Precontract And Its Validity

Precontract is a contract in which relevant parties agree to reach a deal lately in the future. It is the expression of consensus from both parties in transaction negotiations in a bid to oblige relevant parties when conditions are not ripe yet. According to Article 2,The Supreme People’s Court’s Interpretations on the Application of Law in the Trials of Cases :Involving Disputes over Purchase and Sale Contracts Where the parties involved signed a subscription letter, purchase order, reservation letter, letter of intent, memorandum or other forms of pre-contract, and agreed to enter into a purchase and sale contract within a certain period, if one party fails to perform the obligation of signing the purchase and sale contract and the other party demands the delinquent party to assume the liability for breach of pre-contract, or demands the termination of the pre-contract and claims damages against the delinquent party, the people’s court shall uphold it is the first statutory law which stipulates precontract and its validity aiming at to resolve disputes over subscription letter or purchase order in practice especially in the transaction of real estate sales. However, the Interpretations have not stated in details about issues over precontract like its format and validity,it just instead set principle rules regarding breach of contract and compensation for damages. we still need to probe further into the issue in theory and legal practice as well.This thesis consists of three main parts except the preamble and the epilogue. The first part introduces the evolution process and basis of precontract. Section 1-the formation of precontract-firstly represents the formation and development of precontract and legal provisions in different countries. Then the meaning of precontract. Precontract not only makes up for the inadequacy of precontractual liability rules but also acts as an insurance to contract forming and transaction security. Section 2-the theoretical basis of precontract. every legal system is backed by its one theoretical basis, so does the precontract system. The precountract theory is based on freedom of contract and the principle of honesty and credit. If the freedom of contract is deemed as the origin of the validity of precontract, the principle of honesty and credit is the limitation against this freedom.The second part of this thesis discusses identification and application of precontract with the application of precontract in section 1 and the identification in section 2.We should firstly recognize all the features of precontract for the purpose to properly apply. Precontract can be classified as contract for credit as well as consensual contract of which the pivotal object is to stike a formal contract. Then this thesis differentiate and analyze several contractual forms which might be misunderstood as precontract in prevention of confusion of understanding. The next comes the scope of precontract. Some scholars believe that precontract can be applied under no other conditions except only Contractus re given the fact that the precontract develops from it. this thesis concludes that precontract can be applied to any contract for credits after discussion. Section 2 evolves the identification of precontract. Precontract, as a kind of contract, must meet the same requirements of validity of the average ones like eligible subjects, extension of expression truth and no contradiction against the law and public interest. I also discusses the issues of contractual format and content definiteness. this thesis believes that it is not necessary to include the main articles of the future formal contract in precontract. General consensus regarding the transaction and explicit expression of striking a formal deal lately would be enough to reach a precontract. As for the format issue,this thesis upholds the informality theory from which the parties should be left the independent decision power to determine the formality of the precontract.The third part expounds the validity of the precontract and the consequences ofdefault. Section 1 involves the validity of precontract. There are three main standpoints towards this issue: “must negotiate theory”, “must sign theory” and the “division theory”. The “must negotiate theory” believes that the relevant parties are obliged to negotiate with each other lately in the future under the precontract with no consideration over contract sighing while the “must sign theory” argues the involving parties must in effect sign a contract apart from negotiation otherwise there is no need for precontract. The “division theory” believes the validity of precontract depends on whether it includes the main articles of the formal contract. This thesis sides with the “division theory” and discuss specifically the newly proposed “conbination theory of subjectiveness and objectiveness” which develops from the division theory. This new theory believes we should refer to the agreement between relevant parties and the content of the precontract to reach overall consideration. Section 2 discusses the consequences of default. Firstly,the thesis discusses the feasibility of enforced performance which depends on the type of the precontract. Then this thesis probes into the question whether the damages being classified as reliance interest or performance interest and concludes that the damages should be deemed as performance interest since the existence of the precontract as well as the reliance interest incurred by the failure of signing a formal contract. This thesis finally compares the deposit and damages for breach of contract. The deposit can be explained either as deposit for breach of contract or covenant deposit from respective angels of precontract or the formal contract. The thesis also reaches the conclusion that damages for breach of contract cannot be applied in conjunction with deposit or continuance of performance.