Why Culture Matters in Contract Law

Oftentimes in the law, we take a very narrow view of the role an individual’s cultural background plays in a litigated legal matter.  In most cases in the United States, we tend to think that the parties’ cultural background has no bearing whatsoever in the analysis of legal issues that arise.  When dealing with contract law, for example, if the contract was made in one of the United States, that state’s law applies to that contract, and it does not matter whether the contracting parties are American, or Indian, or Pakistani, or French, or anything else.  However, the issue of cultural background has arisen enough times in one particular area of contract law that it merits some discussion – the interpretation of so called “default terms” in a contract.

The case often goes something like this: Person A has a good idea for a business, but does not have the money to get that business off the ground.  However, someone he knows in the community, let’s call him “Person B”, does have money and is always looking for ways to invest his money.  Person A pitches his business idea to Person B, and Person B decides to give Person A $100,000 to get the business going.  Since Person A and Person B are members of an immigrant community, they decide to do things the way they are done in “the old country” – with a handshake instead of a written contract.  Person A puts the money into the business, but unfortunately, the business ultimately fails.  Person B then decides to sue Person A for the return of the $100,000.

This is a legal issue that arises in many immigrant communities where contracts, even contracts involving very large sums of money, are unwritten and made very informally.  The default rule in most jurisdictions in the United States is that the transfer of money described above is a loan, and therefore the loan must be repaid even though the business has failed.  However, the primary question in analyzing a contract dispute in most US court rooms is “the intent of the parties.”

Before default rules can be applied, when contracts are ambiguous, courts attempt to determine what the parties intended when they made the agreement.  This is where cultural background steps out of the shadows and often takes a starring role in the case.  In many cultures, it is understood that when a person gives money to someone else to help that person get a business off the ground, that transfer of money is not a loan, but an equity investment.  Therefore, based on the cultural background of the individuals involved, it is sometimes possible to successfully argue to a court that a financial transaction was an equity investment, even where there is no written contract to that effect.

Rather than taking an ethnocentric view of American law, creative attorneys can argue that the cultural backgrounds of litigants plays an important role in understanding the nature of transactions or business dealings and can use this enhanced understanding to achieve better results.

Article by New Jersey lawyer