Flo's Notes

Contract Law

20 min read

References without law book default to BGB.

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Contracts

Resources

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

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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): 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): 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): 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): 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.

Agency

Resources

Relevant Sections

§ 164 BGB, § 177 BGB

Agency is the concept of an agent acting on behalf of a principal. The agent has the authority to bind the principal to contracts and other legal obligations. For example, an employee may act as an agent for their employer when entering into contracts with customers or suppliers. In a business company, where the company itself is a legal person, this is especially relevant as all transactions are done by agents, as well as for minors.

Declarations by agents are regulated by § 164 BGB. If an agent has authority and scope to act on behalf of the principal, the declaration of intent made by the agent is effective as if it were made by the principal. However, if the agent does not have authority to act on behalf of the principal, the declaration of intent is not effective unless the principal ratifies it.

Contractual authority (agency, possibly for a specific tasks) can be deferred by declaration of intent or by law. In non-everyday transactions, the agent must disclose the principal they represent.

These three requirements (declaration by the agent, in the name of the principal, within scope of authority), the representation is valid. The first two criteria are usually fulfilled. If the scope is breached, it’s up to the principal to ratify the contract, which can be done explicitly or implicitly (e.g. by accepting the benefits of the contract). If the principal does not ratify the contract, the unauthorized agent is personally liable for any damages caused to the third party.

In many aspects, this mirrors the rules of the protection of minors.

Agents and Messengers

An agent is authorized to act on behalf of a principle and issues their own DoI, therefore they can enter into contracts and other legal obligations on behalf of the principal. A messenger, on the other hand, is simply a person who delivers a DoI on behalf of another person.

Agency in Business Entities

In an OHG entity, which acts under personal law with unlimited liability (§ 105 I HGB), all partners of the OHG have individual power to represent the company and are liable jointly. In a GmbH, by default, all partners have to act jointly (though this is almost always changed for an individual managing director), and the company is liable with its assets, not the partners.

Mistakes and Fraud

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Relevant Sections

§ 119 BGB, § 120 BGB, § 121 BGB, § 122 BGB, § 123 BGB, § 124 BGB

Contracts are binding, and changing opinions or a party’s requirements are irrelevant. However, there are some conditions under which a contract may be invalid or unenforceable.

Errors

Under § 119 BGB, if a person makes a mistake where their subjective intention does not match the objective content of their declaration (e.g., misspeaking or mistyping), the DOI can be avoided. If the contract is avoided, the person who made the mistake must declare it without undue delay (§ 121) and must pay compensation for any damages the other party incurred by trusting the contract (§ 122). In effect, the DOI is treated as if it never existed (ex-tunc; § 142).

However, proving an honest mistake (a different intention) in practice is very difficult, so its real-world relevance is limited. Courts will also dismiss these claims if the mistake was due to negligence.

The definition of without undue delay given in this context (§ 121 BGB) is relevant for other cases as well: as a rule of thumb, 14 days for regular and 30 days for complex cases, however it’s up to courts to specify what as soon as possible means in a given case.

Types of Errors

  • § 119 I BGB: The objective content of the declaration does not match the subjective intention of the person making the declaration (e.g., misspeaking or mistyping).
  • § 119 II BGB: A mistake about the essential characteristics of a person of thing relevant for deciding on price/value (not the price itself). This does not apply to Sale of Goods.
  • § 120 BGB: A mistake in the transmission of the declaration.

Deceit and Duress

A person who has been deceived or unlawful duress can avoid the contract (§123 I BGB) within a reasonable time after discovering the deceit or duress, within 1 year of discovery or 10 years after the declaration (§ 124). This is a choice however, and no compensation is owed if the contract is avoided (popular exam question).

Deceit

Deceit is making statements that are objectively not true (e.g. the power of a car), while knowing that this is not the truth or having the intention to deceive (§ 263 StGB). A case that is fraud under criminal law is often also deceit under civil law. Additionally, the incorrect statement has to be relevant for the contract decision.

However, there is no general disclosure obligation and the seller does not have to correct the buyer’s wrong assumptions (take care of your own business) – an exception being crashes of used cars. Lying in response to an unlawful question (e.g. job interview) is not deceit.

Duress

Duress occurs when a person is forced to enter a contract against their will, for example by being threatened with physical harm or economic harm (§ 240 StGB). Threatening consequences that are not illegal (e.g. firing someone) does not constitute duress, the combination of means and aim has to be illegal.

Protection of Minors and Disabled

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Relevant Sections

§ 104 BGB, § 105 BGB, § 105a BGB, § 106 BGB, § 107 BGB, § 110 BGB, § 112 BGB

In contract law, the protection of minors is a core principle.

Incapability

Defined in § 104 BGB:

  • Children under the age of 7 cannot declare their intent, and therefore cannot enter a contract. Instead, parents can act for their child.
  • Similarly, persons in a permanent state of mental incapacity cannot enter into contracts, and their legal representatives can act for them. § 105a however allows low-value every-day transactions (e.g. buying a coffee, though very loosely described) to be valid, even if the person is mentally incapacitated.
  • Declarations made in a temporary state of mental disturbance (e.g. due to intoxication) are voidable (§ 105 II).

As a consequence, DOIs expressed by these persons are void (§ 105 I).

Limited Capacity

Continuing the protection of minors, persons between the ages of 7 and 18 have limited capacity to contract (§ 106 BGB). They require the consent of a legal representative (e.g. parent) for any DOI that does not bring only a legal benefit (§ 107), i.e. if the contract results in new obligations or loss of rights (negative consequences). Thus, consent is required for almost all contracts, as even a financially great deal is not a pure benefit if the minor has to pay.

Pocket money that is given to them by their legal representatives (parents) is considered pre-consented and can be spent as they wish, for the intended purpose (pocket money paragraph § 110). If a minor wants to operate their own business, approval of the family court is required in additional to parental consent (§ 112 BGB).

Limits to Contractual Freedom

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Relevant Sections

§ 134 BGB, § 138 BGB, § 1 GG, § 2 GG, § 3 GG, § 19 AGG

Statutory Prohibition, Public Policy, Extortion

A legal transaction that violates a statutory prohibition is void (§ 134 BGB). For example, a contract for the sale of illegal drugs is void because it violates the statutory prohibition on drug trafficking. This does not apply to the way a contract is executed, only its content.

Similarly, a legal transaction that violates public policy – common decency – is also void (§ 138). These are contracts that are against the sense of just and fair people, or immoral (e.g. surrogate motherhood as a business model). However, basing this on the subjective feelings of the parties is not sufficient, and judges rely on established case groups to determine a case.

Extortion (Wucher, § 138 II) applies if there is a gross disparity between performance and consideration, as well as exploitation of a disadvantaged position (weakness, desperation, inferior position). A 2:1 disparity of performance and consideration alone does not void the contract, but does provide a rebuttable assumption of extortion that might require the offeree to prove that there was no exploitation of a disadvantaged position.

Discrimination

Discrimination requires two elements:

  • Unequal treatment of people in comparable situations or equal treatment of people in different situations
  • No justification for the unequal treatment

This is strongly based on § 1 GG, which prohibits discrimination on the basis of sex, parentage, race, language, homeland and origin, faith, or religious or political opinions. This sometimes contrasts with § 2 GG, which implies freedom of contract. § 3 GG regulates equality before the state.

Balancing of Interests

While freedom of contract is generally given, it has to be restricted in some ways to balance the interests of the parties and society. For example, § 626 BGB allows for termination of an employment contract without notice for a valid reason, which is a restriction on freedom of contract but serves to protect employees from unfair treatment. Similarly, anti-discrimination laws restrict freedom of contract to prevent discrimination and promote equality in the workplace and society, or to prevent the abuse of monopoly power (dominant undertaking).

Anti-Discrimination Law for Businesses

The AGG (Allgemeines Gleichbehandlungsgesetz) prohibits discrimination in employment and other areas of life on the basis of race, ethnicity, gender, religion, disability, age, or sexual identify. It applies to employers with more than 5 employees and covers all aspects of employment, including hiring, promotion, and termination. The AGG also provides for compensation for victims of discrimination and requires employers to take measures to prevent discrimination in the workplace.
In effect, in AGG cases, affected applicants/employees usually get a compensation.

The anti-discrimination law only applies, however, to contracts typically concluded without regard of person (§ 19 Abs. 1 AGG) – and therefore not those that require personal trust, such as the selection of doctors or lawyers. It also does not apply to selecting tenants when a landlord lets less than 50 apartments (§ 19 Abs. 5 AGG), or when reasons of safety or, in some cases, religion are justifiable.

Standard Business Terms

In other words, terms and conditions.

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Standard business terms are terms applied to all contracts of a company, for example in the form of general terms and conditions (AGB). They are used to standardize contracts and make them more efficient, provide clarity or customize existing laws.

Standard business terms are also a way to develop standards for new business models, such as online platforms, where there are no established legal rules yet, which are then confirmed or rejected by courts.

The law on these terms ensures that the party setting up standard business terms does not put the other party at a disadvantage, for example by including unfair terms or by not properly informing the other party about the terms. Therefore, some clauses are fine in regular contract law, but prohibited in standard business terms, such as a clause that allows the seller to unilaterally change the price after the contract is concluded. In contrast to contracts, if an individual clause is invalid, the rest of the standard business terms can still be valid, unless the invalid clause is essential to the contract (e.g. price clause).

Standard Business Terms

A framework of terms and conditions intended for more than one contract and presented by one party (§ 305 BGB). The other party must be given the opportunity to read them and must agree before the contract is entered. Unlike individually negotiated terms, standard business terms must not include unusual/surprising clauses (§ 305c). The individual contract prevails over T&Cs (§ 305b).

Content Control

  • § 308 and § 309 BGB provide a list of clauses that are considered unfair and therefore void in standard business terms in B2C relations (not B2B). Terms and conditions cannot reverse statutory provisions, such clauses must be negotiated in the individual contract.
  • § 307, which outlines particularly unfair clauses also applies to B2B relations.

When checking for unfairness, apply the more specific provisions first, then move to the general one (309 → 308 → 307). If a specific clause is found to be in violation, it’s not enforceable.

Consumer Protection

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Because traders are typically in a stronger position than consumers, EU directives implemented in the member states’ jurisdiction provide for consumer protection, which includes a right of withdrawaltransactions for consumers in certain situations. This allows consumers to cancel a contract within a certain period of time without providing a reason and without incurring any costs (except for the cost of returning the goods).

This applies to B2C transactions, so contracts between trader and consumer:

  • Consumer (§ 13 BGB): Any natural person who enters into a legal transaction for purposes that are predominantly outside their trade, business, or profession.
  • Trader (§ 14 BGB): Any natural or legal person who, in a commercial or professional capacity, enters into a legal transaction.

Before checking for right of withdrawal, therefore, check if a given transaction was conducted between a consumer and a trader.

In effect, consumers have a 14-day (or longer) right of withdrawal (§ 312g BGB) and traders need to provide additional paperwork (§312d).

Scope

Consumer protection is granted for:

  • Situations where consumers might struggle to make up their mind: Distance contracts (e.g. online shopping), and contracts that are formed outside of business premises (e.g. door-to-door sales).
  • Contracts that put long-lasting obligations on consumers: Loan agreements, payments by installments

In these cases, the 14-day rule is active, unless an exception in § 312g II applies: for example newspapers and perishable goods, customized goods, and financial instruments.

Distance Contracts (§ 312c BGB)

Distance contracts are contracts that are concluded without the simultaneous physical presence of the trader and the consumer, and the use of one or more means of distance communication (e.g. online shopping, telephone sales).

Here, withdrawal according to § 355 BGB applies.

Contracts Out of Business Premises (§ 312b BGB)

Contracts that are made outside of a regular business location, where the consumer would expect to make a purchase (e.g. supermarket vs. door-to-door sales or “Kaffeefahrten”) have been shown to be more likely to lead to impulsive buying and buyer’s remorse, and therefore consumers have a right of withdrawal for these contracts.

Here, withdrawal according to § 356 BGB applies.

Withdrawal

The declaration of withdrawal is a DoI and must be received by the other party, however, here the date the declaration is sent is relevant for the withdrawal period, not the date it is received. The 14 days start when the goods are received (§ 355 BGB). No reason or form is required, but in case of conflict the consumer has to prove they have withdrawn in time.

Because these rules are consumer-friendly, abuse is rather easy, when consumers treat the right of withdrawal as test purchase. As usual, there’s a difference between having a right and morally justifying its use.

Common Checks

  • Is there a sale of goods contract (demand delivery, demand payment)? → § 433 I BGB

§ 433 I BGB

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