In review: contract formation in Germany

Bizar Male

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Contract formation

The basics of contract formation under German law have largely remained unchanged over time, with case law being settled and statutory law undergoing only a few reforms.

i Freedom of contract

The fundamental principle in German contract law is the principle of freedom of contract, which is part of the broader concept of ‘private autonomy’ and thus protected by the Constitution. Freedom of contract means that as a rule, parties can shape their legal relationships as they see fit. They can choose whether or not to conclude a contract at all, and they can choose whatever content they like (with some exceptions).

The BGB provides the user with a legal framework for the most common standard types of contracts. These include sales contracts, works contracts, service contracts, lease agreements, and loan agreements. In B2B relationships, parties have broad discretion to deviate from this framework, and to adapt it according to their wishes. In B2C relationships, this discretion is considerably limited.

ii How to conclude a contract

Unless specified otherwise, contracts do not have to be in writing, nor do they have to be notarised (exceptions include sales contracts for real estate). They can be concluded orally, and courts will not hesitate to enforce such contracts if their existence can be proven. For practical reasons though, parties may be well advised to document their agreement in writing – both to obtain clarity about the exact content of their relationship, and to serve as evidence in a potential dispute.

Contracts are concluded by two concurring statements of intent – offer and acceptance. These statements have to contain the essential terms and conditions of an agreement, in particular the key performance obligations. A party can declare its intent either expressly or by implied conduct. For example, case law has confirmed that a contract between a real estate business and a utility can be concluded by the former sending a purchase offer and the latter providing the requested amounts of electricity and water.

In general, mere silence (as reaction to an offer) will not qualify as a statement of intent. It can qualify as such, however, when there is a business practice to that effect, as is the case with the so-called ‘commercial letter of confirmation’ in B2B relationships. Broadly speaking, if a party to such a relationship sends a written summary of previous negotiations to the other party as an offer, then the other party is deemed to have accepted this offer unless it explicitly rejects it.

iii Relativity of contractual obligations

As a rule, contracts are only effective between the contracting parties themselves, and have no effect on third parties. The contracting parties may agree though that a third party obtains certain rights (but not certain obligations) by virtue of the contract.

In some cases, third parties may obtain rights even if the contract does not explicitly say so. One example are freight contracts between a sender and a freight forwarder, for which the HGB stipulates that the recipient – albeit not party to the contract – has certain rights against the freight forwarder. Other examples include life insurance or casualty insurance.

iv Standard terms and conditions

Famously (or notoriously), German law submits standard terms and conditions to legal review. As a result, clauses from standard terms and conditions can be invalid if they unreasonably disadvantage the other party. This applies not only in B2C relationships (where the purpose is to protect the consumer as the presumably ‘weaker’, less sophisticated party), but also in B2B relationships. Examples for invalid clauses would include a stipulation which excludes all liability for gross negligence by a party’s directors.

To exacerbate the issue, standard terms and conditions are interpreted against the drafter. This leads to an interesting mechanism: As the most disadvantageous outcome for the drafter would be the invalidity of the clause, courts will first check whether there is any interpretation of the clause that could make the clause invalid. Usually, this is a hypothetical interpretation that is extremely favourable for the drafter. Only if there is no such interpretation, then – as a second step – the clause is interpreted to the benefit of the drafter’s counterparty.

While this review generally leads to reasonable results, it adds a certain unpredictability in the drafting stage. For this reason, opponents of the review mechanism frequently argue that it discourages parties from choosing German law to govern their contracts.

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