Flo's Notes

Contract Law

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Contracts

A contract requires an offer and an acceptance, and in both cases, the intention to be legally bound.

What is a Contract?

A contract is a legally binding agreement between two or more parties that creates mutually enforceable primary obligations. Contracts are binding as soon as they are agreed upon (pacta sunt servanda) and cannot be changed unilaterally.

Contracts may also include secondary obligations triggered by an event, such as a penalty clause, which is an obligation that arises if the primary obligation is not fulfilled.

In general, parties owe duty of care to each other, meaning they must act with reasonable care and not cause harm to the other party.

Consideration and Intention

Under common law, a contract is only enforceable if there is consideration, which means that each party must provide something of value in exchange for the other’s promise. Here, consideration is used as an objective indicator for intention.

In contrast, under civil law, a contract is enforceable if there is an intention to be bound, which means that the parties must have the intention to create a legally binding agreement. Here, intention is used as a subjective indicator for enforceability, for example testing if a party would take a disagreement to court.

Objective indicators for intent include consideration owed, reimbursements, regular events, or expression of the importance of the agreement.

Principles of Contract Law

Freedom of Contract

Parties are free to enter into contracts and determine their terms, as long as they do not violate the law or public policy. This includes the freedom to choose the other party (private autonomy), freedom of form (contracts can be oral, written, or implied - contracts do not need to be signed), and freedom to determine the content of the contract. Parties can also agree to modify or terminate the contract, as long as both parties consent.

Freedom of contract can be seen as the legal expression of the free market economy: It allows parties to freely negotiate and agree on the terms of their contracts, which promotes economic efficiency and innovation.

Pacta Sunt Servanda

This principle means that agreements must be kept. Once a contract is formed, it is legally binding and enforceable, and parties are obligated to fulfill their contractual obligations. This principle promotes trust and reliability in commercial transactions, as parties can rely on the promises made in a contract and seek legal recourse if those promises are not fulfilled.

Good Faith

The principle of good faith requires parties to act honestly and fairly in their contractual dealings, and to refrain from taking advantage of the other party’s vulnerabilities or weaknesses.

Legal capacity entails:

  • Being able to own property
  • Being able to enter into contracts
  • Being able to sue and be sued

Natural Persons are humans with legal capacity. In Germany, this is generally from birth to death (regardless of nationality or residency). Minors (under 18) have limited legal capacity, meaning they can only enter into certain contracts with parental consent.

Legal Persons are entities created by law, such as corporations, associations, and foundations. They have legal capacity to enter into contracts, own property, and sue or be sued. For example, a corporation can enter into a contract to purchase goods or services, and it can also be held liable for breach of contract.

Declarations of Intent

Relevant Sections

§ 133 BGB, § 157 BGB

Declarations of intent are statements that express a party’s intention to enter into a contract. Examples are offers and acceptances, termination or withdrawals notes, or testaments. These declarations cannot be withdrawn once made (unless the withdrawal arrives earlier or simultaneously).

DOIs are Binding

Unless refused, specifically excluded, or not accepted in reasonable time, contracts are binding and enforceable (§145 BGB, ff). This principle is fundamental to contract law, as it ensures that parties can rely on the promises made in a contract and that there is legal recourse if those promises are not fulfilled.

Offer and Acceptance

Both offer and acceptance of a contract are declarations of intent. An offer is a proposal made by one party to another, indicating a willingness to enter into a contract on certain terms. Offers include price, goods, and parties.
Acceptance is the agreement by the other party to those terms. For example, if a person offers to sell their car for a certain price, and the other party agrees to that price, a contract is formed. An acceptance cannot add new terms.
These do not do not have to be made explicitly but can also be implied through conduct. For example, a taxi driver might accept an offer by starting to drive.

Form

By default, declarations of intent do not require a specific form to be valid and freedom of form applies. However, in some cases, statutory law or contract clauses may require a specific form for certain declarations of intent, such as a written contract for the sale of real estate.

  1. Text Form (§126b BGB): Requires a durable readable declaration in which the declaring person is identifiable. This can be fulfilled by a simple email, for example. It should allow for unchanged reproduction, however no signature is required.

  2. Electronic Form (§126a BGB): Special case of text form with a qualified electronic signature, which requires a digital certificate issued by a trusted authority. This is sometimes used for online contracts.

  3. Written Form (§126 BGB): A physical document that must be signed by the declaring person. This is often required for contracts that involve significant obligations, such as employment contracts or leases.

  4. Notarial Recording (§128 BGB): The strictest form, recorded by a notary public, which provides a high level of legal certainty. This is often required for contracts that involve real estate transactions or certain types of business agreements.

Breach of Form

If law or contract requires a specific form and that form is not followed, the declaration of intent is void and therefore no contract is formed. Overfulfilling the requirement (e.g. written instead of formless) is not a problem.

Interpretation

When interpreting a declaration, its intention is considered over the true meaning of the words (§133 BGB). This interpretation might differ with different backgrounds of the parties. For this, lawyers have to start with the literal meaning, then consider the context and the circumstances of the declaration, and finally consider the parties’ intentions.

Objective Bystander

When interpreting a declaration of intent, the perspective of an objective bystander is used to determine the meaning of the words and actions of the parties. This means that the interpretation is based on how a reasonable person would understand the declaration in the context of the situation, rather than on the subjective intentions of the parties (unless the meaning is clear to both parties but not to a bystander).

Receipt

Declarations of intent become effective on receipt (§130 I 1 BGB) by the other party. For unbodied declarations such as spoken word, this is usually immediate. Bodied declarations such as letters or emails are effective when they arrive in the recipient’s sphere of control (e.g. when they are delivered to the recipient’s inbox or a company’s receptionist) and the recipient can be reasonably expected to take notice (which does not need to the case). For example, a letter is often expected to taken note of the on the day it is delivered.

Bodied and Unbodied DoIs

Bodied declarations of intent are those that are made in a specific form, such as a written contract or a notarial recording. Unbodied declarations of intent are those that are made orally or through conduct, such as a handshake or a nod.

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