Modelling Legitimate Expectations

Legitimate expectation in the context of culpa in contrahendo is an important legal concept for the study of good faith and the duty to negotiate with good care. However when wanting to model it and reason about it, one finds that most existing legal formalisations do not directly account for the concept. In this paper we present a formal model that can explicitly model and reason about legitimate expectations by extending the formal INSTAL legal framework. We demonstrate our extensions with the help of a private law case study which has gained wide popularity in Japanese law. 1 Legal Frameworks and Legitimate Expectations In the legal reasoning community, logical formalisations have been used for a considerable period of time for modelling and reasoning about legal concepts. [9] provides a detailed overview and discussion of the various approaches. Nevertheless these do not capture all legal concepts. Legitimate expectations are one example of a concept which is not explicitly accounted for in existing approaches. Legitimate expectations are a legal concept which is typically mentioned in connection with the long standing legal doctrine of culpa in contrahendo (Latin for “fault in conclusion of a contract”). The concept goes back to an article by von Jhering, published in 1861, entitled “Culpa in contrahendo, oder Schadensersatz bei nichtigen oder nicht zur Perfektion gelangten Verträgen” [14]. The idea described in this article is the duty to negotiate with care. This duty includes not falsely leading a negotiation partner to a legitimate expectation that might result in him acting to his detriment before a contract is concluded. In case of a breach of this duty, the party to blame can be liable for damages suffered by the negotiating party relying on the conclusion of a firm contract [10]. The degree by which culpa in contrahendo is applied differs between countries. For example, in German contract law for example culpa in contrahendo is explicitly accounted for (§311 BGB specifies a number of steps by which an obligation to pay damages may be created). In contrast, the majority of common law jurisdictions are conservative with respect to the culpa in contrahendo doctrine and only apply it if consideration can be proven by the claimant. For example, in the US and the UK, the doctrine of promissory estoppel works as a model for culpa in contrahendo, whereas in Japan it is categorized as a problem of the good faith principle. However the general idea of its application remains the same: if the claimant has acted with the appropriate consideration and as a consequence of the actions of the negotiation partner had legitimate expectations that the contract would be firmly concluded, culpa in contrahendo can be applied. In this paper we understand the term legitimate expectations in the broader sense of fairness and pre-contractual liability based on the abuse of rights outline above, i.e. not only applying to public law (as done in English law). In this paper we propose, to our knowledge, the first model for representing and reasoning about legitimate expectations as a basis for culpa in contrahendo. We use an extension of Cliffe et al’s [3] formal legal framework. Its formal model is solely based on mathematical constructs (i.e. functions and relations), thereby avoiding formalism specific side-effects. In detail, it allows us to specify the concept of legitimate expectations as well as the components required for it independently of the afterwards chosen implementation language. To demonstrate our approach we use a private law case study which has gained wide popularity in Japanese law, in particular w.r.t. the principle of good faith4. This case study was first portrayed in a Workshop on the Sales Convention by Professor Shigeru Kagayama of Nagoya University (Japan)5as follows: A dentist (buyer and defendant) wanted to open a clinic, and, therefore, entered into negotiations to conclude a contract for the purchase of space in a suitable building. During the negotiations, the buyer specified the space needed for the dental clinic, gave the seller plans for the layout of the space, pointed out that the existing space lacked the electrical capacity required for the clinic, and implicitly authorized the owner to change the design and construct facilities suitable for the clinic. After six months, however, the buyer broke off negotiations because he had decided that the space available in the seller’s building was too small. The Japanese Supreme Court (Decision of September 18, 1984, Conf. Hanrei Jiho No. 1137, p. 51.) decided the case by applying legitimate expectations principles. The court held that – despite no contract having been signed by the two parties – the buyer was liable to the seller for losses caused when the seller changed the design of the space and incurred construction costs, because the buyer had not acted in good faith in negotiating the contract. The culpa in contrahendo principle was applied. The paper is structured as follows. In Sec. 2 we provide a formal model for reasoning about legitimate expectations, based on the concept of legal frameworks, by first explaining the existing INSTAL legal framework and afterwards highlighting the extensions made. Both the syntax and the semantics of the framework are explained in detail. In Sec. 3 we demonstrate our approach with the help of the private law promissory Estoppel case study described earlier The paper finishes with a description of related work (Sec. 4), conclusions and an outline for future work (Sec. 5). 4 In the UK and the US, the case study provided in this paper is typically considered as an example of promissory estoppel. 5 The transcript of the workshop discussion including the case presented here were reproduced in the Journal of Law & Commerce [7].