayed answer. In a Norwegian case, 8 A in New
York, owning land in Norway, by a letter to B in Norway,
offered to sell the land but limited the time for acceptance.
B answered affirmatively in time, but his letter was delayed
in the mail and reached the offeror when the time limit, and
let us suppose, a reasonable time for receiving an answer,
had expired. A failed to make any reply. The majority of
the Supreme Court in Oslo granted B's action against A,
by application of Norwegian law, because A should have
notified B of the delay or otherwise should have complied
with the contract. The minority dissented on the ground
that New York law as the law of A's domicil applied.
Conflicts rules. Many approaches have been tried. Beale, as
well as the Swiss Federal Tribunal, according to his usual
method, applies the lex loci contractus/ which, however, in
relation to foreign countries leads nowhere. 1° Continental
writers have proposed to resort to the national law of the
offeror, 11 or the law of his domicil in several variants. 12
7 BG. (Sept. 28, 1912) 38 BGE. II 516, 519.
8 NorwegianS. Ct. (1924) 2 [Link]. (1928) 873 No. 51; HAUDEK 67 approves
the majority vote and RAAPE, IPR. 457 No.3 the dissident vote.
9 2 BEALE II74-II76; Restatement § 332 (c).

Swiss BG. (June 9, 1906) 32 BGE. II 415; (Sept. 28, 1912) 38 BGE. II 516, 519·
The recent decision reversing this rule in favor of the law of the contract left ques-
tions on the formation of agreement deliberately open, BG. (Feb. 12, 1952) 78
BGE. II 74, 86.
1o Supra Chapter JO, p. 457·
u BARTIN, 2 Principes 89.
12 German RG. (Nov. 20, 1902) 53 RGZ. 59 (isolated}; NussBAUM, D. IPR. 239

FERID (supra n. 5) § 24; BATIFFOL 345 § 393 and n. 2 suggesting that a prolonged
sojourn may replace domicil; in Traite 665, for law of the contract.
A similar result is perhaps viewed in Brazil by C. C. art. I087; the contract is
made where the offer has been made, and Introd. Law (1942) art. 9 § 2: where
the offeror resides.
 SCOPE OF THE LAW OF THE CONTRACT 523
Another doctrine, following the usual way out of embarrass-
ment, cumulates the requirements of both laws involved. 18
But more often the true emergency solution, lex fori, has
been suggested. 14
Only the German courts have been in position to face the
problem squarely. 15 They apply the same law that would
govern the contract if it were valid. 16 Where the automatic
force of the law of the place of contracting is eliminated, this
is the natural solution, approved by those modern writers
who are not afraid of an alleged vicious circle, nor of the
existence of a contract which may be denied by the domi-
ciliary law of one party. 17
Illustration: ( v) It is litigious whether a contract has been
effectively agreed upon between S, operating a sawmill in
A, State X, and P, a manufacturer of furniture in B, State Y,
to sell four carloads of lumber, deliverable at a certain date
on the side tracks of the railway depot in A. Because of this
determination of the place of delivery, as will be submitted
in the third volume of this work, the law of State X governs
the contract. This includes all questions of consent in form
as well as in fact. There is no inquiry into such questions
as which party has first made an offer or where acceptance
has been signed or mailed or received.
Writers following this theory have been preoccupied, it
is true, with hardships resulting, for instance, if an American
party, contrary to his own law, should be declared bound by
13 LEwALD No. 295; PACCHIONI 329 § 10; for cumulation modified by favor to

validity AcHENBACH, supra n. 5, criticized by WAHL, Book Review, 10 [Link].

(1936) 1070.
u LoRENZEN, 31 Yale L. J. (1921) at 53; PILLET, 2 Traite 18a-z8z; DzENA, 2
Prine. 256; HAUDEK 91. Contra: PACCHIONI 328 § IO.
16 Statement by BATIFFOL 346 § 394 !lis and n. I.
18 This is the law intended by the parties or the law of the place of performance.

See RG. (Jan. 3, 19II) 55 Gruchot's Beitrage 888; (May 15, 1917) Warn. Rspr.
1917, 267; {Jan. 16, 1925) 34 [Link].R. 427; (March 13, 1928) IPRspr. 1928 No. z;
(May 12, 1928) Leipz. Z. 1928, 155c; (Feb. 3, 1933) lPRspr. 1933, 19 No. 10.
The lex loci solutionis has been a.s:> advocated in Argentina by ZEBALLOS in 2
Weiss-Zeballos 295 n. (a).
17 WAHL, 3 [Link]. (1929) 788-8oo; RABEL, id. 753·
 CONTRACTS IN GENERAL
an offer, as in the above example (i) under German law, or
an English party bound by his silence as in the above example
(ii). One proposal is that the court of such a party's domicil
might free him on the ground of public policy. 18 This, how-
ever, would not help, if the case were to be tried in the other
court, and would defy the purpose of the rule. A more attrac-
tive suggestion has been to consult the domiciliary law of
each party, not for all, but for the single question, whether
his conduct presents any declaration that might be a subject
matter for legal construction. 19 The underlying argument of
equity, however, is doubtful in view of the interest of the
other party, which, supposedly, would be protected by his
own law. In addition, English and American courts cannot
be expected to follow a personal law.
Indeed, the apparent hardship disappears, if the modern
principles of interpretation are duly transferred into the field
of international business transactions. A German court under
German law cannot treat a proposal to contract as a binding
offer, if the offeror must be presumed to have intended the
contrary. 20 An offer by a New York firm, in the absence of
particular circumstances, can not be understood as would an
offer of a German to another German. Nor should an offer
by a New Yorker to a Norwegian, under express limitation
of time, be construed as embodying the conception that he
must repudiate a belated acceptance. Under any law what-
ever, informal declarations ought to be construed according
to the principles of good faith, considering the laws and
usages of the place where the declarant lives. Certainly, if
a declaration is sent out into the world, the sender is not
entitled to expect that the effect will always be the same as
18 BATIFFOL 346 § 394i RAAPE, IPR. 456.
19 M. WoLFF, IPR. 123 and Int. Priv. Law 439; WAHL, 3 [Link]. (1929) 8oo;
RABEL, id. 754; K. Th. KIPP, in Fischer-Henle-Titze, Biirgerliches Gesetzbuch (1932)
II09 II r; RAAPE, IPR. 455ff.
to See also WAHL, 3 [Link]. (1929) 8or. For an analogous appraisal of the
question whether a proposal is meant as an offer, RAAPE, IPR. 458 No. 5·
 SCOPE OF THE LAW OF THE CONTRACT 525
under the law of his domicil. But this does not affect our
cases. Wise judges are careful not to subject foreign promises
to domestic standards, unless submission to them appears to
be required by usage.

2. Consent in Fact
The problem. Error, fraud, duress, and simulation are
everywhere grounds for nullity or voidability, yet circum-
stances vary. 21 Error, in particular, may be either more or
less liberally allowed to vitiate the consent. The most im-
portant difference of laws resides in the question whether
error must be caused by misrepresentations of the other party
or at least the latter must have been unaware of the error.
In addition, the various shades of invalidity are divergently
regulated, and so is the liability of the party avoiding a
contract on the ground of his own mistake. The following
examples may illustrate the ensuing conflicts problem:
(i) A, a resident of British Columbia, acquired what in
his opinion were treasury bonds of a corporation in the state
of Washington, but were actually common stock shares, the
holder of which was liable under the corporate charter for
certain payments.
The Canadian court refused to apply the law of the
charter, using the argument that, because of the seller's
misrepresentation, A had never become a shareholder under
the law of British Columbia. 22 The report of the case does
not state why this law applied, but probably it was taken for
granted that the contract was made there and that the lex
loci contractus governed the entire contract. A comparable
case came recently before the Supreme Court of the United
21 For comparative municipal law see YEHIA TAG-ELDINE, Le dol fran~ais et Ia
misrepresentation anglaise, contribution a !'etude de Ia theorie du consentement
et de ses vices. (Vol. XVI·Bibliotheque de l'Institut de Droit Compare de Lyon,
1926.)
22 American Seamless Tube Corp. et a!. v. Goward [1930] 3 D. L. R. 870

(B.C. S.C.); fortunately, the court adds that the contract would have been voidable
under California law, too.
 CONTRACTS IN GENERAL
States. 23 A mutual insurance company, chartered in New
York, became insolvent. Assessments were adjudged in pro-
ceedings in New York against the policy holders regarded as
members under New York law, and suit for enforcement was
brought against residents of Georgia at their domicil. The
Georgia Supreme Court refused enforcement on the ground
that the policy was a contract made in Georgia and therefore
governed by Georgia law. 24 Under the New York statutory
law, the policy holders were liable to the assessment, but
according to the law of Georgia they were deemed not to
have become members of the company, a clause on the back
of the policy being insufficient to produce this effect. Although
in this case protection of residents was conspicuous, the reas-
oning was simply based on the law governing the contract.
( ii) In I 89 7, a German reinsurance company in the Rhine-
land, the Aachener Riickversicherungs A.G., consented to a
reinsurance contract for three-fifths of a fire risk in Japan
with an insurance company of Hamburg, through an agree-
ment made in Japan by the agents of both parties. The com-
pany in Aachen contested the validity of the agreement
because its agent had not been made aware of the unusual
fact that the other two-fifths of the risk had been covered
previously by another reinsurance. The Reichsgericht applied
articles I I I o and I I I 7 of the French Civil Code, in force
in the Rhineland at the time of contracting, as the law of
the domicil of the debtor. 25
Conflicts rules. Aprioristic theory, again, has postulated
that the personal law of the party whose assent is concerned,
should govern, 26 or that the lex loci contractus must neces-
sarily determine this problem of validity/7 but courts in
23 Pink v. A. A. A. Highway Express, Inc. (1941) 314 U.S. 201.
2' Pink v. A. A. A. Highway Express, Inc. (1941) 191 Ga. 502, 13 S. W. (2d) 337·
25 RG. (Dec. 5, 1902) 53 RGZ. 138.
16 For the national law among others: 8 LAURENT 228-229 § rs8; PILLET, Prin-

cipes 448 § 238; BARTIN, I Principes 175, 177, 2 id. 6o; AuorNET, I Melanges Pillet
78; I FRANKENSTEIN 572. For the domiciliary law, PILLET, 2 Traite 289 § 537;
LEWALD 239 No. 296. Contra: WEiss, 4 Traite 392 n. 4i KosTERS 774; and decisively
BATIFFOL 336ff. §§ 38I-384.
17 FooTE 402; 2 BEALE I22S; RoLIN, r Principes 481 § 291; 2 ARMINJON 234

II§ 97·
Switzerland: BG. (April ro, r896) 22 BGE. 471, 483; 32 id. II 416; 38 id. II 519;
 SCOPE OF THE LAW OF THE CONTRACT 527
England, 28 Belgium, 288 the United States, and Germany
have instinctively applied the same law that would govern
the contract if it were valid. In the United States, this has
been, as usual, either the law of the place of contracting,29
that of the place of performance, 30 or the law intended by
the parties. 31 In Germany, the Supreme Court and other
courts in the last decade have firmly upheld the law of the
contract, 32 and finally this attitude has found the deserved
theoretical recognition. 33 Frail French authorities at present
are understood as aiming at the same effect. 34
The Hague Draft Convention (I 9 5 I) on conflicts rules
concerning sales of goods has adopted this view in applying
even the law stipulated by the parties to the consent prob-
lems.35 Occasionally courts have resorted to the law of the
forum. This happened in England, when the foreign law
did not seem to guarantee annulment of a contract made
under duress, 36 in a case of the German Reichsgericht dis-
Trib. com. Ziirich (Feb. 14, 1937) Bl. f. Ziirch. Rspr. 1937, 164 No. 85, cited 12
[Link]. (1939) 594·
The German Reichsgericht argued similarly in two or three isolated cases.
28
SeeM. WoLFF, Priv. Int. Law 439 § 421; BATIFFOL 341 § 387.
28a Belgium: App. Gand (March 3, 1949) J.d. Tr. 1951, 434·
29 Cases: 2 BEALE 1225 § 347.1; but in Elbro Knitting Mills v. Schwartz (1929)

30 F. (2d) 10, the "Michigan contract" was not questioned.

3
°Cases: 2 BEALE 1226 § 347.1 ns. I-6.
31 Union Central Life Ins. Co. v. Pollard (1896) 94 Va. q6, 26 S. E. 421.

The Netherlands: Rb. Haag (June 6, 1935) W. 1936, 402.

32
RG. (Dec. 5, 19II) 78 RGZ. 55: sale of membership in a limited private
company, error on the money paid in; OLG. Hamburg (Sept. 27, 1918) Hans.
GZ. 1918 HBI. No. 92, aff'd, RG. (March II, 1919) 95 RGZ. 164: sale of nuts, the
price payable in Vienna, Austrian law applied to the excusable ignorance by the
German buyer of a German war decree; RG. (Oct. 30, 1926) 39 [Link].R. 276, 281,
Revue 1928, 523 (duress); (June 13, 1933) IPRspr. 1933, 31 (fraud); and many
older cases, see the list established by LEWALD 240 No. 297·
33
WAHL, 3 [Link]. (1929) 782; NussBAUM, D. IPR. 237; BATIFFOL 340
§ 386; see also NusSBAUM, Principles 178, and ARMINJON, 3 Travaux du comite
fran~ais de droit international prive (1937) at 94·
31
BATIFFOL 343 § 389,
36
Conference de Ia Haye de droit international prive, 7eme session, 1951, Actes
382; 1 Am. J. Comp. Law (1952) 275·
36
Kaufman v. Gerson [1904) 1 K. B. 591, Clunet 1905, 1063; Societe des Hotels
Reunis, Societe Anonyme v. Hawker [1913) 29 T. L. R. 578. See also Hope v. Hope
(1857) 8 De G. M. & G. 731 (agreement illegal according to English law).
 CONTRACTS IN GENERAL
regarding the Turkish law on employment,87 and in one or
two American insurance cases involving misrepresentation of
the insured. 88 The most characteristic of these decisions is
that by the English Court of Appeals in Kaufman v. Gerson.
The defendant, a woman, had promised the plaintiff, her
husband's creditor, to pay the debt in consideration of his
promise not to prosecute her husband criminally. Under
English law, the contract would have been bad because its
object was to stifle a prosecution and it was obtained by
coercion. However, the places of contracting and of per-
formance made it a French contract, and under French laws,
supposedly, the promise was valid. The court argued, how-
ever, that enforcement in England would violate the rule
that the plaintiff must come into court with clean hands.
The decision deserves the severe criticism it has suffered,39
since opinions are and may well be divided on the existence
of unlawful coercion when a creditor attempts to obtain
satisfaction of his valid claim by threatening legal sanctions.

3. Want of Consideration
The common law requirement of consideration has a
parallel in the much-debated requirement of the French
Civil Code (arts. II o8, I I 3 I) by which an obligation must
have une cause licite: "An obligation without cause or on a
false cause or on an illicit cause can not have any effect." 40
87 RG. (Oct. 30, I926) 39 [Link].R. 276, Revue I928, 523·
88 Fidelity Mutual Life Ins. Co. v. Miazza (I9o8) 93 Miss. IS at 36 and 422 at
435, 46 So. 8I7 at 8I8 and 48 So. IOI7 at Ioi8. In John Hancock Mutual Life Ins.
Co. v. Yates (I935) so Ga. App. 7I3, I79 S. E. 239, the court operates on the
assumption that the materiality of representations made by the insured in his
application affects the remedy only and therefore is to be decided under the law
of the forum.
39 DICEY, (ed. s), Appendix, Note 3, 882; FALCONBRIDGE, The Law of Banks and

Banking (ed. s, I93S) 902, also Essays 388; 3 BEALE I647 § 6I2.I; GooDRICH 307
n. 9; Notes, 79 U. of Pa. L. Rev. (I93I) 63s; 33 Col. L. Rev. (I933) soB. On the
problems in substantive American law, see the remarks of DAwsoN, "Economic
Duress and the Fair Exchange in French and German Law," I I Tul. L. Rev.
(1937) 34S, 3S9·
40 For comparative municipal law, see LoRENZEN, "Cause and Consideration
 SCOPE OF THE LAW OF THE CONTRACT 529
To believe a considerable part of the French doctrine, 41 this
provision includes the rules that in onerous contracts a
promise must have an actual counterpart in a promise or in
a giving or doing by the other party, and that on principle,
with exceptions, obligations ought not to be separated from
their economic background. Central European systems,
however, use other forms of thinking that do not need this
general requirement.
Any law governing the contract will naturally determine
the requirement of consideration.
The Supreme Court of the United States in Pritchard v.
Norton applied the law of the place of performance, accord-
ing to the presumed intention of the parties, thus preventing
the contract from being held invalid for want of consider-
ation under the lex loci contractus. 42 There are parallels to
this decision in England 43 and France. 44 The American cases
referring the question to the lex loci contractus seem to con-
sider this law as governing the entire contract. 45 For German
courts, the application of the law of the contract follows as
a matter of course. 46
in the Law of Contracts," 28 Yale L. J. (1919) 621 at 623. On the peculiar com-
bination of both in Louisiana, see SNELLINGS, "Cause and Consideration in
Louisiana," 8 Tul. L. Rev. (1934) 178.
41 See on the vast controversies, EsMEIN in Planiol et Ripert, 6 Traite Pratique,

in particular his own thesis at 350 § 252.

4 2 (1 882) 106 U. S. 124.
43 British Controlled Oilfields v. Stagg (1921) 66 Sol. J. 18 (applying English

law expressly stipulated for in the contract); In re Bonacina Le Brasseur v. Bonacina

[1912] 2 Ch. 68, 73 (validity under Italian law conceded although the action is
dismissed on other grounds).
44 App. Paris (Feb. 28, 1935) Revue Crit. 1935, 748 applying French law as

lex loci solutionis to a German-created bill of exchange, see comment by BATIFFOL,

Revue Crit. 1937, 434· The Court of Cassation (req.) has affirmed the decision,
(Dec. 14, 1937) Nouv. Revue 1938, 131, on the basis of German lex loci contractus,
in a laconic reasoning, well explained in the note ibid.: under German law the bill
was valid but the action could be refuted by pleading that the plaintiff would be
enriched without cause.
46 BATIFFOL 353 § 408 n. 5·
4 6 Bay. ObLG. (July 6, 1904) 5 Bay. ObLGZ. 357 (force of an I. 0. U. not indi-

cating the ground of obligation); OLG. Miinchen (April 13, 1929) Zeitschrift fiir
Rechtspflege in Bayern (1929) 365 cited by LEWALD 244 No. 302 (consideration
required by English law). See also supra p. 364 n. 15.
 530 CONTRACTS IN GENERAL
Recently, the Tribunal de la Seine dealt with several
strange agreements made in New York by German refugees,
whereby a man promised huge sums to his wife and daughter,
without any visible motive and as was supposed, with no
intention of making a gift. The court thought it probable
that the promise was void under the German law, applicable
as presumably intended by the parties, but added that, if
approved by German law, the agreement would be void
under French imperative public policy. 47 This is one of the
easy ways of dealing with obscure facts; the case could have
been conveniently solved under the German Civil Code.

II. NATURE AND EFFECTS

1. The Nature of the Contract

The law applicable to an obligatory contract should deter-
mine what kind of a contract is made.
Illustration. Before the German Civil Code came into
force, a promise to deliver goods to be manufactured with
materials owned by the promisor was considered in the courts
following common (Roman) law as a sales contract, whereas
the Prussian Landrecht assumed that a contract for work
and labor entitled the customer to cancel his order. In several
cases one party was domiciled in the territory of the common
law and the other in that of the Landrecht.
Instead of treating each party as debtor according to his
own law, as was done in other cases, the German Supreme
Court subjected the entire contract to the law of the promisor. 48
No one thought of resorting to the law of the forum.
A deterrent example of a contrary reasoning may be found
in a case of the Swiss Federal Tribunal, influenced by the two
unnatural theories which recommended splitting the contract
47
Trib. civ. Seine (July 5, 1939) Revue Crit. 1939,450.
48
RG. (May 13, 1891) z [Link].R. 587. For other German cases, see LEWALD
248 No. 306.
 SCOPE 0F THE LAW OF THE CONTRACT 531
and characterizing its nature according to the lex fori. 49
A resident Swiss, having executed by letter an admowledg-
ment of a loan of £3250, to an English woman domiciled
in Paris, demurs to an action for recovery, brought by an
assignee, because he has not received the money. What law
determines his plea? In this case, suitable for an elementary
law class, the Federal Tribunal argued as follows: First, it is
considered that the making of a loan contract, under French
law, requires as in Roman law the transfer of the money
to the borrower as an essential prerequisite; that under Swiss
law the mutual consent of the parties suffices to create con-
tractual rights of the borrower to receive and of the lender
to recover the money; and that English law is still different,
the court using an unusual term probably meaning that
English law does not make a promise to lend or borrow
specifically enforceable. The court considers, further, that
under the French approach no contract has been made, unless
the money was given, hence, the question would be one of
formation, governed in Swiss conflicts law by the lex loci
contractus. If, however, under the Swiss construction, the
contract originated independently of delivery, the issue would
be merely one of the requisites for recovery, pertaining to the
"effects" and determined by the law chosen by the parties
or, subsidiarily, by that of the place where repayment is due.
In this dilemma, remembering that a court characterizes
problems according to its own domestic law and citing
Nussbaum, the Federal Tribunal resorts to the Swiss con-
struction of a loan as a consensual contract and reaches the
law of the place of performance which is-the French law.
Thus, because under the Swiss Code of Obligations a loan
may originate by mere consent, the French Civil Code is
applied, under which it may not! Even the harmful division
between validity and the effects of contract can be worked
out in a more suitable way than by the domestic construction.
It was the task of the court candidly to interpret its own
dubious conflicts rule and to state, once and for all, whether
the problem is attributable to "validity" or to "effects."
49 BG. (Nov. 7, 1933) 59 BGE. 397·
 532 CONTRACTS IN GENERAL
The Restatement, at least, does not fail to explain that any
requirement for making a promise binding is determined
by the law of the place of contracting (§ 332,d).
The law of the contract, no doubt, should include all
requisites for validity as well as the legal category of the
transaction and, therefore, its legal effects.
2. Intended and Legal Effects
Most courts do not hesitate to include interpretation of a
contract in the law which governs the whole of the contract.
They also apply this law to the questions, who obtains rights
through the contract, and what is the object of these rights.
For it is plainly not feasible to consult two different laws
for determining the extent of the contractual duties, the one
when they are to be inferred from construction of the parties'
intention, implied in fact, and the other when they flow
from legal rules completing an agreement, implied in law.
In the narrower domain of interpretation, the natural
conception was adopted in this country over a century ago by
the Supreme Court of the United States. When two sureties
in New Orleans signed a bond payable in Washington, D.C.,
the court held that, in the absence of a stipulation to the
contrary, their liability was joint, according to the common
law of the District rather than divided in half under Louisiana
law. 50 Nobody then doubted that the bond was subject as
a whole to the law of the place of performance, a rule also
applied by the Supreme Court in Pritchard v. Norton. 51
Analogous results may be found in many decisions relating
to legal effects of contracts.
Nevertheless, the Restatement, influenced by a few cases,
has confused the matter. It determines "the nature and extent
of the duty for the performance" by the lex loci contractus
( § 332, f), but declares "the duty for the performance" to
6
61
°Cox and Dick v. U.S. (1832) 31 U. S. (6 Pet. S. C.) 172.
Supra n. 42.
 SCOPE OF THE LAW OF THE CONTRACT 533
be "discharged by compliance with the law of the place of
performance." (§ 358). It is instructive to see how hard
Stumberg tries to apply these contradictory tests. 52 He deals
with an Oklahoma case53 where a contract granting an auto-
mobile agency was made in Michigan with the Ford Com-
pany and the agency was to be maintained in Columbus,
Ohio. The plaintiff in obtaining the contract acted for the
benefit of a company in which he took an altruistic interest
and invested money to help manage the agency. The court
applied Michigan law as the lex loci contractus to the "execu-
tion, interpretation, and validity." Hence, the breach of the
contract by the Ford Company was found not to entitle the
third beneficiary to sue for damages, nor the promisee who
sued as assignee. The decision, as Stumberg recognizes, might
have been otherwise, if the center of the contract had been
sought in Ohio without clinging to the mechanical use of the
lex loci contractus, although perhaps the facts relevant for
equity were not fully published. However, Stumberg won-
ders whether this problem would fall under the "extent of
the duty" or the "compliance with the duty," especially the
determination of "the person to whom performance shall be
rendered" (§ 366), and asks: "Is it practically possible to
draw a line sharply dividing the extent of the obligation of
the contract from its performance?" Our answer has been
given before and is strictly: No. 54

3· Interpretation of Terms
Rules of interpretation. It is a settled principle that rules
of interpretation contained in the law governing the contract
must be applied to the exclusion of those of the lex fori. 55
51 STUMBERG 245 n. 74 continued on p. 246.
53Brown v. Ford Motor Co. (C. C. A. roth 1931) 48 F. (2d) 732.
u Supra p. 452; and see the vain efforts in the Restatement itself, § 332 com-
ment c, to solve the "difficult problem" of separation of duty and performance.
For another consequence see hereafter p. 538.
u STORY §§ 272, 280.
California: C. C.§ 1646, cj. Monarch Brewing Co. v. George J. Meyer Mfg. Co.
534 CONTRACTS IN GENERAL
But doubts have long been raised against this principle. 56
In fact, if the contract is mechanically governed by the law of
the place of contracting, there is no consideration provided
for the circumstances under which parties envisage perform-
ance in another country. Moreover, we might hold this
principle to be objectless to the extent that the various rules
of interpretation are superseded by the proposition recognized
in national laws as well as in the international practice as a
"general principle," that we must always look for the real
and harmonious intention of the parties when they bound
themselves. 57 On this basis, the court of any country must
pay natural and necessary regard to the foreign origin of
an instrument.
Ascertainment of true meaning. Thus, in a leading English
case, a Brazilian in Brazil executed in the Portuguese lan-
guage a power of attorney, granting authority to a London
broker to buy and sell shares. The Court of Appeals, before
deciding what law determined the extent of the authority,
held that the exact meaning of the declaration ought to be
ascertained through interpreters and experts according to the
(C. C. A. 9th 1942) 130 F. (2d) 582. The courts adhering to the lex loci contractus
commonly enumerate construction and interpretation as well as validity as subject
to this law.
England: In re Societe Intercommunale Beige d'Electricite, Feist v. The Com-
pany [1933l Ch. 684, 690; St. Pierre v. South American Stores Ltd. (1937l 3 All
E. R. 349, 351, 355·
France: Lex loci contractus, Cour Paris (April 5, 1905) Clunet 1906, 170; Trib.
civ. Seine {March 12, 1908) Clunet 1908, 1132; WEiss, 4 Traite 348, 364; RoLIN,
1 Principes 429 § 231, 547 § 344, 550 § 346.
Germany: RG. (March 15, 1892) JW. 1892, 220 No. 27; (April 6, 1911) 24
[Link].R. 305.
C6digo Bustamante, art. 184 with exceptions.
In principle, though with exceptions, the law governing the contract also includes
the force allowed to commercial usage, see 1 Recht des Warenkaufs 62; this problem
will be studied with particular reference to sales contracts.
65 See 2 BAR 34; 7 LAURENT 582 §§ 479-482; DEsPAGNET 896 § 302; SuR VILLE 332

§ 219; VALERY 978 §§ 678ff.; all inspired by BouLLENOIS.

67 Permanent Court of Arbitration, decision between the Netherlands and

Portugal in the Island of Timor case, The Hague (June 25, 1914), in The Hague
Court Reports {ed. J. B. Scott 1916) 354, 365, 382.
 SCOPE OF THE LAW OF THE CONTRACT 535
language and the habits at the place of transaction. 58 A char-
ter party between two German corporations contained clauses
usual in English maritime trade, including an exception
clause, a cessor of liability clause, and an indemnity clause. 59
In another case, a vessel was insured, both parties being
German corporations doing business in New Guinea, with
the general conditions attached in English. (Institute Time
Clauses). 60 In both cases, the German Supreme Court stated
the meaning of the English original, although the contract
was governed by German law. Indeed, in all cases of party
statements and agreements, the true meaning must be dis-
covered under full observation of all circumstances. This may
be supposed to be provided for in practically all municipal
laws61 and does not touch conflicts problems.
Reference to local conceptions. Neither is conflicts law
affected, when it appears that parties expressly or probably
referred to the conceptions of a place other than that of
contracting. It has been held that in a fire insurance policy
an indication of time was to be computed according to the
law of the place where the property covered was burned, 62
and with respect to a contract of accident insurance prescrib-
ing that packing should be done in the presence of an adult,
that who was an adult ought to be determined by the law
of the place where the packing was supposed to be done. 63
To explain such decisions as though they referred to the law
68 Chatenay v. Brazilian Submarine Telegraph Co., Ltd. (1891] I Q. B. 79, 82 per

Lord Esher, M. R., 85 per Lindley, L. J.

59
RG. (May 22, 1897) 39 RGZ. 65.
60 RG. (November 7, 1928) 122 RGZ. 233·
81 M. WoLFF, Priv. Int. Law 461 § 432 calls attention to the English rule of

construction that words of an instrument must be interpreted from the context,

or understood in their plain and literal meaning, and requires that this rule be not
applied in interpreting a contract governed by French, German, or Swiss law.
This is correct; but the same is true and recognized by the English courts when the
instrument is executed abroad, irrespective of the applicable law.
62 Globe & Rutgers Fire Ins. Co. of New York v. David Moffat Co. (1913)

154 Fed. IJ.

83
Banco de Sonora v. Bankers' Mutuality Casualty Co. (1904) 124 Iowa 576,
roo N. W. 532.
 CONTRACTS IN GENERAL
of the place of performance,64 is inaccurate. The packing firm
had nothing to "perform," nor had the insurance company
to "perform" at either of the two places mentioned. Also,
it could well have been that a commercial usage might have
interpreted time or adult quality differently from the general
law of the contract, and the former would have prevailed.
It follows, at the same time, that German courts are wrong
when they purport to apply English law as an exception to
German law governing the entire contract, whilst they simply
ascertain the significance of certain clauses inserted in a bill of
lading or an insurance policy according to English usage. 65
It is a definitely distinguishable phenomenon that the
parties or conflicts rules may subject a part of the contractual
relationship to special applicable laws. What is to be done
in interpreting foreign expressions has been well said to be
really a question of fact. 66
The rule of the law of the contract in itself, however, is
perfectly sound.
III. LEGALITY

In the Anglo-American conflicts literature, the doctrine of

"illegality" has been singularly inflated and confused by
sweeping English dicta relied upon by Beale. We have to
state the correct opinion to this effect:
(a) The pertinent question is not whether the "making"
or the "performance" of a contract is prohibited, but whether
or not the contract is valid and enforceable by the applicable
law, which is the law governing the contract as a whole. This
observation needs no proof, although it seems to be widely
neglected.
14 2 BEALE 1261 ns. 2 and 3; STUMBERG 263 n. 18, 245 n. 73·
86
See the cases supra n. 55 and [Link]. (Oct. 14/28, 1912) Recht 1913
No. 70, cited by NussBAUM, D. IPR. 242 who seems to approve of it in principle.
8
' Note, 23 Harv. L. Rev. (r9ro) 563.
 SCOPE OF THE LAW OF THE CONTRACT 537
(b) The law of the place of contracting (if it does not
govern the contract) is immaterial, and its prohibitions with-
out any importance, as expounded earlier. 67
(c) The law of the place of performance as such is of no
greater significance.
(d) The rules of private law of the forum likewise should
not obstruct the application of foreign law, except in ex-
traordinary cases.
The two last contentions will be developed here and in
the next chapter, respectively.
One of Dicey's rules reproduces the assertion of English
judges that a contract valid under its proper law is neverthe-
less void if prohibited by the law of the place of performance. 68
Repeatedly, renowned judges have connected this alleged
rule with the broader proposition that English courts should
not sanction the breach of the laws of other independent
states. 69 The principal thesis, alone contemplated here, recurs
in the municipal English law of obligations and, according
to critics, belongs only to that branch of law; 70 in fact, it
has been used in no case where a law other than English
law or the law of the place of performance itself governed
the contract. 71 The Restatement of the Law of Conflicts,
however, has elaborated on this rule:
"If performance of a contract is illegal by the law of the
67
Supra Chapter 29, pp. 399-401.
68 DICEY 788, exception to Rule I 53·
69 Scrutton, L. J., in Ralli Brothers v. Compaiifa Naviera Sota y Aznar [1920]

2 K. B. 287, 304. The principle was called"•.• too well established now to require
further discussion" by Lord Wright, M. R., in International Trustee for the Pro-
tection of Bondholders Aktiengesellschaft v. Rex [1936] 3 All E. R. 407, 429.
NEUMAYER, Rev. Crit. 1957, 579 ff.; 1958, 53 ff. (56 ff.) urges respect for foreign
imperative rules of international relevance.
70 MANN, "Proper Law and Illegality in Private International Law," r8 Brit.

Year Book Int. Law (1937) 97 at 107-113; MEZGER, Nouv. Revue 1937, 527 at
531ff.; CHESHIRE 235; FALCONBRIDGE, Essays 389-394; MoRRIS, "The Eclipse of
the Lex Loci Solutionis-A Fallacy Exploded," 6 Vanderbilt L. Rev. (1952/53)
505-532, so8ff. See also NussBAUM, 51 Yale L. J. (1942) 893 at 917, and the mental
reservation in DICEY (-KAHN-FREUND) 790 n. II.
71 MANN, id. at 111.
 CONTRACTS IN GENERAL
place of performance, there is no obligation to perform so
long as the illegality continues." 72
The comment assumes that a local prohibition at the place
of the intended fulfillment makes the contract unenforceable
at any place, although this law does not govern the contract
(or in Beale's theory, its validity). 73 Again, the rule re-
appears in the American Restatement of contracts law. But
Williston at least indicates how uneasy he feels about this
unreasonable dogma; and in a somewhat forced argument,
he leads the discussion to the result that illegality under
any nongoverning law does not itself kill or paralyze an
obligation. 74
The mistake, indeed, is of a double nature. Neither (I)
has the place of performance in conflicts law the absolutely
dominant role which Dicey and Beale believed; nor ( 2) does
a prohibition of the contractual performance absolutely elimi-
nate the contractual duty in the law of obligations.
In the first place, we are carried back to the unfortunate
attempts to bisect the contract so that it may be governed
by different laws. The defects of this method appear patent
here. If payment in gold coins, traffic in narcotics, prices
exceeding a ceiling, are forbidden in any country, this does
not mean that the contract is blameless while performance
is reproved. The "great difficulty" admitted by Beale is in
distinguishing what is illegality of contracting and what is
illegality of performance, subject to different law; this diffi-
culty must be immense, since the only material case is that
72 Restatement § 360.
73 Restatement § 360 comments b and f.
Also the Polish Int. Priv. Law, art. IO has a similar provision: "The parties
are bound by the specific legal prohibitions annulling transactions contrary to
law, provided that they are in force in the states (sic) in which the debtor is domi-
ciled and the obligation is performable by him." This obscure provision does not
appear in the Czechoslovakian drafts or the law of I948.
74 Restatement of the Law of Contracts § 458 comment b; WILLISTON, 6 Con-

tracts 5093 § I792; note the embarrassment of ]ENKs, I Digest of English Civil
Law (ed. 3, I938) I32 § 307.
 SCOPE OF THE LAW OF THE CONTRACT 539
where the contract itself is vitiated because of a prohibition
of performance.
In the second place, we may contend, as a result of investi-
gations that cannot be repeated here, that under all modern
laws controlling obligations, although with some variety and
occasional uncertainties, a debtor will be excused from his
duty of specific performance (where this duty is recognized)
by impossibility or frustration; and that his duty to pay dam-
ages for nonperformance is released, if impossibility or frus-
tration is not included in the risk to be borne by the debtor
according to the individual contract or suppletive legal rules. 75
As a simple result, we have to look to the governing law,
none other, to ascertain whether any obstacle laid in the path
of performance, frees the debtor from his duty of specific
performance, if any exists, and from damages. English courts
are certainly not more ready than others to excuse the debtor
in any venture. Let us contemplate the leading case principally
claimed to support the thesis of Dicey and Beale and many
more prudent assertions in the English and American litera-
ture.
The Ralli case 76 was decided under English law to the
effect that an English firm was held not bound to pay a cer-
tain freight difference. The firm had sold jute to a Spaniard
in Barcelona and, in a charter party made in London with
a Spanish shipping company, agreed to a freight rate for
carrying the jute from Calcutta to Barcelona. Half of the
freight was to be paid by the buyer upon arrival as part of
the purchase price. The Spanish law having established a
maximum freight for jute, the buyer refused to pay more.
Did the court really hold English law to be that, because
of a Spanish prohibition, the Englishman did not owe the
75 See Blackburn Bobbin Co. v. T. W. Allen & Sons, Ltd. [I9I8] I K. B. 540;

[I9I8]2 K. B. 467; Romer, L. J., in Walton Harvey, Ltd. v. Walker and Homfrays,
Ltd. [I9JI] I Ch. 274, 285; RABEL, I Recht des Warenkaufs 277,343. 357·
76 Supra n. 69.
540 CONTRACTS IN GENERAL
freight promised by him? This would cover the usual propo-
sition, but the court would certainly not have agreed to such
an untenable ruling. If a German firm had bought cotton in
New York at the market price, to be paid on sound arrival
in Hamburg and the German state had decreed a ceiling
price for cotton, it is not very probable than any American
court would hold the contractual right to the price unenforce-
able. What characterized the case was the fact that the freight
in question, half of the contractual amount, should have been
paid by the Spanish buyer to the Spanish company in Spain.
Although one of the judges remarked that he did not look
beyond the immediate issue, it seems evident that the English
seller, if bound to pay the difference, would have lost his
recourse against the buyer in a Spanish court, and that this
was the reason why it seemed equitable to send the Spanish
company back to the law of its own country.
Whether such equitable considerations, not quite unfamiliar
to English and other courts, are sound in municipal law is
of little interest here. The really decisive consideration,
pointing to the distribution of risks, a consideration grounded
in a model English tradition, 77 was admirably followed by
the Privy Council in a few weeks after the Ralli case, 78 and
very neatly formulated in the following American decision. 79
The Tweedie Corporation of New Jersey, owner of the
vessel "Catania," let the ship on hire to the McDonald Cor-
poration of West Virginia by a written contract in New York,
where both companies entertained offices. The vessel was to
transport laborers on four trips from Barbados, an English
colony, to Colon. New York law evidently governed. After
two trips had been made, the British government prohibited
any export of workers from Barbados. The performance,
77 See Jacobs, Marcus & Co. v. The Credit Lyonnais (r884) 12 Q. B. D. 589.
78 Trinidad Shipping & Trading Co., Ltd. v. G. R. Alston and Co. (1920]
A. C. 888.
78 Tweedie Trading Co. v. James P. McDonald Co. (1902) II4 Fed. 985; other
cases are discussed by 2 BEALE 1263 § 36o.2.
 SCOPE OF THE LAW OF THE CONTRACT 541
thus, was not impossible but illicit in Barbados. Did this pro-
hibition of performance by the law of the place of perform-
ance excuse the hiring company from payment or even in-
validate the contract? The court, somewhat perturbed by the
confused authorities, nevertheless penetrated to the decisive
consideration. In the spirit of the contract, as the court as-
sumed, the McDonald Corporation had to carry the risk of
the change of laws of a foreign government at the place of
performance. This rigor may be approved or disapproved,
but the solution is sought in the correct field of excuses for
nonperformance according to the governing law of New
York, and the risks contemplated by the parties directed this
decision.

IV. NONPERFORMANCE oF THE CoNTRACT

I. In General
Apart from the questionable theories establishing a separate
law applicable to performance,80 in principle the law govern-
ing the contract determines all its effects, including the
requisites of default, excuses for nonperformance, and the
effects of unexcused failure to perform. 81
The English Law Reform Act of 1943, in modernizing
the rules of restitution in various cases of failure of consider-
ation, expressly presupposes that the contract is governed
80 EspecialJy BEALE II 58, 1267, 1274; in France, VALERY 987 § 685; Judge

Learned Hand in Louis-Dreyfus et al. v. Paterson Steamships, Ltd. (1930) 43 F.

(2d) 824 recognizes that liability and excuses for nonperformance must foilow the
same law, but nevertheless, foilowing the Restatement, excuses the debtor under
Canadian law from the fulfillment of a Minnesota contract. Cj. NussBAUM, 51 Yale
L. J. (1942) at 917 n. 149; BATIFFOL, 261 n. I, 407 n. 2.
81 United States: BATIFFOL 407-408 n. 2 recalJs the constant practice in the

cases concerning insurance and transportation.

England: Jacobs, Marcus & Co. v. The Credit Lyonnaise (1884) 12 Q. B. D.
589; Blackburn Bobbin Co. v. T. W. Allen & Sons, Ltd., supra n. 75.
Austria: OGH. {Oct. 24, 1928) 10 SZ. 609.
France: N1BOYET, 16 Recueil (1927) I 83; LEREBOURs-PioEONNIERE 397 § 358.
Germany: RG. (June 26, 1912) Leipz. Z. 1912, 762; Bay. ObLG. (Oct. 15, 1930)
30 Bay. ObLGZ. 354, 368; LEWALD No. 303.
Switzerland: BG. (June 28, 1918) 44 BGE. II 280 (intention of the parties}.
542 CONTRACTS IN GENERAL
by English law. 82 The Act is understood thereby to subject
the right of restitution to the law of the contract and has
been criticized on this ground83 because this right should be
governed by the law of the place where enrichment was
obtained. 84 But while undue enrichment in general may have
to follow extracontractual lines in both substantive and con-
flicts law, consideration or an advance payment given on the
ground of a contract is to be recovered under contractual
rules. Even though, in the part concerning contracts, a code
may refer to its rules relating to undue enrichment, as the
German Code does, it is well settled that the relation created
by the contract extends to the duty of restitution. 85 Hence,
German and Swiss courts apply the law governing the con-
tract, and a similar rule has probably been adopted in the
draft of the Montevideo Treaty in 1940. 86
Illustration. The English Act repeals the rule in the
Fibrosa case87 that a party who prepaid money under certain
accidental circumstances may recover all the money paid,
82 The Law Reform (Frustrated Contracts) Act, I943, 6 & 7 Geo. 6, c. 40.
83
G. L. WILLIAMS, 7 Modern L. Rev. (I944) 66, 69.
84 Williams follows GuTTERIDGE and LIP STEIN, "Conflicts of Law in Matters of

Unjustifiable Enrichment," 7 Cambr. L. J. (I939) 8o.

86 See BGB. §§ 323 par. 3, 325 par. I sent. 3; §§ 346, 347, 348 make clear that

restitution on the ground of rescission is not identical with recovery of undue

enrichment.
86 Germany: Under the common law: RG. (June I8, I887) 4 Bolze No. 26;

Bay. ObLG. (Nov. 16, 1882) 38 Seuff. Arch. 260, still regarded as leading cases by
NussBAUM, D. IPR. 295 n. 2. Under the actual practice, the courts apply the law
of the place of performance of each party with respect to his obligation. If a buyer
has paid the price in advance, he may recover after rescission, under the law of the
place where he had to pay under the contract. For the cases see LEWALD 252 No. 31 I
sub (2). RAAPE, IPR (ed. 1) 296ff. adds support by examining the practical results.
ZWE1GERT, "Bereicherungsanspriiche im lnternationalen Privatrecht," Siiddeutsche
Juristenzeitung I947, 247-253 at 252.
Switzerland: BG. (Nov. 1, I952) 78 BGE. II 385, 389, Revue Crit. 1953, 401.
Montevideo Treaty, draft of 1940, art. 43 says that the obligations arising
without contract are governed by the law of the place where the act is done from
which they derive "and, in the proper case (en su caso) by the law governing the
legal relations to which they correspond." This obscure text seems best construed
as above.
87 Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour, Ltd. [I943]

A. C.32.
 SCOPE OF THE LAW OF THE CONTRACT 543
and the payee is not allowed to deduct his own damage and
expense. Suppose that an English firm has paid a sum under
an English contract to a party in a British jurisdiction in
which the Reform Act has not yet been adopted, why should
the payee not profit from the new and unquestionably just
law governing the contract rather than depend on the place
where by a casual circumstance the money was paid? 88
The Restatement, it is true, applies its section concerned
with the quasi-contractual obligation of restitution in an
illustration, to an agreement whereby A promises to build a
house for B on B's land. The promisor starts on the building
but does not complete it. When he sues B to recover the
amount by which A's labor and materials have benefited B,
the law of the place where the land is, allegedly applies. But
in the illustration, fortunately, it is this law that allows the
recovery. 89 Otherwise, it would have been difficult to defend
the nonapplication of the law decisive for all of the contract.

2. Sanctions of Nonperformance
The unity of the contract must naturally be preserved also
with respect to the several sanctions of nonperformance. 90
Rescission. Whether a party is entitled to cancel a contract
and what restitution is due in this case by either party, is
determined by the law of the contract. 91 Beale, who would
88 Exactly to the same effect, FALCONBRIDGE, "Frustrated Contracts: The
Need for Law Reform," 23 Can. Bar Rev. (1945) 43 at 6o with reference to Ontario.
And see, more recently, MORRIS, "The Choice of Law in Statutes," 62 Law Q.
Rev. (1946) 170, 181; FALCONBRIDGE, Essays 429.
89 Restatement § 452 illustration 3·
90 E.g., German Reichsgericht (Jan. 10, 19II) Warn. Rspr. 1911, No. 111:

the right to exercise a lien is governed by the law of the contract rather than that
of the place where the right is exercised.
91 United States: Sokoloff v. Nat'! City Bank of New York (1924) 239 N. Y.
158, 145 N. E. 917, ajj'd (1928) 250 N.Y. 69, 164 N. E. 745; American Union Bank
v. Swiss Bank Corp. (1930) 40 F. (2d) 446; (both cases recognized by 2 BEALE 1275,
as authorities contrary to his own theory). For insurance, see New York Life Ins.
Co. v. Cravens (1900) 178 U.S. 389; Mutual Life Ins. Co. of New York v. Johnson,
Administrator (1934) 293 U, S. 335; and for other types of contracts, Pratt v.
 544 CONTRACTS IN GENERAL
have preferred the law of the place of performance, explains
the cases by the theory of the courts that the right of rescission
flows from a sort of implied contract. 92 But this, indeed, is
the correct theory, inasmuch as it acknowledges a right
inherent in the contract.
Damages. The old conception that damages exclusively
pertain to the procedural law of the forum, has maintained
as little force with respect to breach of contract as with respect
to tort. 93 The right to recover and the measure of damages
in a violated contract are determined by the law governing
the contract. 94 This law also extends to the question whether
damages may be obtained in addition to rescission. 95 Occa-
Dittmer (1921) sr Cal. App. SI2, 197 Pac. 36S; James N. True v. Northern Pacific
R. Co. (1914) 126 Minn. 72, 147 N. W. 948.
As an example of application of the foreign law stipulated by the parties, see
Rubin v. Gallagher (1940) 294 Mich. 124, 292 N. W. S84 (partial recovery of paid
installments in a title-retaining sale).
England: Benaim and Co. v. Debono [1924] A. C. SI4.
France: Cass. (civ.) (May 12, 1930) S.1931.r.r29, Clunet 1931, r64ff.; BATIFFOL
40S § 490·
Germany: RG. (Oct. 30, 1926) 39 [Link].R. 276; Reichsarbeitsgericht (Dec.
21, 1932) IPRspr. 1933, 23.
92
2 BEALE 127S § 373•1•
13 The procedural theory was maintained in Massachusetts as a hangover from

the past: Grimshaw v. Bender and Dana (r8o9) 6 Mass. IS7; Ayer v. Tilden
(r86o) IS Gray (81 Mass.) 178; lves v. The Farmers' Bank (r86r) 2 Allen (84
Mass.) 236.
14 United States: Restatement§ 413 (law of the place of performance); Walker v.

Lovitt (r9rr) 2SO Ill. S43, 9S N. E. 631; Amos v. Kelley Co. (1927) 240 Mich. 257,
21S N. W. 397; Riddle v. Hudson (1917) 68 Okla. 173, 172 Pac. 921, 926; Wynne v.
McCarthy (C. C. A. roth 1938) 97 F. (2d) 964; Stentor Electric Mfg. Co., Inc. v.
Klaxon Co. (1940) IIS F. (2d) 268, 27S; Smyth Sales Inc. v. Petroleum Heat &
Power Co. (1942) 128 F. (2d) 697, 702 (the last two dicta by Goodrich, J.).
England: D'Aimeida Araujo, Lda. v. Sir Frederick Becker & Co., Ltd. [I9S3l
2 Q. B. 329, 338 (remoteness of damage).
Canada: Supreme Court of Canada, Livesley v. Horst & Co. [1924] S. C. R. 6os,
[1925]1 D. L. R. 159·
Ontario: Schrader, Mitchell & Weir v. Robson Leather Co. [1912]3 D. L. R. 838
(lex loci contractus).
Quebec: See 3 Johnson 394 n. 2.
Germany: RG. (March 27, 1903) JW. 1903, r84; (Jan. 21, 1908) Leipz. Z. 1908,
308, and many subsequent cases; RG. (March 24, 1933) IPRspr. 1933 No. 14.
Italy: Cass. (June 20, 1938) Sett. Cass. 1938, 131, 7 Giur. Comp. DIP. 324 No.
173·
96 Cass. (civ.) (May 12, 1930) supra n. 91.
 SCOPE OF THE LAW OF THE CONTRACT 545
sionally, as in tort, it happens in this country that a court
wrongly denies the right to damages because of a different
construction in the domestic law. The Michigan Supreme
Court in Mount Ida School v. Rood,96 refused to enforce
the right of a school to a contractual fee under an agreement
recognized to be governed by Massachusetts law, because the
plaintiff asked for the full amount allowable in Massachu-
setts, instead of deducting at once in his own complaint the
costs he would have incurred in case of performance, as
prescribed in Michigan. The court, to avoid the "illogical and
unjust result" of Massachusetts law, resorted to the public
policy of the forum and has been justly criticized therefor. 97
Penalties. The same law may be expected to apply to the
various types of penalties stipulated in contracts. This has
been constantly recognized by the German courts resorting
to the law governing an obligation in order to determine
the validity of a penalty promised in case of nonperformance
or delay, 98 the concurrence of the right of penalty with the
right of damages, 99 and the question of waiver. 100
The same is probably true in this country, 101 with one
restriction. The purpose in agreeing on a penalty may be
either to fix a lump amount of damages or to punish the
defaulting debtor irrespective of damage, both valuable stip-
96 Walton School of Commerce v. Stroud (1929) 248 Mich. 85, 226 N. W. 883,

Wiest, J., dissenting; Mount Ida School v. Rood (1931) 253 Mich. 482, 235 N. W.
227, 74 A. L. R. 1325.
97 Notes, 14 Minn. L. Rev. (1930) 665, 67o; 78 U. of Pa. L. Rev. (1930) 64o;

So U. of Pa. L. Rev. (1931) 126; AILES, "Substance and Procedure in the Conflict
of Laws," 39 Mich. L. Rev. (1941) 392, 411, 417. But the federal Circuit Court of
Appeals has regretfully accepted the rule that the law of the forum applies as
settled by these cases, Transit Bus Sales v. Kalamazoo Coaches Inc. (1944) 145 F.
(2d) 8o4, 807.
98 RG. (March 15, 1892) 2 [Link].R. 477; RG. (Dec. r, 1911) 22 [Link].R. 311;

and other cases.

99 RG. (Jan. 5, 1887) 19 RGZ. 33 (penalty clause under English law).
100 ROHG. (Feb. r, 1875) r6 ROHGE. 14; OLG. Dresden (July ro, 1891) 2

Sachsisches Archiv fiir biirgerliches Recht 65o, cited by LEWALD No. 375a.
101 Restatement§ 422 (r); First American Nat'l Bank of Nashville v. Automobile

Ins. Co. (1958) 252 F. (2d) 62, 64.

 CONTRACTS IN GENERAL
ulations when the evidence of actual damage is difficult to
obtain, the latter method also being useful to secure prom-
ises lacking any pecuniary estimation. Nevertheless, some
American courts persist in believing that all liquidated
damages are punishments and that they are unenforceable
despite the fact that their purpose is not "to punish an
o:flense against the public justice of the state" but to grant
a civil right to a private person. 102 These courts are said to
be supposed to refuse enforcement to a promise that they
regard as a penalty, although it is valid under the law
considered by these courts themselves as governing. 103
An analogous public policy was once announced in a
German decision which reduced an agreed sum by applica-
tion of the domestic provision contained in the Civil Code
that the judge should mitigate an exaggerated penalty
according to his discretion. 104 It has been correctly objected
that such reductions cannot be essential, since the German
Commercial Code allows no such judicial mitigation.
Moratory interest allowed as damages. Finally there is
no reason why, on principle, damages for delay in a money
payment fixed by law at some percentage of the principal
sum, should not be governed by the law of the contract. 105
The contrary decisions of the French Court of Cassation are
m Words of Mr. Justice Gray in defining statutory penalties with respect to
judr,ments not falling under the Full Faith and Credit Clause, Huntington v. Attrill
(1892) I46 U.S. 657, 673-4.
m Restatement § 422 (2); BEALE 1340 § 422.1 cites only two cases of I889 and
1893, respectively.
1 " Germany: BGB. § 343; OLG. Hamburg (Dec. 23, I902) 59 Seulf. Arch. 63,

14 [Link].R. 79· Contra: see 2 FRANKENSTEIN 232; LEWALD 257·

S1milarly, Switzerland: BG. (Feb. 25, I9I5) 4I BGE. II I38.
On the other hand, in Brazil, 2 PONTES DE MIRANDA 2IO states that a Brazilian
coul't may exercise a German-created right of mitigating a penalty, art. 927 of the
Brazilian C. C. not being based on public policy.
105 Germany: RG. (Feb. 20, I88o) I RGZ. 59, 6I; (Jan. 8, I930) Hans. RGZ.

1930 B 2II, 2I4.

 SCOPE OF THE LAW OF THE CONTRACT 547
obsolete. 106 But in the United States, it is said that the law of
the place of performance applies. 107 Since the cases alleged
for support mostly refer to negotiable instruments, which, in
fact, are in a special category, we shall reserve the question
for a later opportunity.

3. Burden of Proof
We may repeat the statement made in the discussion of
torts that, in the prevailing theory, except in English courts,
burden of proof is controlled by the law governing the sub-
stantive rights. 108

v. CHANGE OF LAW

The prevailing view seems to be that in any law suit the

law governing a contract applies in the form in which it is
in force at the time of the final decision. 109 Rules of law
repealed after the making of the contract are inapplicable
and replaced by the current rules. This opinion is in con-
formity with the view set forth in this work that all references
to a foreign law as applicable to a certain question are directed
to the whole law of the foreign state, to the body of its sys-
tem susceptible of alterations, and not to a few selected rules.
106 BATIFFOL 413 § 503 has only alleged correct decisions of lower courts, but the

decision Cass. (civ.) (May 15, 1935) S.1935·I.244 clearly recognizes the law of the
place of contracting as that intended by the parties, cj. EsMEIN, 10 [Link].
(1936) 884.
107 2 BEALE 1335 § 418.2; STUMBERG 266 n. 28.
108
LoRENZEN, 32 Yale L. J. (1923) at 332 n. 74; supra pp. 283-286.
Germany: RG. (April 17, r882) 6 RGZ. 412; (Oct. 29, 1925) 79 Seuff. Arch. 353
No. 215; (May 19, 1928) 82 id. 289 No. 164.
The application of the lex fori in England has been reaffirmed by an Admiralty
Court judge and the Court of Appeals in The Roberta [1937] 58 Ll. L. Rep. 159,
177; [1938] 6o id. 84, ss.
109
England: In re Chesterman's Trusts [1923] 2 Ch. 466, 478.
France: BATIFFOL, Revue Crit. 1935, 615 at 618; HAMEL, Nouv. Revue 1937,
499 at 509; BATIFFOL 68 § 74•
Germany: RG. (Jan. 27, 1927) and (March 22, 1927) IPRspr. 1926/27 No. 42
with more documentation; RG. (May 26, 1936) JW. 1936, 2058.
Italy: Cass. (March 6, 1940) Rivista 1941, 166.
 CONTRACTS IN GENERAL
Occasionally, in this country, a contrary idea has been
advanced, as if the applicable law were that existing at the
time when the contract was made. The New York Court of
Appeals thought it necessary to excuse a deviation from this
alleged principle, when it applied the Joint Resolution of
Congress abrogating the effect of gold clauses to bonds issued
previously in New York, the new law being constitutional
and representing the public policy of the forum. 110 Evidently,
such opinions are stimulated by the doctrine prohibiting
retroactive laws from impairing vested rights. But our subject
should not be confused with constitutional problems.
At any rate, the New York Court argued on the presump-
tion of an intention of the parties to submit to the laws of
New York. There are cases, in fact, in which the parties may
well be supposed to have tacitly agreed on a reference to a
law merely as it was at the time. However, as seen earlier,
it is controversial whether the parties are allowed to do so. m
As a rule, no such temporary limit should be understood to
inhere in either an agreement or an intention of the parties;
too many difficulties would be raised in ascertaining a sub-
stituted law. In fact, the Joint Resolution of 1933 has been
applied in a great number of decisions in various countries
as a subsequently enacted part of New York law governing
bond debentures. 112
Similarly, the main part of the German Law of Revalori-
°
11 Compaiifa de lnversiones Internacionales v. Industrial Mortgage Bank of

Finland (r935) 269 N. Y. 22, 26, r98 N. E. 6r7.

It is entirely distinguishable that under the Georgia Code (r895) § 288o, (r933)
§ 57-ro6 "every contract bears interest according to the law of the place of the
contract at the time of the contract," and therefore a defendant's plea that the
contract was usurious according to a certain Alabama law, was dismissed, because
the defendant had not proved the existence of that law at the time of the contract;
see Thomas v. Clarkson (r9o6) I25 Ga. 72, 54 S. E. 77; and for subsequent cases,
Jones v. Lawman (I9J7) s6 Ga. App. 764, no, I94 s. E. 4!6, 420. This regards a
cause of initial defect in the con tract.
1 11 Supra Chapter 28, p. 395·
112 See the surveys in [Link]. Vols. 9-II.
 SCOPE OF THE LAW OF THE CONTRACT 549
zation of r 92 5, prescribing that certain debts expressed in
"Mark" currency should be due in the amount of a percent-
age in new "Reichsmark," was regarded without hesitation
as an alteration of the German law.
Only the peculiar provision of this law was much contested
whereby a debtor having redeemed a mortgage with heavily
depreciated money was bound to add some supplementary
payment. While some courts of other countries repudiated
this retroactive law under the point of view of public policy,113
a Dutch court argued that a Dutchman, having bought a
house in Germany, paid the mortgage effectively under the
law then existing, and resold the house before the new law
went into force, had no connection with Germany and could
not be affected by German legislation. 114 The court, thus,
denied the continued effect of the governing law rather than
its retroactivity, a view of great force.
Finally, obligations entered into under the Czarist Russian
legislation before the 7th of November, r9I7, were pro-
hibited by Soviet legislation from being brought before the
courts. 115 In agreement with the prevailing opinion, a Swiss
court held that as a consequence Soviet law replacing the
former law made the obligations in question unenforceable
also in Switzerland. 116 While the objection of public policy to
the legislative impairment in this case was expressly denied,
it might be granted under circumstances where the contract
has sufficiently close connection with the forum, as when the
debtor resides in the forum at the time of the decree. 117 But
even so, obligations expressed in Czarist roubles are without
113 See the cases infra Chapter 33, p. 569 n. 46.
114 Rb. Rotterdam Gune 13, 1930) W. 12266.
115 Art. 2 of the Introductory Decree of Oct. 31, 1922, to the Civil Code.
116 App. Ziirich (Dec. 19, 1928) 3 Z. f. Ostrecht (1929) 1403 with approving

note by FREUND.
117 In the case of Nazi-German expropriations, Weber v. Johnson (1939) 15

N. Y. Supp. (2d) 770; Anninger v. Hohenberg (1939) 172 Misc. 1046, 18 N. Y.

Supp. (2d) 499·
550 CONTRACTS IN GENERAL
object. 118 Cases seem to be rare in which it may be reasonably
argued that an old Russian contract survives under some
substituted law. 119
In conclusion, we may state the principle that changes in
the applicable law must be observed, except where a contrary
agreement of the parties is ascertainable and permitted by
the law of the forum.
118 Lehman, J., in Dougherty v. Equitable Life Assurance Society (1934) 266

N.Y. 71, 105, 193 N. E. 897, 910.

119 M. WoLFF, Priv. Int. Law 426 § 406 makes the interesting suggestion that a

revolutionary overthrow of the existing law and its replacement by something new
is not included in a choice of law by the parties. In my opinion, this is a question
of interpretation, as also with respect to less exorbitant changes of law, such as the
Joint Resolution on gold clauses. The difficulties, however, of a new choice of law
made necessary by the suggestion, may be great.