Image source: https://blog.ipleaders.in/obligations-parties-contract/

This article is written by Sarthak Kulshrestha, a student of Jagran Lakecity University, Bhopal. This article presents a comparative study between the concepts and performance of contracts in Germany and Australia considering the law of contract and obligations in both the countries. 

Introduction  

Though the contract law is almost similar worldwide, the scope of comparison between German contract law and Australian contract law exists considering several points of differences between the two.  

Every day, parties enter into numerous transactions globally, representing the share of global Gross Domestic Product (GDP). These transactions are possible because parties share common knowledge of how to enter into a contract, and what to expect as a result of the same. This common knowledge is based on commercial practices shaped and restricted by regulations from different jurisdictions. The contract laws from different jurisdictions all over the world are written in different languages and are operated according to their own legal requirements and tradition. Currently, Germany is one of Australia’s most significant trade, investment, tourism markets, and also one of the top 10 sources of Foreign Direct Investment (FDI). This is evident of the commonalities between them as legal requirements of entering into the contract with Germany make the cross-border trade practices possible to be carried out considering similarities, consistencies, and contrasting features between the countries’ contract law. This article deals with the concepts of German and Australian contract law considering some commonalities between them.

German contract law : an insight  

In the year 2002, the German Civil Code was adequately amended when the Act on the Modernisation of the law of obligations came into force. This Act came as a reform in the law relating to the contract and obligations as Germany, in the past, suffered severe losses of taxpayers’ money caused by the state liability. The original German Civil Code to regulate civil matters was meant to contribute to the needs of the society concerning such issues and the general clauses demonstrated adaptability to new economic, cultural, and sociopolitical norms.

Under the category of contract and obligations, the parties are free to establish relations within statutory limits and good faith. For example, unless the promisor can prove that a breach of contract has been caused in a way entirely outside his sphere of risk, he is liable for damages. But if the promisee chooses to do so, he may ask the promisor to complete the contract till the time its impossibility does not show up. The principle that “anyone who through an act performed by another or in any other way acquires something at the expense of that other without legal justification is bound to return it to him” is stated in broad terms, but it is cautiously applied by the courts.

Fundamental concepts 

The fundamental concepts of German contract law include the significant aspects of the contract law of the land. 

  1. Freedom of contract 

Freedom of contract also implies the autonomy of the parties and entails that the contracts do not require consideration and can contain the elements which are agreed between the parties unless specifically required by law.

  1. Violation of statutory prohibition

The contracts which violate a statutory prohibition are void. However, many a time it becomes a matter of interpretation whether or not its prohibitory provisions were intended to nullify contravening contracts. Thus at such times, the contract becomes a valid one. 

  1. Contracts are void if contrary to good morals

The immoral contracts are void. The German Courts interpret “immoral” as anything which lies in contrast with the sense of the decorum and ethics of every person who possesses an understanding of differentiating between right and wrong. 

  1. Form of the contracts

The contracts, unless the law provides otherwise, may be either oral or written. But, there are a few types of contracts which are ought to be in writing, and they are as follows:

  • Assuming or assigning a mortgage;
  • A lease for more than a year;
  • A promise of an annuity;
  • Guaranty and surety contracts (not in commercial transactions);
  • Acknowledgement of debt.
  1. Formation of contract

It is not expressly mentioned that a contract comes out as a valid one after proper conduct of offer and acceptance. However, it is a well-established fact that an offer and acceptance are required to form a contract.

Mere dispatch of the offer is not sufficient and the offeree doesn’t have to become aware of the offer. For example, if the offer has been put into the mailbox of the offeree, then the offer is said to have reached the offeree even if he does not check the mailbox the other day. Offers and acceptances can be revoked until they have become effective.

A contract can only come into existence when both the parties have agreed upon the same thing in the same sense. The notion that a contract can legally come into existence only by an offer and acceptance which reflects the complete agreement of the parties is not necessarily consistent with modern realities. When a person uses public transportation or public utilities or even when he uses a parking space for his car, there is no offer and acceptance in the traditional sense because the rates are fixed. 

  1. Performance of contract 

Regarding the performance of the contract, there have been several provisions stipulated in the contract law concerning the place and manner of performance of the same.

  • Place of performance:  In the absence of the provision of place at which the promise of the contract is to be performed, the debtor’s place of business would be the place of performance. Generally, in German law, the debtor’s obligation is referred to as Bringschulden. In any event, all standard form contracts include a provision that specifies the place of performance.
  • Conforming performance: A contract in which the parties have fully performed the obligations following the terms or the creditor accepts something else than what was originally agreed, is said to be conforming performance. 
  • Delayed performance: When the debtor does not perform the agreed promise on time, he constitutes the delayed performance of the same.
  • Impossibility to perform: Under German law, impossibility exists where performance is rendered impossible for both parties. Where performance is still possible but has become so burdensome that it would be a breach of good faith for the creditor to insist on. 
  1. Classification of contracts

The contracts have been classified into various types based on the functioning of the parties in each one of them. They are as follows:

  • Reciprocal contracts: Reciprocal contracts are the contracts in which the parties intend that the performance of each party is equivalent and dependent upon the performance of the other parties.
  • Third-party contracts: The contracts which are made for the benefit of the third party are called third-party contracts. It expressly provides the performance in the favour of the third party and the party has the right to demand the performance of such a contract.
  • Sales contracts: In German law, the sales contract is called “Kaufvertrag” which means a purchase contract. It is a reciprocal contract that puts an obligation on the seller to transfer the ownership of the subject matter in exchange for the price, and which obligates the buyer in return, to pay that price and accept the transfer of ownership title of the subject matter. It requires a separate transaction, namely delivery of possession of the object. 

Necessary provisions 

To carry out the formation of the contracts according to the prescribed legal rules, there are various necessary provisions in the German contract law to make the contracts possible to perform as these provisions help to resolve the problems in the making and performance of the contract. Some of the provisions are listed below:

  • Contractual penalties 

A penalty clause in a contract provides that in case the debtor does not perform his promise or does not perform it properly, then he must pay a monetary penalty or do something else that is legally valid. A creditor may claim a penalty, even though the creditor suffered no injury provided, of course, that the debtor’s fault is responsible for the non-performance, delayed performance, or improper performance.

  • Provision of recission 

According to this provision, a contracting party can include in the contract a clause that provides that he reserves the right to rescind the contract. The exercise of this right terminates the contract and substitutes an obligation to make restitution. The right to rescind can arise by operation of law as one of the remedies that the innocent party can use when the other party is in default of his contractual obligations.

  • Gift deed : In German law, a gift (inter vivos donation) occurs when one person (the donor) transfers something of value from his assets to enrich another (the donee), in which both agree that the donee need not compensate the donor for that subject matter. It has to be in writing if it has to be enforced in the Court. 
  • Gratuitous loans : A gratuitous loan is a contract that obligates the lender to permit the borrower gratuitously to use an object owned by the lender. If the duration of a gratuitous loan is not provided for in the contract nor can be implied from its purpose, then the lender at any time can demand the return of the object.

Australian contract law : an insight 

Contract law in Australia is classified as civil law. In Australia, the law of contract is based on the English common law system rather than on a particular codified statute. The principle on which the Australian contract law underlies is, the freedom of contract in which the parties which have entered into a contract, have the liberty to choose the bargain as they find suitable. 

General aspects of Australian contract law

A society needs a civil law system for the contracts to get legally enforceable and it allows for legal mechanisms to ensure the parties involved in a contract, to be treated equally before the law. The general aspects for the justified functioning of the same are as follows: 

  • Form of the contract 

The Australian contract law provides for the freedom of the parties to enter into a contract in any form, either written or oral. However, the Australian courts give significant weight to the expression of the parties’ intentions stipulated in writing. 

  • Parties to the contract

Under Australian contract law, the privity rule holds significance as, those who are not parties to a contract cannot be bound by it, notwithstanding with certain exceptions. A contract is generally enforced only between the parties who entered into the contract.

  • Security or title over the assets

When over any “personal property” asset, a security asset is created, then the Personal Property Securities Act 2009 (PPSA) will apply. To preserve the security holder’s interest, the interest has to be registered on the personal property securities register within the applicable time. Personal property includes all property that is not land or certain rights granted by Commonwealth or State Governments.

Fundamental concepts 

Australian contract law which is a civil law deals with the enforceability of the contracts in the Court of law, functioning on a simple line of concepts as explained below: 

  •  Formation of contract

Here, a contract is defined as a set of promises. A promise is an undertaking by one person to do something or abstain from doing something if another person does something or abstains from doing something or makes a promise in return. It is legally binding and in Australia, this requires to have an agreement, lawful consideration, intention of the parties to create a legal relationship, compliance to the legal formalities, and competency of the parties to such a contract.

  • Scope and content 

Once the contract is formed, it can be legally enforced by or against one of the parties. For example, a contract entered between X & Y for the benefit of Z will create contractual obligations only on X and Y, the parties to the contract and the same cannot be imposed on Z. Also, it cannot be enforced by Z since the obligations are only upon original parties. 

The doctrine of privity of contract was formally recognized in Tweddle v. Atkinson (1861). In this case, the father of a bride promised the father of the groom to pay the groom (plaintiff) a sum of money upon the marriage. But, before making this payment, the bride’s father died and his estate didn’t honour his promise. The plaintiff sued for the money but failed on the ground that, though the contract had been made for his benefit, he was not one of the parties to the contract.

  • Terms of contract 

In every contract, certain rights and obligations of the parties are contained which are determined by the terms specified under such a contract. These terms may be expressed (explicitly agreed between the parties in oral or written form) or implied (not articulated by the parties but based on implied presumption). To constitute a term of the contract the parties must have intended it to be promissory. As is the case with determining intention to create legal relations, intention in this context is determined objectively as to what a reasonable person would have thought to intend in such circumstances. 

  • Remedies 

As the remedies against a breach of contract, the Australian contract law provides for damages as a matter of right. Damages for breach of contract are viewed as a ‘substitute’ for performance and they are available to put the plaintiff in the position in which they would have been having the contract been performed properly. Punitive damages are not available. However, damages are available for the mental stress that the aggrieved party must have borne as a result of the breach of contract. Also, the loss must not be remote from the breach. 

Other remedies are also available such as liquidated damages and debt. Liquidated damages will be available where a clause in the contract between the parties provides that a fixed sum of money will be payable upon breach. However, debt is quite different from the damages discussed, in that it involves a claim for a sum of money due under the contract. It is, therefore, a liquidated sum, but is not in the form of a substitution remedy but is a claim for a monetary amount owed under the contract.

Necessary provisions

To carry out the formation of the contracts according to the prescribed legal rules, there are various necessary provisions in the Australian contract law to make the contracts possible to perform as these provisions help to resolve the problems in the making and performance of the contract. Some necessary provisions are as follows:

  • Restriction on penalties

Under the usual law of contract, the parties are permitted to agree upon a sum of liquidated damages, or the method of calculation of such a sum, payable by one party to the other in the situations of a breach of contract. Such an agreement on liquidated damages must represent a genuine attempt to estimate the likely damages which may be suffered. If it is imposed by one party merely as a threat to enforce compliance or is specified to arise in circumstances that may be triggered arbitrarily, then the provision may be regarded as a mere penalty and not enforced by the Court.

  • Restriction on restraint of trade 

Any restriction upon the dealing by a party to a contract with third parties, directly or indirectly, whether during or after the term of a contract may constitute exclusive dealing, conduct regulated by the anti-trust provisions of the Competition and Consumer Act 2010 (Cth); or maybe a restraint of trade at common law, which if unnecessarily broad in the conduct restrained, the time of the restraint or the area over which the restraint exists, will be void, and not enforceable by the Court.

  • Limitations and exclusions of liability

The parties to a contract are free to limit or exclude liability for breaches of contract, or in any other circumstance. The party which seeks the limitation or exclusion clause is supposed to convince the Court that the clause is properly interpreted and analysed as the party contends.

Key learning from both the laws 

The common learning which both the laws entail is the “concept of good faith” followed in the law of contract.

The principle of good faith serves to prevent injustice that can arise through the mere application of a provision and constitutes a necessary correction for the weaknesses of statutory law. The common law system, in Germany, acknowledges this principle and it is specified to every contractual obligation. The parties which enter into a contract are supposed to consider the interests of the other party under the same contract in which they expect the other to do the same as a matter of faith. Therefore, parties are obliged to duly consider the protection-worthy interests of the other party and to conduct themselves loyally. As an example of good faith, if a party forfeits its right and does not rely on it for a long time, the other party may rightfully expect this one to refrain from exercising this right completely. On exercising the right, the principle of good faith would be breached in case of disloyal exercising of that right.  

Discussing the principle of good faith in light of Australian contract law, it is right to say that the principle of utmost good faith is upheld in Australia. Australian contract law is rapidly moving towards three propositions. First, in most contracts, a requirement of good faith must be implied. Second, the source of the implied requirement of good faith is an implied term of the contract. Third, the requirement of good faith is satisfied by a party who has acted honestly and reasonably. Good faith is considered as the essence of the contract, thus every aspect of the law of obligations should be consistent with its principle.

Conclusion

The study of the fundamentals of the contract law of Germany and Australia shows us that how the contracts are formed and enforced in the Court of law. The differences regarding the judicial system of both the countries and the functioning of the provisions regarding the law of obligations provide the gap between the law of the contract of Germany and Australia. The trade practices are carried out between both the countries following the rules and regulations of their commercial laws. The Australian contract law is said to be a bit complex regarding the enforceability of the contracts in general and may move to the implementation of more of a set of International rules for the contract. 

In Germany, the contract laws are comparatively less complex, and simple aspects of the law of obligation are followed such as the freedom of every private person above 18 years of age to enter into a contract followed by the rights and obligations of the parties arising by the contract. It is also observed that the German contracts avoid the excessive use of legalese, making the terms less complex. 

Hence, the Civil law concerning the law of contract in Germany and the Australian contract law, which is also classified as civil law, make the parties enter the contracts in daily life on national and international levels considering the commonalities such as following the common law system, principle of good faith and fundamentals of contract formation & performance in both the countries. 

References

  1. https://www.researchgate.net/publication/266462525_The_German_Law_of_Obligations
  2. https://www.britannica.com/topic/civil-law-Romano-Germanic/Property 
  3. https://germanlawarchive.iuscomp.org/ 
  4. https://www.australiancontractlaw.com/contractlaw/scope-classification.html.

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