Contract law

You may have heard of the Latin phrase pacta sunt servanda – agreements must be kept. The reason behind this is that contracts determine the rules of the game. They grant leeway and establish obligations. And they set boundaries. In short: contracts organise our lives and how we interact with one another – not only but especially between companies. This means that they are also key to a company’s success.

The English word “contract” comes from the Latin contractus, meaning drawn together or tightened. People enter into contracts because they are drawn together in agreement. But they might not stay that way.

Companies need to have confidence that contracts will not only be adhered to, but are also worded in such a way as to cover all conceivable situations. Contract law is of central importance here, and there are many questions that parties to a contract must consider: What I am allowed to regulate in a contract, and what do I have to regulate? What types of contract are there, and what type of contract do I need for my particular transaction? How can I enforce my contractual claims if it comes to that? And how can I release myself from a contract? What happens after the contract has expired?

Contracts are – in general terms – legal transactions between two or more parties. They can concern the supply of goods or services or provision of digital content or licence rights, and also aggregates of things, such as in the sale of a company. Cooperation and framework agreements can be complex, long-term contracts involving performance of various obligations. To formalise a particular legal transaction, the parties give concurrent declarations of intent. Contracts do not normally need to be in written form; verbal agreements, including over the telephone, can also have legal effect.

Matters which are not explicitly dealt with in the text of the contract are determined by the statutory provisions, for example the Civil Code (Bürgerliches Gesetzbuch, BGB), the Commercial Code (Handelsgesetzbuch, HGB) and other legislation.

In an international context, i.e. in contracts with parties located elsewhere in or outside Europe, the law of the country concerned must also be taken into account. International treaties govern the application of national law to cross-border contracts. There is no uniform international or European law of contracts. Other countries also have different rules relating to agreement of security interests, such as retention of title and assignment of receivables.

Once a contract has been signed, the parties must adhere to it. It is often at this stage that the real work on the contract begins. What is each party permitted and required to do, what do I do in case of shortcomings, what happens when force majeure prevents performance of the contract? What is needed here is a professional contract management system – this ensures that your rights are safeguarded and it supports efficient contract performance. Often parties underestimate the importance of monitoring contract performance.

Considering all these factors, companies are well advised to seek out experts who can help with drafting, implementation, enforcement and termination of contracts and help put in place an efficient contract management system.


Contract drafting

Contract drafting plays a central role before a legal transaction can come into being. The parties negotiate the precise terms of the legal transaction and put the results of their negotiations into a contract. At this stage, it is essential for parties to keep their business and personal risks calculable. Individual ideas and projects need contracts tailored to their specific requirements. Companies and their business partners should consider very carefully which details of their transaction they want to have explicitly set out in the contract during contract drafting. Professional advisors can provide valuable support here. Thanks to their legal expertise and experience, they know what is and is not possible and which aspects and details require particular attention in which contracts. In particular, contracts should be nuanced and specific enough to prevent, as far as possible, disputes regarding interpretation from ending up before the courts. Ideally, a contract will be worded in such way as to anticipate and rule out from the outset potential disputes around clauses with particular potential for conflict.

Two important practical tips here are to document the contract negotiation phase fully, and to consult legal advisors at an early stage. Because no matter how detailed a contract, the negotiation phase can be of very great importance for interpretation.


General terms and conditions

A company’s general terms and conditions (T&Cs) contain the often-mentioned “small print” underlying a transaction. General terms and conditions are contract terms formulated by one party intended to be used in the same form for multiple transactions of a similar type. The advantage is that the contracting parties do not need to renegotiate and agree terms for every similar transaction in future.

The general terms and conditions are the basic framework of the contract to which further provisions can be added if necessary. However, general terms and conditions have legal force only if they are brought to the attention of the customer in a reasonable manner and explicitly incorporated into the contract. They usually contain provisions relating to the conditions governing the conclusion of the contract, payment arrangements, delivery terms (timing, manner of delivery), delayed performance and liability including liability for defects. However, there is usually very little latitude for T&Cs. If a company’s T&Cs exceed those limits, the offending provisions are invalid – and the statutory provisions apply instead. The courts are repeatedly imposing new requirements and setting new limits for individual terms.

So it is a good idea to seek the advice of a skilled legal expert both when drafting general terms and conditions and to carry out regular reviews after that.

Contract management and enforcement

Pacta sunt servanda – agreements must be kept. That is why contract management and the enforcement of contract stipulations are both key. A customised contract management system helps companies optimise their contracts and performance of those contracts – in terms of time limits, amendments and termination, for example. This can be done using an electronic contract management system to monitor the contract and compliance with deadlines as well as to specify responses to particular situations – what do we do if an obligation is breached, who in the company needs to be consulted if that happens, and when do we need to seek legal advice? Systematic rules of this kind save time and ensure that rights are not lost.

But what can a company do if a partner does not keep to the contractually agreed arrangements? It is clear that contracts lay down not just obligations but rights too. If these rights or obligations are breached, the precise options for action and response must be reviewed and applied. In most cases, a reminder is issued and a deadline for compliance set. If the other party allows that deadline to pass without taking the necessary action, there is still the possibility of asserting the claim either out of court, or via judicial enforcement proceedings. Companies also need to monitor deadlines applicable to themselves, to avoid the risk that their claims will expire, for example.

One particularly important issue is the safety of provisions in case of insolvency. For example, will the agreements regarding securities still apply if the customer is in a crisis? Does a company remain a licensee if its licensor enters insolvency? Can a contract be terminated if the other party is insolvent? And when is avoidance in insolvency a risk? The risks arising when a contractual partner enters insolvency are often underestimated. Careful drafting in this regard is vital, and should be done with the support of experienced insolvency experts.


Withdrawing from contracts

The circumstances or preferences of contracting parties can change, or contracts might not be fully complied with. Sometimes, one or other of the contracting parties might not want to perform the contract as agreed after it is concluded. However, it is important to remember that a party wishing to back out of a contract must have grounds for doing so. Either the contract itself must allow the parties to terminate it under certain conditions and such condition must be present. Or alternatively, the party wishing to withdraw from the contract needs to have statutory or contractual grounds for termination, such as late performance, non-performance by one of the parties, or some other default. The important thing here is not just to exercise the right of revocation or termination, but to bear in mind at the drafting stage what the consequences of ending the contract will be – what financial consequences will there be for your company if the contract has to be ended in this way?



Schultze & Braun’s contract law experts

Schultze & Braun can help give your company a clear view of your contracts and help you stay on top of them. Off-the-shelf contracts are not enough when it comes to defining business relationships. Our contract law experts design solutions tailored to your individual requirements, from contract preparation and negotiations with the other party right through to long-term contract management. And in case of a dispute, they will enforce your rights and claims – through the courts if necessary.


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Dr. Michael Rozijn
Rechtsanwalt (Attorney at Law), Fachanwalt für IT-Recht (Certified Specialist in IT law)


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