The Structure of the Law on Multiparty Situations in the Draft Common Frame of Reference

Author:Matthias E. Storme
Position:Professor, Katholieke Universiteit Leuven

1. Direct representation - 1.1. The separation between the authority and the authorisation/mandate - 1.2. The form and features of this separation - 1.2.1. Coming into existence - 1.2.2. Ending of authority - 1.3. Effect on the resulting relationship - 2. New creditors - 2.1. Stipulation in favour of the third party - 2.1.1. Rules on binding character and revocability in conformity with general... (see full summary)


Matthias E. Storme1

Professor, Katholieke Universiteit Leuven

The Structure of the Law on Multiparty Situations in the Draft Common Frame of Reference

The purpose of this contribution is to provide a comparative analysis of the treatment of multiparty situations in the Draft Common Frame of Reference (DCFR)2. Because such situations are more complex than simple bipartite relationships, their study reveals a lot about the structure and underlying way of thinking of a legal system.

A very important element in this respect is that the DCFR clearly distinguishes the contract as a juridical act from the obligational relationship between the parties resulting from a (valid) contract - the contractual relationship. This distinction is also expressed in the division between Book II (on contracts and other juridical acts) and Book III (addressing contractual and non-contractual obligations). This distinction is especially important for avoiding misconceptions concerning multiparty relationships or situations. In multiparty operations, there often is a contractual relationship between parties other than those having made the contract. But in nearly all legal systems, the law of obligations was developed first for two-party-relationships and only later for more complex situations. The discipline of multiparty operations is in many national systems covered with rules that are still determined proceeding from the idea that a 'real' contractual relationship only can exist between the parties who made the contract. Some of them may have been useful as transitional in the development described but have since lost their utility. Some were originally in line with the general rules for bipartite relationships in their time but are no longer so because they have missed out on the developments of general contract law3.

This approach of the DCFR allows a more or less coherent treatment of the different multiparty situations. I will deal in this article with situations wherein three parties are involved, as they are sufficient to demonstrate the questions and proposed solutions. The main questions in this respect involve the relation among the different relationships - i.e., to what extent one of the bipartite relationships is dependent upon one or more of the other bipartite relationships. The rules of the DCFR are, as in most national jurisdictions, the expression of a balancing of general principles, especially the principles of autonomy and of reliance4.

I will start the analysis with the rules on (direct) representation, continue by addressing operations that can be seen as giving rise to a new creditor, and finally discuss operations giving rise to a new debtor.

1. Direct representation

In the rules on representation, the balancing of the different principles, especially the autonomy principle and the reliance principle, has applied a technique of 'separation', which is used to some extent (but less clear) in the rules on other institutions discussed below.

1.1. The separation between the authority and the authorisation/mandate

The rules on (direct) representation start from the distinction and separation between the 'external relationship' and the 'internal relationship'. The rules on representation in Book II, Chapter 6 deal only with the external relationship - i.e., the relationships between (a) the principal and the third party and (b) the representative and the third party (article II.-6:101 (1) - whereas the internal relationship will be governed by its own rules, depending on the nature of that relationship (article II.-6:101 (3) a contrario); the latter relationship will often be one stemming from a contract of mandate, and the rules for such relationships as set forth in Book IV.D will apply, but a different type of contractual relationship or even a non-contractual relationship could be involved.

The external relationship centres on the notion of authority, to be distinguished from the (act of) authorisation and the directions that are elements of the internal relationship. It is the old distinction between 'quod potest' and 'quod licet'. Thus:

- Articles II.-6:102 (2) and IV.D.-1:102 (b) define the 'authority' of a representative as "the power to affect the principal's legal position" (especially to bind the principal by acts by which the principal will be bound as if he had carried out the act itself).

- Article II.-6:102 (3) defines the 'authorisation' of the representative as "the granting or maintaining of the authority" (usually by the principal itself in a contract or other juridical act with the representative). Equally, article IV.D.-1:102 (a) juncto IVD.-1:101 (1) (a) defines a 'mandate' of a representative as "the authorisation and instruction given by the principal to conclude a contract or otherwise affect the legal position of the principal in relation to a third party".

Given this approach5 , the question of whether the act of 'authorisation' is separated from the (rest of the) contractual relationship itself between the principal and the representative (as it is constructed in, for example, German law) has lost most of its importance.

1.2. The form and features of this separation

The exact nature of the separation can be seen more clearly when one analyses the rules on the coming into existence of authority and its ending.

1.2.1. Coming into existence

The authority of a representative may be (a) granted by the principal (II.-6:103 (1)); (b) granted by the law (II.-6:103 (1)), this grant also being called authorisation; or based upon appearance: If a person causes a third party reasonably and in good faith to believe that he has authorised a representative to perform certain acts, the person is treated as a principal who has so authorised the apparent representative (II.-6:103 (3)). In the latter case, the authorisation is only 'apparent' but the authority is 'real': the agent has authority and not merely apparent authority6. The rule is an expression of the principle of reliance, which in the circumstances described receives priority over the pure autonomy principle.

The same applies for the scope or extent of the authority. The rules of II.-6:103 and IV.D.-1:102 (a) imply that directions given by the principal to the representative but not known to the third party do not limit the authority of the representative7.

1.2.2. Ending of authority

The same separation between authorisation (in the internal relationship) and authority (in the external relationship) is found in the rules concerning the ending of the one and the other.

The rules on the ending of authorisation are found in the general rules of contract law, especially in Book III, supplemented by the specific rules on mandate contracts in Book IV.D., which provide that a mandate can, moreover, be revoked at any time by the principal (article IV.D-1:104), except in specific cases of irrevocability where revocation is restricted to the grounds of termination as in general contract law and some additional situations (see article IV.D.-1:105).

The rules on the ending of authority, on the other hand, are found in Book II - specifically, in II.-6:112. Again, the basic rule (paragraph 1) cites the apparent internal relationship as the criterion for the continuation or ending of the authority: "The authority of a representative continues in relation to a third party who knew of the authority notwithstanding the ending or restriction of the representative's authorisation until the third party knows or can reasonably be expected to know of the ending or restriction." 8 This also implies that authority does not end retrospectively.

The terms in paragraph 2 apply when the 'third party' is not really a third party; that is, "[w]here the principal is under an obligation to the third party not to end or restrict the representative's authorisation, the authority of a representative continues notwithstanding an ending or restriction of the authorisation even if the third party knows of the ending or restriction". This also means, a contrario, if there is no obligation toward the third party, authority is ended in the external relationship when the third party is notified or knows about the ending, even if the ending is not allowed in the internal relationship between principal and representative; whether the revocation is valid or not is for the third party a res inter alios acta.

1.3. Effect on the resulting relationship

The mechanism of representation in the DCFR implies, in conformity with the tradition, that the relationship between the principal and third party is the relationship as concluded between the representative and the third party. Both parties are in relation to each other as well bound by that relationship as able to invoke it.

Thus, the relevant elements for interpretation of the concluded contract are to be found in the acts and minds of the representative and the third party (not of the principal). However, as the principal is considered to be a party to the relationship from the beginning...

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