The Essential of a Contract in German Civil Law

Table of Contents

Bibliography

1. Introduction

2. The Role of Contract Law

3. Formation of a Contract
3.1. Offer, Acceptance and Mutual Consent
3.2. Defects of Consent
3.2.1. Mistake
3.2.2. Fraud
3.2.3. Coercion

4. Penalty Clauses

5. Contractual Performance
5.1. Excusable Non-Performance
5.2. Contractual Remedies

6. Discussion and Conclusion

Bibliography

Freund, Ernst, The New German Civil Code, Harvard Law Review Vol. 13, No. 8, 1900, pp. 627-637

Geest, De Gerrit, Contract Law and Economics: Encyclopedia of Law and Economics, Vol. 6, 2nd edition, Edward Elgar, U.K., 2011

Pieck, Manfred, A Study of the Significant Aspects of German Contract Law," Annual Survey of International & Comparative Law Vol. 3, No. 1, Article 7, 1996, pp. 111-176

Wittman, Donald A., Economic Foundations of Law and Organization, Cambridge: Cambridge University Press, USA, 2006

Posner, Richard A., Economic Analysis of Law, 7th edition, New York: Aspen Publishers, 2007

Markesinis, B. Sir, Unberath, Hannes, Hannes, Angus, The German Law of Contract: A Comparative Treatise, 2nd edition, Oxford and Portland, Oregon, North America, 2006

Lowisch, Manfred, New Law of Obligations in Germany, Ritsumeikan Law Review No. 20, 2003, pp. 141-156

Rowan, Solène, Remedies for Breach of Contract: A Comparative Analysis of the Protection of Performance, Oxford University Press Inc., New York, 2012

Youngs Raymond, Sourcebook on German Law, 2nd edition, Cavendish Publishing Limited, U.K., 2002

1. Introduction

An important characteristic of German civil law system which sets it apart from common law system is the codification of core rules received from Roman law. These codes are drafted in order to cover all relationships within the field of law they govern. The provisions of a code are the references for a great many practical legal problems arise within that field over time. The concept of codification was developed in order to form a base where the laws of a given field can be found in one category – the code – instead of creating many judicial decisions. Beside its general part, German civil code contains other four divisions; the law of obligations, the law of property, the law of family or domestic relations, and the law of inheritance.¹ The whole commercial law falls under the law of obligation regulated by the code. This includes e.g. the law of bills, notes, shipping, insurance, patents, copyrights, trademarks, contracts, and business transactions.² This way of codification provides all citizens with a collection of laws they must follow. These laws constitute a systematic written collection of interrelated articles arranged by subject of matter.

The following chapters present the essentials of a contract as a part of the German civil law and how it is governed through this law.

2. The Role of Contract Law

The law of contract is almost the same worldwide to a large extent. The German legislation of contract has its roots in the Roman law tradition of the 19th Century and in addition it is influenced by the French Civil Code ("Code Napoléon" of 1804). On an economic view, contract is “an open-ended institution by which individual actors can exchange resources to their mutual advantage, thereby moving them to higher-valued uses”.³ In this sense and in the German civil law, parties have a freedom right to make a contract (Vertragsfreiheit), according to Grundgesetz (GG) Art. 2 (1), for any object (Inhaltsfreiheit) and in any form (Formfreiheit) they agree upon as well as to conclude or not to conclude a contract (Abschlussfreiheit) unless these rights are specifically restricted by law.⁴

The role of law in this case is to protect parties from unforeseen circumstances and avoid mishaps occurred by the contracting process or at least reduce its seriousness. In other words, the role of contract law is to reduce the costs of contracting parties, the cost of courts writing the contract and the costs of incompatible behaviour caused by the poor content of a written contract.⁵ However, parties themselves ensure a considerable level of precautions as the first line of defence.

In more details, objectives of contract law revolve around preventing opportunism behaviour, setting out suitable terms as well as punishments on avoidable mistakes in the contracting process, attributing a burden to the superior bearer of it and minimizing the costs of resolving a dispute.⁶

3. Formation of a Contract

As mentioned before, parties have a freedom to form a contract but some elements must legally be considered in the contracting process in order for the contract to be valid. This chapter explore briefly these elements in more details according to Book One, Section III, Title 3 of the civil Code (§§ 145-157).

3.1. Offer, Acceptance and Mutual Consent

The contract is an agreement between two parties or more about certain legal objectives. These objectives to be set into binding arrangement with preconditions, one party needs to deliver the so-called “declaration of intention” or will to the other who should unreservedly accept it delivering also a declaration of will to enter into a contract. Offer and acceptance are required to form a contract through corresponding declarations of will (Willenserklärungen) even they are not sufficient to form a contract. They produce their effect by the time they reach (Zugang) the other party’s sphere of influence meaning the offer “reaches” the offeree and acceptance “reaches” the offeror, as not to be revoked before that time.⁷ This rule states that revocation is possible if it reaches the addressee prior to or simultaneously with the offer or acceptance. For the offer and acceptance to come into an existing contract and to be binding, it must be communicated to the other party as a declaration of intention (will) to be received by the addressee (§ 130 I 1 BGB) in time at which a declaration of intention may come into existence.⁸ In this sense, the actual notification of the content of declaration must be received by the addressee. In some cases, and according to § 151 BGB, acceptance of an offer need not to be communicated to the offeror, rather, the offeree need to externalize his will through an appropriate form of conduct.

Further, agreement from parties on all points is required in order for a contract to come into existence unless they conclude that some disputed points, stipulated in the contract, have not been settled and in this case the contract is valid.⁹ Agreement also includes parties to agree on the period of time during which the obligations must be met and the place of performance where the duty of performance should take place.

However, offer and acceptance are one of the basic elements of a contract but are alone not sufficient to form a contract. For the formation of this element or the formation of a contract as a whole, many issues arise such as the key principle “Good Faith” which describe how honestly, fairly and equitably parties to a contract intentionally treat each other as under an obligation not to destroy the other party´s benefits of the contract.¹⁰

3.2. Defects of Consent

To ensure the conception of consensualism of a contract, German civil law provides correctives for many cases where consent can be defected. These cases are represented in obviously not enlightened (Mistake or fraud) or free (Coercion) consent.

3.2.1. Mistake

The expectations from a contract have to be realistic and not mistaken in order to produce the so-called Pareto gain where parties are aware of the essential benefits expected from contracting.¹¹ Mistake (Error) can be defined as “the result of information having been trafficked by the other party or under its control” where the other party being mistaken has the right to demand nullity of the contract or to go forward with it, since Mistake is contrary to consensualism concept as an essential element of the contract.¹² The meant mistake here is the error occurred by the promisor being not aware of the objective meaning of his declaration of will. The BGB has referred to common error as ‘common mistake’ for specific incident of notion of misconception for entering into a contract that if the mistake affects the foundation of objective meaning or the contract terms, it gives one party the right to have the contract adjusted or to terminate the contract (§ 313 II BGB).¹³ However, mistake constitutes misunderstanding and delivers inaccurate information to the other party who will be deprived of its preferred option. If the contract better redone, it is considered as a new contract and needs a new acceptance from obligee.

3.2.2. Fraud

Fraud can be described as the intentionally manipulation of information from one party, by trickery or lies, on which the other party builds its consent; or in the form of giving misleading answers or outright lies to specific questions from the other.¹⁴ In this case, the fraud is considered as an intended error from one party allowing the other being mistaken to call for nullity of the contract.¹⁵ The German court (Bundesgerichtshof) argues according to § 123 I BGB that fraud consists not only of active manipulating but also of withholding information that must be revealed and is considered decisive for the other party.¹⁶ The court ensures some exceptions to this rule clarifying that parties have to keep themselves informed about all information relevant to the decision to enter into a contract. Hence, the defect of fraud makes the contract void and the obligee must not perform his duties.

3.2.3. Coercion

As a necessary condition, declaration of will has to be carried out with the intention to act and not to be forced by coercion. As defined in § 123 I second alternative BGB, Coercion is “the presence of (unlawful or) illegitimate threats (widerrechtliche Drohung)”.¹⁷ A threat refers to opportunistically abuse by the power of one party to force the other to carry out an act and therefor it doesn´t constitute a declaration of will. Obviously, illegitimate threat should constitute harm to the party aggrieved to have the contract set aside. In some cases, it doesn´t constitute a harm and the contract may be valid. In contrast, the contract goes forward when the threat is ceased and the threatened party approve it in one full year that after (§ 124 BGB).

However, the BGB entitles the party under coercion to rescind the contract regardless of the person making the pressure where the coercion is specifically the “reason” for entering into the contract.¹⁸

4. Penalty Clauses

Penalty clauses are conditions included in contracts, especially in standard terms contracts to govern the dealings between dealer and consumer. The German law gives full effect to penalty clauses. The including of penalty clauses (Vertragsstrafe) in a contract ensures alternatives when the debtor doesn´t perform as agreed. These clauses can be applied against non-performance, delayed performance, or non-conforming performance of obligations (BGB §§ 339, 285) where the creditor can claim that debtor may pay monetary penalty, do something equal or at least perform as stipulated or agreed even if creditor suffers no injury.¹⁹ The court also takes the responsibility of balancing the penalty to ensure a reasonable level in case of disproportion with non-performance. On the other side, the court cannot exceed the legitimate interests of creditor and further, the court is not entitled to reduce penalty amount if it was paid (BGB§ 343).²⁰ Penalty could be enforced by the court when loss is fairly estimated even without being exactly corresponding with the actual loss.

[...]

¹ Cf. Freund, German Civil Code, 1900, p. 630.

² Cf. Freund, German Civil Code, 1900, p. 631.

³ Geest, Contract Law and Economics, 2011, p. 425.

⁴ Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 111.

⁵ Cf. Wittman, Economic Foundations of Law and Organization, 2006, p.194.

⁶ Cf. Posner, Economic Analysis of Law, 2007, p. 99.

⁷ Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 116.

⁸ Cf. Markesinis et al., The German Law of Contract, 2006, p. 69.

⁹ Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 117.

¹⁰ Cf. Markesinis et al., The German Law of Contract, 2006, p. 58.

¹¹ Cf. Geest, Contract Law and Economics, 2011, p. 435.

¹² Cf. Geest, Contract Law and Economics, 2011, p. 435.

¹³ Cf. Markesinis et al., The German Law of Contract, 2006, p. 301.

¹⁴ Cf. Geest, Contract Law and Economics, 2011, p. 436.

¹⁵ Cf. Geest, Contract Law and Economics, 2011, p. 436.

¹⁶ Cf. Markesinis et al., The German Law of Contract, 2006, p. 305.

¹⁷ Markesinis et al., The German Law of Contract, 2006, p. 315.

¹⁸ Cf. Markesinis et al., The German Law of Contract, 2006, p. 315.

¹⁹ Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 128.

²⁰ Cf. Pieck, The Significant Aspects of German Contract Law, 1996, p. 128.