Private Law

Law of Obligations – Contract Law I

IBA 2023/2024

1
 LAW OF OBLIGATIONS

"Law of Obligations" - Meaning

The Law of Obligations is a (sub-) division of Private Law. Other divisions of Private law are
Property Law, Family Law and Inheritance Law. The Law of Obligations defines the conditions
under which a person is obliged to deliver a performance to another person. Such performance
can consist in an "active" action (for instance delivery of goods, making a payment, a
performance of a service or of a work) or consist in a "passive" omission ("omission": for
instance not to make any business in a specific country or in a specific sector of the industry).

AN OBLIGATION IS A LEGAL RELATIONSHIP

WHEREBY A PERSON, CALLED AN OBLIGOR, IS BOUND TO RENDER A PERFORMANCE

OF ANOTHER, CALLED THE OBLIGEE.

A PERFORMANCE MAY CONSIST OF GIVING, DOING, OR NOT DOING SOMETHING.

The person who is entitled to demand performance is also called

"CREDITOR", whereas the other side obliged to perform is also

sometimes called "DEBTOR".

But generally, in the English legal terminology, the terms for a specific

contract (f.i. buyer/seller for purchase contracts, contractor and

company for works contracts, employee an employer for employment

contracts are used in practise.

There are several situations, where according to the law of obligations,

a person is "obliged" to make a performance

(delivery/service/work/employment etc):
  A person may be obliged to render a performance because

he/she promised to do so (=promise based on a contractual

agreement): CONTRACT LAW

 A person may be obliged to render a performance because

he/she can be made accountable ("liable") for a damage caused

(performing of a payment to compensate damages): LAW OF

TORTS

 A person may be obliged to render a performance because

he/she used assets/goods of another person without

entitlement (without contract/exceeding a contract/without

consent of the other person): performing a payment for the

unjustified use: LAW OF UNJUSTIFIED ENRICHMENT

 A person may be obliged to render a performance because

he/she acted in the interest of another person without being

authorized to do so: performing a payment for compensation for

such rescue or necessary assistance: LAW OF NEGOTIORUM

GESTIO (MANAGEMENT OF AFFAIRS)

Therefore, the Law of Obligations can be – simplified – structured in following categories

(="sources of obligations"):

a) Contract Law:
A contract represents a legal agreement: promises are made against receiving
counter-promises by entering voluntarily into respective legal agreements
(=coordination): thus, basis (=pre-condition) for the existence of an obligation is a
mutual promise (=a contract), thus the contractual obligations are based on
contractual agreements to do or to omit anything (for instance: to pay, to work, to
render a service, to live together as man and woman [=marriage contract], etc).
So a contract is the private-law vehicle to receive a legally binding promise
(=obligation) from another person to act or to omit.

In short: The contractual obligation arises from a contractual agreement.

In Business, Contract law represents the main source of obligations.

ANY OTHER OBLIGATIONS (b), c), d) and others more ARISE WITHOUT AGREEMENT
BUT DIRECTLY BASED ON PRIVATE LAW AS STATED IN THE CIVIL CODE AND/OR BY
COURT PRACTICE:
b) Law of Torts: obligations – mainly to compensate damages - based on "torts" in case
"civil wrongs" are committed. "Civil wrongs" are sometimes also fulfilling the elements
of "criminal wrongs" (and therefore may trigger two separate legal proceedings: a civil
law procedure and a criminal law procedure). IN PRINCIPLE, THE MUST-HAVE
CONDITION for a claim based on torts is that a DAMAGE is caused (inflicted) to another
person (the "victim"): without a damage, no claim based on torts, no compensation

(therefore: no compensation in case of an attempt of a wrong without an actual

damage!

[please mind: in Criminal Law also an attempt of a crime is punishable and punished!).

The legal consequence is based directly on Civil Law (for instance a Civil Code) and
provides obligations to pay money-compensation for damages caused, obligations to
compensate by revocation of a statement (for instance in case of unfair competition).

c) Law of Unjustified Enrichment (=Enrichment without cause): In case another person's

goods/assets are used without entitlement (without "justification") then
a) Obligation to restitute (return) of such good/asset and
b) Obligation to pay an appropriate compensation for the unjustified use
Restitution based on private law = also called: restoration: obligation to return things
no longer (or never) legally entitled to keep, obligation to pay compensation for usage
of goods owned by others ("others" are often addressed and called as "third parties")
etc. In this category NO DAMAGE required (damage required only for obligations
within the category of torts!).

So: In case another person's goods/assets were used without justification and in
addition also damaged by the unauthorized user, then
a) compensation of the damage based on torts
b) return of the good/asset based on unjustified enrichment or based on
torts (usually claimed only based on unjustified enrichment because easier
to be proven at court) and
c) payment for usage based on unjustified enrichment

Examples:
• Obligation to re-payment in case money is transferred by mistake to one's bank

account etc.

• Obligation to pay for the use of things without rent contract or exceeding
the rent contract term (living in an apartment after the termination of the
apartment rent agreement).

d) Negotiorum gestio: (=Agency of Necessity =management of affairs):

Of course, in first place nobody is entitled to interfere in other persons' private or

professional affairs. Such person may be stopped in doing so by legal force (self help,
house right etc). Therefore a right/obligation based on "negitiorum gestio" represents
an absolute exception from that general principle. So only in the exceptional cases – in
 particular emergency cases and cases of clear advantages of the other person –
negotiorum gestio may apply. In case applicable, negotiorum gestio provides the
bligation to pay compensation for expenses and expenditures for another person’s
affair made with the intention to promote another person’s interest.

In other words:
Management of affairs: when a person ("manager", here not in the sense of a
representative of a company) acts without authority to protect the interests of another
(the "owner", not in the sense of property law), in a reasonable belief that the owner
would approve of the action if made aware of the circumstances.

Examples:
• Sacrificing one's car by stirring the car against a tree in order to avoid a

collision with another person in the street

• Spending time and wasting own property in order to save another person's

life/property etc in case of emergency or even (only) if necessary or useful.

Therefore the Agency of Necessity is no general legal possibility to create business

opportunities besides contracting to request payment for performances from a person
who did not request such performance: only in case of – objective – emergency and in
case of demonstrable objective usefulness.

The different legal systems require different facts and provide different legal
consequences.

Additional example: Unrequested succession search.

So “Obligation” means any private law related legal duty of a person to perform (payment,
service, delivery, omission, restitution etc) to another person. The “Law of Obligation” is a
core part of Private Law.

Other fields of private law also provide situations where another person is obliged to
perform to another person:

• family law related obligations: for instance family law obliges parents to support their
minor children ("maintenance"),
• Inheritance law related obligations: for instance inheritance law obliges the successor to pay
certain amounts to other persons: so called "forced heirship.
• Obligations emerging out of disrespect of property rights

Due to historic reasons and for the sake of easy structure, traditionally family law generated
obligations and inheritance law and property law generated obligations are not integrated and
included in the group of "Law of Obligations".
 CONTRACT LAW
In case a contract has to be
a) made or
b) checked or reviewed etc,

following prior issue has to be clarified before any additional issues:

FIRST CLARIFICATION AND FIRST CHECK: WHICH CONTRACT LAW IS

APPLICABLE TO THE SPECIFIC CONTRACT IN QUESTION?

Contracts do not exist in a vacuum. Any contract is – and has to be - based on a specific
contract law provided by a legal system/by a jurisdiction. So any contract is subject to by a
certain legal system that gives the contract its legal character: Austrian contract law, English
contract Law, Russian contract law etc.

Therefore: First of all, whenever any contractual issue whatsoever arises, first we have to
check, which contract law governs the respective contractual issue (in other words: which
contract law is applicable to the respective contract). Only after such check is made
successfully, we will know, on which basis of which contract law we have a) to evaluate and
b) to check the legal questions arising out of said contractual issue.

Only after such check is made, we know on basis of which contract law the contract is based
and to be evaluated and interpreted and understood and executed.

Only after knowing the specific applicable contract law for a contractual issue (f.i. Russian Contract Law, English
Contract Law, Israeli Contract Law, Austrian Contract Law, Venezuelan Contract Law, Columbian Contract Law,
Spanish Contract Law etc) we will know for instance if we need to involve a notary for making the contract or if
we have to make the contract in written form in order to have the contract valid or which specific
consequences a breach of contract might have, what shall be legally true if a contract text remains silent about
a specific issue (which interest rates for delayed payments) etc.
So we cannot just read a contract as it is written, because the applicable contract law is simultaneously applicable
to the contract and provides additions, corrections and supplements to the text of the contract:
THE APPLICABLE CONTRACT LAW PROVIDES THE LEGAL LANGUAGE ("THE TRANSLATOR") TO THE CONTRACT.

Only after knowing the applicable contract law, we know if we have to read which civil code and which legal
practise of which jurisdiction or if we have to involve any locally specialised lawyer. So if we know that the

contract is subject to Spanish law, we might need the help of a lawyer familiar with local Spanish law.
Otherwise we get information of lawyers not familiar with the applicable contract law of limited value and
reliability. This aspect is regrettably sometimes not respected in Business practise.

So we cannot just “start reading” a contract "as such", trying to understand its content and legal meaning and
consequences just on basis of the text of the contract. But we always have to check before on which legal basis
(=on which contract law) the contract in question exists in order to apply the correct contract law to the contract
and having the full legal picture and understanding of the contract.

Reading a contract ignoring the applicable contract law leads – maximum – to a consistency
check only with a rough idea what the contract liabilities and legal consequences of the text
might be, but without coming to a definitive final understanding of the legal contractual
situation.
This check is made on basis of following rules (these rules are are called “conflict of law rules”
or in short "conflict rules" or "choice of law" [because the conflict of law rules choose the law
applicable on the cross-border related legal relationship]):

A. for "local contracts" the local Contract Law applies mandatorily.

"Local" contract:

A local contract shows no cross-border connection (=no “foreign element”) and

therefore “stays locally at home” (at the domestic location). Thus, local domestic law
applicable mandatorily. NO CONFLICT OF DIFFERENT LAWS (BUT ONLY ONE – THE LOCAL
ONE – APPLIES, no "conflict of laws" matter!)

Example for a local contract: all parties to the contract have their domicile/seat in the
same country (jurisdiction) and in addition the contractual obligations have to be
performed in this country (jurisdiction) and also no other element is linked to another
jurisdiction (location). In such case the local contract law of this country (jurisdiction) is
applicable and governs this local contract.

Example: A Russian contracts with an Israeli a purchase agreement in Vienna. Both have their domicile in
Austria. The hand-over and the payment shall be made in Austria. Conclusion: Such purchase agreement
represents a “local Austrian contract” which is therefore mandatorily governed by Austrian Contract Law.

Please mind: the citizenship of a contractual party or of share-holders of a company party to a contract is
irrelevant and does not matter in this legal respect. So a contract made between a company with Russian
share-holders and registered seat in Vienna and an Israeli person with residence in Vienna represents a “local
Austrian contract” with mandatory Austrian contract law applicable, because two companies registered both
in Austria are making a contract (structure of sharholders irrelevant in this respect).

B: In case a contract shows any cross-border connections (at least one foreign [=not local]
element), such contract is considered to be an “INTERNATIONAL CONTRACT”. So an
“International Contract” is "the opposite" of a local contract. Such international
contracts have therefore connections to two (or even more) different
jurisdictions/countries (and not just connection to one jurisdiction/country as a local
contract has).

Which contract law of which state shall be applicable and govern such international
contract?

Both jurisdictions having connections to the “international contract” cannot be

applicable simultaneously otherwise their simultaneous applicability would create chaos:
different contract laws usually have different legal rules for the same issues (for instance
different payment periods or different venues where the contract has to be performed)
which would trigger conflicting and deviating legal consequences!

Example 1 CONTRACT LAW: Contract is made between a person with

residence/registration (=domicile) in Italy and a person with
residence/registration (=domicile) in Switzerland. The person in Italy shall send a
delivery (computer), the person in Switzerland shall make the corresponding
payment [=the price]. This contract has connections to Italy and to Switzerland.
Italian and Swiss contract law cannot be applicable simultaneously to this
contract, because these two different contract laws have different legal
 consequences and structures. The application of both contract laws would create
chaos in the contractual relationship.

For instance one contract law (the Swiss or the Italian) might say: “payment
obligation already expired”, the other (the Italian or the Swiss) might say
“payment period did not expire: therefore you still shall pay and otherwise can be
brought to court”.

Therefore two or even more different contract laws cannot be applicable

simultaneously for the same contract. One of them has to be relevant exclusively
instead of the other one. Specific legal rules tell us which contract law shall apply
and which not (on our example 1: Italian contract law is applicable exclusively,
Swiss contract law is not applicable, if the parties did not decide otherwise).

Example 2 FAMILY LAW: An Italian man marries a Russian woman. Marriage is

considered to be a contract (the marriage agreement is considered to be a legal contract!
In addition, sometimes an additional agreement is concluded in order to manage the financial
aspect of the marriage deviating from the provisions of the standard-legal situation provided by the
applicable law. Such additional agreements shall cover the matrimonial property regime and/or the
financial consequences of a possible future divorce. Such agreements are sometimes valid,
sometimes not: in most legal systems in Europe it is not possible to agree at the date of marriage
that no financial support shall be possible to claim in case of a divorce
[so the agreement “naked-in, naked-out” is on basis of such legal situation not possible.]).
Which marriage law is governing the marriage? Italian and Russian laws of
marriage cannot be applicable simultaneously, because they have different
contents (=different obligations as to the duties of husband and wife in a
marriage). Please mind for "marriage contracts" (=conclusion of marriage) the
citizenship is usually relevant (for other contracts like purchase contracts, lease
contracts and so on the citizenship is irrelevant!).

The only possibility to avoid such chaos is that one contract law out of the various possible
applicable contract laws has to be chosen and to be applied exclusively to the contract.

The conflict of contract law rules state (usually) that the contract law to which the
“international” contract is most closely connected shall be applied and applicable. So
this choice is made with the help and guidance of the rules of the "International Private
Law".

The international contract will be covered by the law of the state agreed upon the
contractual parties. Such contractual agreement on the applicable contract law made by
the contractual parties is often called “Choice of Law”. In principle, any law might be
chosen by the parties ("free choice of law"), even a law with no connection whatsoever to
the contract and to the contracting parties. So parties in Austria and Germany may agree
on the Chinese Contract law as applicable contract law.

Please note: Not all kind of contracts are open to such “choice of law” made by the contracting parties:
usually family law related contracts are traditionally not open to such “choice of law”. However, the modern
tendency (globalization) - also in International Private Law – leads to an increase of selfdetermination
and consequently in many countries reforms and changes in law introduce additional possibilities to have
legally valid choice of law options.

Please also note: Often even lawyers do not respect or ignore the limits of choice of law in drafting contracts
and do not realize that in case of local contracts no choice of law agreement is legally possible (because the
 local contract is applicable mandatorily). Usually it is also not possible to agree on the applicable law as to
property law issues: in most jurisdictions the applicable property law is mandatorily governed by the law in
force at the respective location of the object.

Example: A person with his domicile/residence in Tel Aviv sells a product to a person with a
residence/domicile in Salzburg. Both persons may agree in their contract that English law of sale of goods
shall apply (choice of law clause). Such choice of law agreement is valid, even if this international contract
has no link whatsoever to England. This contract is therefore governed by English contract law.

Of course: it might not be very advisable or meaningful to agree on a contract law, which
rules cannot be enforced at the place where it might once be important to enforce. Or
to agree on a contract law which has obviously no reasonable link to the contract (for
instance Chinese contract law agreed on a contract between a Swiss and Austrian
Company).
Maybe the background for the choice of such "alien" contract law which has – at first sight
– no reasonable link to the contract may lie in the relation of the parties to the chosen
contract law (for instance one of the parties has a parent company in that country) or the
choice simply represents a compromise (popular compromise in the International
Business in this respect is the agreement by both parties on Swiss contract law as a
synonym for a "neutral civilized law").

Example: Internation Corporations often intend to have all their contracts across the
globe governed by the law of their parent company (US-Oil corporation wants to have all
its contracts goverened by the Laws of Texas).

Example: Various civil laws of the United States of America (mind: every state of USA has its own civil law:
the civil law of California, the civil law of Alaska etc) know the possibility to agree on punitive damages
("punitive damages" mean: compensation in order to punish the wrongdoer, not compensating any
damage caused; Example: compensation in the fast food business
http://www.criminaljusticedegreesguide.com/features/10-biggest-fast-food-lawsuits.html): Punitive
Damages do not cover actual damages caused or loss of profit, but shall punish the wrongdoer by means
of sometimes even astronomic monetary amounts. Such punitive damages granted by a (US) court are not
enforceable in European countries. Therefore it is not very meaningful to agree on Californian contract law
in order to be entitled to claim “fantastic” punitive damages and to expect to have them cashed in in

Europe, if the other party has its seat in Europe: punitive damages cannot be enforced “and cashed” in
Europe.

In the absence of such agreement by the contracting parties (= in case of no choice of law
agreement made by the contracting parties), the statutory law “rules of conflict of private

laws” declare applicable the law of the state/jurisdiction of domicile/residence of the party
making the "characteristic contractual performance".

The "characteristic contractual performance" stands in case of sales contracts for

the seller, stands in case of service contracts for the service, stands in case of a
contract for employment for the employee, stands in case of a works contract for
the work etc. So "vendor law", employee law", "service provider law" is applicable
in case of absence of a choice of law clause.

Example: A person with his residence in Tel Aviv sells a product to a person with his residence in Salzburg. In
the absence of a choice-of –law-agreement of both parties, the Israeli law of sale of goods apply to such
 contract, because the vendor (seller) has its seat in Israel. Please mind: the citizenship of the contracting
parties is irrelevant for the evaluation of the applicable contract law!

So the applicable contract law is either defined by the contracting parties themselves, in case
of lack of such applicable contract law agreement ("choice of law clause") the "conflict of law
rules" identify the applicable contract law instead.

Therefore following SCHEME OF SEQUENCE for any contract drafting, contract clarification or
contract check before any deeper analysis or writing is made:

1. Any choice of law clause? If not, then

2. Identification of the applicable contract law by applying the
pertinent conflict of law rules.

Negotiation phase: Pre-contractual Liability

From the moment of contacting another person for business purposes, by statutory law or on
basis of customary law, a “pre-contractual” legal relationship is kicked off:

The "pre-contractual" relationship states – in general - that during the bargaining period both
parties must act in good faith.

The specific pre-contractual duties and obligations can be broken down to two major
groups (an "active" and a "passive" one):

a) To disclose “proactively” possible obstacles/problems to contract formation and/or

contract performance: pre-contractual obligation to act.
b) To reply to the questions of the other side correctly (i.e. true answers): pre-
contractual obligation to re-act.

The legal consequences for non-compliance with these pre-contractual duties ("breach") are
liability for the damages caused (i.e. reliance interest): the non-correctly acting bargaining

person (=the wrongdoer) has to compensate to the other side whatever the other side would
not have invested/paid if the wrongdoer would have acted correctly.

Or in other words: the damage that the other side suffered due to its frustrated reliance in the
correctness of the vis-à-vis ("if you would have told me before, I never would have made all
these expenses, therefore you have to compensate these expenses caused by you").

The person usually liable for such reliance interest is the potential (not correctly bargaining)
contractual party. Therefore in case the negotiators are acting in the name of another
person (for instance: in the name of a company), such represented person (=company) will
become liable: the represented person becomes liable, not the representor (=negotiator)

Please mind following exception: For the breach of the pre=contractual duty to
disclose possible insufficiencies of his power of attorney, a negotiator (for instance:
manager) becomes liable himself/herself in person! So in case a manager does not
inform the other side about the extent of his power of attorney (=legal
power/entitlement to represent the company he is negotiating for), becomes liable for
any and all damages incurred and caused to the other side.

Example: A manager XX representing company XYZ does not disclose to the other side
(company ABC) that he has no power to represent XYZ in real estate matters.
Nevertheless long negotiations took place. Finally XYZ does not approve the
negotiation outcome because its manager XX exceeded his power of attorney
without asking before. Therefore ABC participated in the negotiations meaninglessly.
ABC is entitled to claim compensation for all meaninglessly invested costs for
negotiations (=reliance interests such as travel costs, costs for stay, costs for
elaborating offers, etc) against the manager XX in person.

Please mind: Certain insurance companies offer specific manager insurances

covering such risk of becoming liable in person due to such pre-contractual mistakes
(except those mistakes that were made gross negligently or on purpose).

In significant cases, negotiation phases are based on contractual agreements, which specify
exactly all the duties and obligations concerning the negotiating companies and specify all the
legal consequences in cases of non-compliance with those agreed duties and obligations (for
instance also confidentiality agreements or agreements on exclusive negotiations [=no
negotiations in parallel with third parties]). Such contracts are sometimes called "Letter of
Intent "("LOI"), in case they also regulate the review of documents provided by the seller to
the buyer in order to have a common understanding about the object of the transaction (for
instance transfer of shares or transfer of real estate), such contracts are often addressed as
"Due Diligence Agreements". ("Due diligence" in this respect means that the experts
examining the object of the transaction shall apply their professional expertise ("Professional
expertise" can be also addressed as "Due Dilligence").

In such case the pre-contractual obligations are not directly based on law, but are (only) those
which are expressly agreed. Such express agreement is usual in the industry in order to clarify
crystal-clearly the obligations among the negotiating sides.
Preliminary Contract

A preliminary contract represents a contract entailing an obligation to enter into a (main) contract. The
reason for entering better into a Preliminary Contract instead of a main contract may lay in the legal or
factual impossibility to enter already into the main contract: the legal or commercial or factual conditions
for the main contract are not fulfilled yet but the parties want to be legally bound to each
other already or immediately. Outstanding authority approvals, outstanding separation of a plot of land
from a real estate, outstanding board approvals (which may also make impossible to enter into the main
contract on basis of a condition precedent).
On basis of a Preliminary Contract the conclusion of main contract can be claimed at court directly. Please
mind: in many jurisdictions different validity periods for preliminary contracts (for instance in Austria one
year if not agreed otherwise).
Pleas also mind that in case during the validity period of the Preliminary Contract the assumptions of the
parties change significantly, in many jurisdictions the Preliminary Contract automatically or on request of
one of the parties terminates (implicitly agreed clausula rebus sic stantibus).
Please mind: Clausula rebus sic stantibus means “things thus standing”, meaning that in case the situation
assumed by parties changes unexpected, the agreement is no longer applicable. This principle is usually
in Private Law NOT applicable only exceptionally, namely in connection with Preliminary Agreements
or – of course – if expressly agreed by the parties.
In International Law, usually every state treaty among states are based on the “clausula rebus sic
stantibus”, so any state is no longer bound to a state treaty if fundamental change of circumstances happen
(“escape clause” to the general legal rule “pacta sunt servanda”(=latin: contractual promises must be
kept)! In International Law it is deemed that this principle (“escape clause”) encourages states to enter
into – meaningful – agreements avoiding conflicts of interests among them.
A betrothal (“engagement for a marriage”) represents a special preliminary contract to a marriage contract
(however conclusion of marriage cannot be directly claimed, just compensation fordamages
in case marriage is refused without good reason or good reason for refusal is caused to other side).
In order to avoid an illegal bypassing of special forms required for the main contract, preliminary contracts
must fulfil the same formal requirements as the main contracts, as the case may be.

Punctuation
In some jurisdictions a summarized notice signed by the involved persons represent a
full valid contract! Therefore in case “minutes of meetings” are made during contract
negotiations signed by the negotiations, it is very recommendable to state expressly that these
signed minutes of meetings do NOT represent any contract but document the status of
contract negotiations only. Otherwise one of the parties may successfully claim later that
these signed texts already represent a contract (concluded as a “punctation”).

Sometimes parties want to summarize the outcome of their negotiations or talks by producing
a signed “Memorandum of Understanding” in order to fix the achieved results of their talks.
Managers should be better very diligent when signing such “Memoranda”: if not intended,
then such “Memorandum of Understanding” should clarify that it does not represent a
preliminary agreement, does not represent a punctation (main contract!) but shall clarify each
other’s position and already achieved mutual assumptions and understandings. Therefore
a Memorandum of Understanding usually represents an “increased” Letter of Intent.

Option
An option represents an agreement that entitles one or both of the parties to create a pre-
defined text into a contract (“execution of the option”). Therefore the text the option makes
reference to must be already fully defined and clarified, otherwise the option is invalid. By
execution of the option no amendments are admissible (if not expressly agreed in the option).
Please mind the conditions and circumstances of options vary quite significantly between
jurisdictions.

Freedom of Contract and its Limits – Private Autonomy – Self-

Determination

As already stated, contracts do not exist in a vacuum.

So any contract is based on an applicable Contract Law of a certain jurisdiction. The various
applicable Contract Laws sets different frameworks, different requirements and different
conditions for the various contracts.

The significant character of Private Law is granting to any person "private autonomy" (="self-
determination"). "Private Autonomy" means that a person may regulate his/her own
business (and life) and does not need for regulating his/her own business a legal entitlement
or allowance or approval by the state. Private law sets the "fence", sets a border to a (private
law) area. Within this area a person is free to do/to agree whatever he/her likes ("at their
discretion").

On basis of private law, a person may only receive another person's performance on basis of
an agreement made voluntarily with this other person ("coordination law").

So the principle of Private Law is: freedom to persons and only in unavoidable cases limited by
mandatory private law (imperative private law).

Usually any civilized jurisdiction protects the freedom of the individual and accepts the self-
determination of persons. The jurisdictions (the states) therefore give a person space to
structure his personal way of life including his business relationships and to give space for
individual decisions.

The main instrument given to persons for self-determination is a contract. By entering into
contracts person can determine his/her own life, including his business decisions (to buy a
house or not, to become an employee or not, to work as a free-lancer or not, to buy a golden
watch or not, to marry or not, to adopt a child or not etc).

Not the country, not the party, not the general public, not the Godfather, not Big Brother
makes determining decisions for privates for their lives and business , but the affected person
herself/himself.

So this piece of freedom is granted on basis of contract law. Politics should take into
consideration that any “new good political idea” usually automatically unavoidably reduces
the freedom of persons (including contractual freedoms).

Following contractual freedoms are usually enumerated:

• Freedom to decide if a contract will be concluded by him.

• Freedom to choose his contract partner.
 • Freedom to choose the formalities of the contract (written or oral etc)
• Freedom to limit the validity of the contract.
• Freedom to decide on the specific content of the contract.

These freedoms are of course not granted unlimited by any legal system.

In particular, already by logic, any freedom has its limits in the freedom of others
(for instance: no interference in other persons’ contracts).

The various applicable contract laws set different limits to these freedoms.

1. Limitation of freedom to decide on the content of a contract

Common law contracts (=Anglo-American Law based contracts) usually offer more space for
contracting parties, simply due to the lack of comprehensive contract laws and civil codes:
there are no codes which upfront limit the private autonomy of contracting parties. The limits
are made ("found" because judges assert that they find the legal rule which has already
existed but was to be "found" and applied) by judges (=court practice) in case of a legal
disputes subsequently on a later stage.

Therefore: common law contracts look attractive for contract makers and seem to provide
upfront increased liberty for contracting parties (“big liberty of the contracting parties to agree
on whatever they like”), but later, when a dispute raises, maybe limited, waived and reduced
by court: initially legal freedom against a lack of legal certainty and lack of legal predictability
(“we can agree in a contract whatever we like but may be corrected by a judge later in case of
a dispute at court”).

Civil Law contracts (= Romanistic, Scandinavistic or Germanistic legal system based

contracts) usually offer expressly less space to the parties to decide on the content of their
contracts, because comprehensive civil codes or contract statutes/acts limit and regulate
possible and admissible contents (you have to know the content of the applicable codes and
laws in order to know what content is admissible to agree in a contract). However, in case
the contracts are drafted in accordance with the imperative and mandatory norms of these
codes and statutes/acts, in case of legal disputes, the courts will have to follow what was
agreed and cannot to overrule the contractual agreements: initially reduced legal freedom
against legal certainty! In addition, civil codes and/or contract statutes/acts facilitates the
formation of contracts easier, because they provide rules to fill any gaps in a suitable
manner. Such rules are called “implied terms” ("non mandatory law"), in German “dispositives
Recht”, in French “lois supplétives”.

Usually an entrepreneur is free to refuse to contract with an offering person for whatsoever
reason. So for instance the owner of a discotheque may refuse entrance to whomever he does
not like. In case an unjustified reasons expressed expressly or implicitly (f.i. racist reasons),
such entrepreneur might face administrative or criminal law related consequences (due to
discrimination allegations). However, the contract conclusion cannot be forced (so entrance
[=contract conclusion with the owner] cannot be enforced!).

In addition, all jurisdictions provide prohibition laws which interdict certain transactions
(drugs, exotic animals such as elephants or lions, administrative documents like passports etc).
However, prohibitions may trigger different legal consequences:

• violation of certain prohibitions may trigger administrative fines but are do not affect

the validity of the contract. Example: Selling products after shop closing hours.

• The violation of other prohibitions may make the contract automatically null and void
(i.e. inexistent from its very beginning): Example: contract killer agreement, purchase
agreement concerning delivery of elephants without license etc.
• Other violations may make the contract voidable (i.e. contract is valid until it is
expressly declared as voided by court decision): Example: contract made under undue
pressure.

Please mind: all these examples are taken from civil law related legal systems as practised in Europe.

2. Limitation of freedom to choose its contract partner

Sometimes exceptionally contract laws impose even an one-sided ("unilateral") obligation to

contract in following situations:

a) In Europe usually a monopolist (=”single source”, exclusive market actor) of

fundamental important goods or services (food, transport, even social important
service provisions etc) has the obligation to agree to contract with anybody ready to
pay the usual price and to accept the usual terms and conditions. This principle is
sometimes expressly injected in some acts and statutes but is extended also by court
practice to a general legal principle. In larger cities usually not many private monopolist are acting in the market.
Monopolists in larger cities might be the Public Transport Company or certain exclusive sport premises (in Austria for instance
ice-skating in certain cities

b) In addition, also the state (cities, regions etc) as a buyer of goods or a principal of
services can never decide freely with whom to contract (otherwise it would be
possible that politicians decide to place lucrative contracts to family members or to
companies willing to pay a “commission” (=corruption). Therefore in case the state
(cities, regions etc) intend to place contracts for purchase or for work or for services,
they must follow “public procurement rules” which shall ensure that the best bidder
based on objective decision making basis shall receive the “contract award”.

Even if there are no public procurement rules, always the state is only legally
entitled in order to act for the public benefit: a state is never entitled to act for
private benefit. In case a state acts for private benefit, such acts are illegal and can
be declared as null and void at court and trigger civil and criminal legal
consequences.
3. Limitation of freedom to limit the validity of the contract.

Usually the parties of a contract can decide to limit timewise their contract whenever they
prefer. Limitations made by law may happen in family law and rental agreements. So for
instance in civilized countries a marriage contract cannot be limited timewise upfront.

The phrase of “INEQUALITY OF BARGAINING POWER” raises the question, if in any case both
contractual parties in fact enjoy their contractual freedom(s) in an equal and balanced way.
The not very surprising answer: no.

Examples: Employees usually have to accept terms and conditions in their employment
contracts often unconditionally, consumers in their purchase contracts (who is in a position to
reasonably negotiate with amazon?) as well and so on. For typical situations of “inequality of
bargaining power” many jurisdictions have imposed mandatory (=imperative) rules in civil
codes or enacted special statutes (for instance consumer protection laws) in addition to their
civil codes protecting the "weaker side" in a contract. Such protective legislation developed
"new" fields of law: "Employment/labour law", "Consumer protection law", "Passenger Law"
etc.

Formation of a Contract ("Making of a Contract"): Offer and Acceptance

Nearly any contract under any legal systems is made by the exchange of corresponding
declarations of will, called “offer” (made by the offering party=offeror=promisor) and
“acceptance”. An acceptance is made by that person (=offeree=promissee), who declares his
final, unconditional and unlimited consent: the final “Yes”.

Up to acceptance (=the final unconditional "yes") the negotiation procedure consists of a first
offer and “counter offers”. So the declarations during a negotiation phase legally are
exchanged offers/counter offers until one side finally gives his last "yes".

Such “declarations of will” are statements by persons to be communicated to the recipient

and to be received by the recipient (the other side).

Please mind: if a person signs a contract without reading, the entire content ABOVE (not
following) the signature is accepted and agreed. However, completely unusual unread
clauses in a contract are not covered by a signature (=agreement)!

Please also mind: Nobody can burden a recipient with an obligation to answer without the
recipient's prior agreement. So if you receive a letter telling you that you have to reply such
letter can be ignored (however of course better to protest expressly against such "marketing
gag").

The declaration usually only enters into its “legal life” and becomes legally relevant after
reception of the addressee.
These declaration of will have to be made with the intention to be legally bound (=the
declaring person must be aware that in case his declaration of will is accepted by the
addressee this agreement can be enforced at court: So, between contractual partners, it is
sufficient that the declaration can be understood in that way, taking any and all relevant
specific circumstances into consideration. In Europe the standard how to interpret such
declarations is the horizon of a reasonable man and woman (=recipient) with the diligence of
the sphere to which this declaration is addressed (f.i. a lawyer has to be more diligent).

In case a declaration was not made with the intention to be legally bound, and also the other
person agrees without any intention to be legally bound, such agreements are often called
“Gentlemen’s agreement”. Both “gentlemen” rely on the other’s word as a gentleman, rule
out the legal enforceability in case the word of the other side is not kept and dispenses with
the help of the law in case of any later dispute (“we will not need a judge”).

Advertisements in magazines and in TV (also TV channels promoting goods or services) and

radio and also presentation of goods in shop windows and in sales rooms and presentations
in catalogues are to be considered and to be understood as “invitations to treat” (lat. invitatio
ad offerendum) only and do not represent any binding offer (which might be accepted
by anybody). Such acts are “only” marketing actions which shall motivate clients to make
offers (which the seller still can refuse to accept for whatsoever reason).

So you cannot "accept the offer" made in advertisements, in the internet-

webpage, in a shop-window by insisting to receive the good, because all these
situations only represent an invitation to the interested visitors to make an offer
by themselves (which can be refused by the company without stating any
reason).

So the “meeting of minds” (=contract conclusion, contract formation) occurs through OFFER
AND ACCEPTANCE. Mutual consent/assent usually has to be exchanged freely, seriously,
precisely and intelligibly.

In case not freely or seriously: usually such agreement enters into existence but may be
avoided at court (=destroyed at court, move to court necessary otherwise agreement "stays
alive").

In case not precis and intelligible: usually such agreement/clause does not enter into
existence at all.

The consent must contain all minimum essential terms of the contract. In case of a
purchase contract: agreement upon price and good. In case (only) the minimum essentials are
agreed, the other parts of the contractual agreement are added by the provisions of the
applicable civil code.

Usually any promise, any legal transaction, any legal agreement (=contract) has to be based on
a (so called) valid CAUSE. A "valid cause" describes a legally acceptable economic
background of the transaction indicating also the seriousness of an agreement and
permissibility of the agreement/promise/contract. So any contract shall have a valid cause in
order to be in a position to be checked if the content is "OK" (=legally permissible)!

In case no such valid cause is indicated and described, the respective

promise/contract/agreement cannot be evaluated if it is in accordance with the law or not.
Therefore any “abstract” promise or contract lacking such valid cause is invalid. So in nearly
all jurisdictions a valid contract must show/carry/include (however you name it) a valid CAUSE
and "abstract" contracts are usually invalid!

EXAMPLE: The promise "to pay 100.000 Euro" is per se invalid, if not explained why (as
a purchase price for a certain product, for services etc), this promise does not carry a
"cause" (=does not carry an explanation why to pay 100.000 Euro: for a contract
killing? For a DVD? For a car? For heroine?)

So a piece of paper stating: "Mr X has to pay 10.000.- Euros to Mr Y" is a legally
invalid statement because it does not indicate the "cause" for this promise of
payment.

Nearly all jurisdictions state: contract conclusion happens only upon unconditional
acceptance of an offer.

Differences between the various legal systems: to which degree an offer can be withdrawn or
revoked and thus no contract is made.
Common law governed offers can be revoked/withdrawn until acceptance. Such offers are therefore not binding
for the offering person (until acceptance). Reason: common law only accepts legal binding declarations if they
were made against consideration (f.i. against payment; quid pro quo). As offers usually are not made against
payment, offers cannot be regarded as binding. Legal practice in USA and UK tried to improve this – not very
practical – situation by imposing the so called mail box theory: an offer is accepted already when the acceptance
declaration is put to the mail box. Not necessary for its legal effect to be received by the offering person (no
communication necessary!): the “mail box theory” allows the recipient to accept “quickly” and makes it for the
offering party more difficult to revoke/withdraw his offer in due time before acceptance is made. Another
possibility lies in the conclusion of an option contract (against consideration) which includes an agreement not
to withdraw the offer. In the United States the US-Uniform Commercial Code states that an offer shall be not
revocable if the offer states an acceptance period or in lack thereof within three months latest: therefore at least
between business partners said Common Law principle is in the decline.

The French Code Civil (Civil Code) states that offers can be revoked/withdrawn, however in case before elapse
of an acceptance period set by the offering person, the offering person has to pay damages suffered by the
recipient.

The Italian Codice Civile (Civil Code) states that in case of an acceptance period mentioned in the offer, before
the expiration of said period the offer shall not be revocable. In case no acceptance period is mentioned in the
offer, the offer can be withdrawn/revoked, however damages for the loss he suffered in preparation to
perform have to be paid to the recipient in case he relied in good faith.

The Germanistic Civil Codes (Germany, Switzerland, Austria and Liechtenstein) declare that any offer is binding
and cannot be revoked/withdrawn: this binding force is valid either during the acceptance period set by the
offering party in its offer or if he specifies no acceptance period for a “reasonable” time (to be determined for
each specific case). A withdrawal has no legal effect. Exception: In case the withdrawal reached the recipient
sooner than the offer, then the offer is withdrawn. In case an offering person does not want to submit an offer
with legal binding force, he has to use expressly statements in his offer stating that this offer does not entail any
legal binding force. Such “offer” represents just an invitation to treat and a corresponding “acceptance”
represents just the legal valid offer. However, in case this “acceptance” is not accepted by the offering person, he
has to refuse immediately otherwise bound (and contract concluded).

So different legal systems have different legal scenarios and consequences in case an offer is
transmitted / sent to a recipient. Common Law offers have usually no binding force at all (with
exception to the Uniform Commercial Code of the USA), in Romanistic legal systems the
premature/early withdrawal of an offer is valid however triggers the obligation to compensate
damages, in Germanistic legal systems any withdrawal has no legal effect at all (and the offer
is still open for acceptance).

HOWEVER; in call legal systems it is legally "allowded" that the offerent makes his offer under explicit conditions
("not binding", "open for acceptance until", "not revocable", "revokeable"). Therefore the differences between
the various legal systems are only relevant in case of an unclear situation, because the offerent did not make
him/herself clear in this offer!

Therefore: In the Common Law an offering person can – until acceptance – correct his offer in
case f.i. prices changes, in Civil Law legal systems not. In Common Law an acceptance may
occur without communication to the offering person (mail box theory!), in Civil Law legal
systems any declaration of will – also acceptance declaration – has to be communicated to the
other person and must be received by the latter.

So it depends

1. on the text of the offer and

2. on the applicable contract law,

if an offer already sent to the recipient still can be withdrawn/revoked (or

corrected or amended) or not.

Formal Requirements – Formalities

This section deals with the question, whether contracts require a special formality or not and
with the issue if orally made contracts are equally valid and enforceable as written contracts
are.

Are contracts only valid if made in written because there is a general mandatory form
requirement for any and all contracts?

The answer is “No”: Also orally made contracts are in principle valid as written contracts are.

Usually all contracts made in supermarkets and shopping-centres represent oral contracts. The
invoices received by the clients do not represent a written contract, but as a rule a receipt.

In modern western legal systems the general principle of informality rules. "Informality"
means that there are no specific formalities for a contract mandatorily necessary. Thus oral
contracts are valid as well. Formalities are usually the exception to this general principle of
informality.

Please mind: an invoice does NOT represents a “written contract” but is a summary of an already
concluded (orally or written) contract stating the items and the corresponding price(s) and also often
the payment deadline.

Please mind: a receipt/quittance does NOT represent a “written contract” but is a certification of
already effected payment. Many jurisdictions (check applicable contract law!) stipulate the legal
principle that who makes a payment is entitled to request and to receive a receipt/quittance.
 Please mind: Exception to the principle of informality: Anglo-American legal systems (still) know the
principle of formality (more to this aspect below): any contract needs a counter-performance or have
to be made in a special written form. In civil law: marriage, often real estate transactions, adoption
contract, partnership agreement.

This means that at least in case “Continental” contract law is applicable, as a rule, the law does
not force the parties to make their contract in writing. Therefore in such case, usually
contractual parties can make oral contracts and may also amend and complete written
contracts also by their “simple” oral agreement (or also by way of exchanging emails etc).

Please mind: Therefore also “voluntary” written contracts can be amended by mutual oral agreement.

Therefore contractual parties must be attentive during contract execution that their statements made to
the other party cannot be understood as oral offers for contract amendment:

Sometimes parties are of the opinion that a written contract can be amended only on basis of an additional
written agreement (sometimes also referred to as an “addendum” or as a “variation”).

Often this is a misunderstanding of the legal situation: a written agreement can also be
amended/completed/terminated etc by an oral agreement. This legal possibility cannot be ruled out by
a contractual stipulation such as “this contract can only be amended/completed in writing”:
fundamental legal principle: parties cannot agree not to be entitled to agree on basis of whatsoever
formality in future! Nevertheless such contractual formal requirement is standard contractual practice.

In ancient societies solemn formalities (often also of religious character) – and not the will of
the parties only - were the true reason for being bound to fulfil obligations:
Promises/commitments were made solemnly and expressly in front of the community (in
some countries names of parliaments derive from the name of such an ancient forum: for
instance “ƥing” in Iceland). Therefore from ancient times we know that without expressly
made promises/commitments in a “solemn” (or at least in a form involving the society) form
but made only in private agreements had no legally binding force.

Nowadays formalities are no end in their selves but shall serve in certain exceptional cases
certain functions.

Nowadays – as to contract law – the freely expressed will of the parties are the legal reason for legal
valid obligations: no will, no contract.

In case a legal system exceptionally requires formalities for certain contracts or

declarations (examples later), such formalities may serve following functions:

1. To document the identity of the person involved (signature requirement)

On basis of this prior basic function which identifies for the future the individual who
made the declaration/contract, following additional functions may be intended:
2. To facilitate proof (i.e. a) to prove the fact of conclusion of a contract and/or b) to
prove the content of a contract).
3. To confirm seriousness (and – as a reflex – to warn the party making the declaration
against the legal consequence of his declaration, or, in other words, to protect the such
party against its own rash and precipitant declaration: if declarations have to be made
in writing, then persons usually – and hopefully - better think twice before signing).
Sometimes a third person is involved in order to document the fulfilment of the formalities in
an increased and in a neutral way. Such persons may be a private individual (as a witness for
a last will and testament) or a lawyer or – more often - a notary.

Please note: the function, qualification and character of a notary is quite different in each
jurisdiction.

In Civil Law jurisdictions (the “Continental jurisdictions”) a notary is a neutral very qualified
and sworn in lawyer with general and special legal knowledge who does not give legal advice
one sided but gives legal information and advice “objectively” to both sides/parties.
(Advocates/attorneys at law give one sided advice and have to protect in principle only the own
client against another person or against the state). Often statutes and acts also empower a
notary to act on behalf of courts in order to prepare files for court’s final decision (for

instance on basis of inheritance law). Notaries also are often involved in the conclusion of
mergers and acquisitions of companies and other legal acts for companies.

The “notarial document” and the “Notarial Act” as such are typical in Civil Law jurisdictions
and unknown in Anglo-American jurisdictions.

a) A civil law notary checks within a “notarial document” the identity of the parties.

b) On basis of a Notarial Act a civil law notary checks that the parties are also aware of the content of the
act.

In England a “public notary” “just” draws up documents for the use abroad by the parties who
needs such documents under foreign (=not English) Law. In some Common Law countries (for
instance Cyprus) there is no notary at all and attornies or state institutions take care for what
is usually done by notaries in Europe or in England.

An US-American “public” notary has nothing in common with the Continental notary except
his name. American public notaries enjoyed little legal training and are empowered by the laws
to record sworn statements and to certify signatures. Often secretaries have as an additional
professional competence the function of a notary in some US states.

Formalities in the Romanistic Legal Systems are known for promises of a gift, for marriage
contracts, holographic wills and contracts made on behalf of a power of attorney. But even if
such contracts were not made in writing, courts accepts such contracts as valid if their
existence can be proven by other written documents which makes the respective claim
plausible.

In Germanistic Legal Systems, in principle any orally made contracts are valid, if
exceptionally a statute/a law does not explicitly request a formality for a specific contract or
for a specific situation.

Examples:

• In Switzerland and Germany sales of land (=real estate transaction including transaction of
apartments) require written form, whereas in Austria and Liechtenstein also orally made sales
of land are fully valid (in legal practice, of course also in Austria and Liechtenstein real estate
transactions are made in writing).
• In Germany, Austria and Liechtenstein an assignment of claims usually does not require any
written form, whereas in Switzerland such assignment of claims has to be made in written.
• In Germany, Austria and Liechtenstein promises of a gift has to be made in writing in order to
be enforceable (even in the form of a Notary Act), whereas in Switzerland also oral promises
of a gift are valid and enforceable.
 These examples show that even within a cohesive legal system as the Germanistic Legal System, the
requirements for formalities considerably vary. Therefore in any case better to ask for qualified legal
advice which formality (if any) has to be followed in order to avoid invalidity.

In Anglo-American Legal Systems, any contractual obligation needs a counter-performance

(called “consideration”) in order to be valid. So this counter performance is a formal
requirement for any contract made under Anglo-American Legal Systems. If no counter-
performance is intended by the parties, the contract has to be made “under seal” (“L.S”: “loco
sigilli”). In the UK the Law of Property Act 1989 introduced the form of a “Deed” instead of
the traditional “seal”. From an European "continental" point of view, the consideration
principle may look archaic, not necessary, out dated and a hindrance for a practical modern
business law. But obviously in everyday business practise this consideration principle
seems to be manageable. In the USA the doctrine of “consideration” still is in full force and
not amended (as it is the case in UK).

Anyway, in modern business practise (and nowadays also often according to corporate
governance rules of corporations), any agreement or statement or record of any significant
importance is made in writing.

Therefore the legal rules - if contracts need to be made in writing or not - might be of minor
importance, because in practice anyway usually important and significant agreements are
usually made in writing.

But even so, as said above the legal rules still have significant importance in particular for
amendments and completion of contracts/agreements (and of course for agreements and
assurances made on the telephone or during conferences later in question if the statements
made are legally binding or not). And of course in case all of a sudden one side starts to argue
that there is an oral agreement made which now needs to be performed; in particular in such
situations a quick check is necessary if such agreement may be subject to any formality or
not.

Example: Parties decided in accordance to business practice to have their agreement in a written form.
Any amendment made but not signed by both can be irrespective of such "in-writing-form- agreement"
a valid (oral!) amendment, if no legal rules require written form.

The “in-writing” requirement is usually only fulfilled if signed (hand written personal
signature with one’s own written signature [“manu propriu”]). Therefore emails and texts
without such hand written personal signature are deemed as not made “in-writing” due to the
lack of such signature (but – if agreed by the parties – are deemed as orally agreed).

“Signature” means at least the full family name (not in capital letters) - better also with full
forename – and in case of representation also the function of the signing person and full name
of the represented person.

Therefore, in case a manager is signing on behalf of a company, full name of the manager plus his function
inclusive that he acts in the name of/on behalf of the company plus complete name (=”firma”) of the company.

Please mind that “Initializing” (i.e. “signing” by adding just the initials of a name) legal wise constitutes no
“signature” and therefore does not fulfil the “in writing” requirement: The purpose of initializing is to
document or to fix the existence of aligned text without declaring and without giving an legal binding
agreement to it (for example to document the outcome of negotiations), because the negotiations are not
already finished or the negotiating persons are not entitled to give a legal valid agreement.

So "signature" means: "I legally agree with what is written above".

"Initializing" means: "I am aware of what is written above without giving a legally binding agreement to what is
written above".

Example: After termination of an employment contract, in many jurisdictions the employee has
the right to receive a job reference and in addition, in many jurisdictions such job
reference shall not include any negative statements concerning the employee. Therefore any
job references only talk very positive about the respective employee. The employer is not
allowed to inject critical aspects about their (ex)-employees. Some employers just "initialize"
the job reference instead of signing and by doing so, such employers send a signal to future
readers that the employer does not agree to what is written in the "positive" job reference but
– according to the law – had to issue such job reference. (Other employers write literally nicely
but in a way that implies negative aspects: "He was very communicative [=means: he was
talking all the time about private issues, he drunk etc]". "He was always up to date with the
internet [= private use of the internet during working time etc])". Or leave out "must- have-
adjectives or adverbs" such as "very", "always" etc ("He was punctual" means "he was often
not punctual").

Please note that in consumer protection laws the contractual formal requirement (stating
that any amendment/addition has to be made and shall be only valid in writing) is null and
void. The reason for this is that entrepreneurs and its representatives and agents often make
oral promises to consumers in addition to or deviating from the texts of their standard
contracts: such oral promises vis-à-vis consumers are completely binding and valid
irrespective of the contractual formal requirement.

Usually the signature only covers the text above. Any text stated below the signature has to
be signed separately in order to be covered. The same is true for hand written additions or
deletions of a printed text: in such case – not surprisingly – such handwritten addition or
deletion has to be signed as well.

The specific legal consequences for defect in form (formal defect) are construed by the
specific in writing requirement. Therefore – as always – at a first stage the applicable
contract law has to be identified and at a second stage the specific form requirement has to
be construed and interpreted: sometimes such form requirements state expressly the legal
consequence for formal defects, in such case the interpretation is easy: (f.i. “…otherwise null
and void” or “…otherwise not binding”… etc). In such explicit case finding the correct legal
consequence is not difficult. But often the form requirements in statutes, in laws or in acts or
made by parties in their contracts remain silent about the specific legal consequence for
defects in meeting the specific form requirement. In such a case the specific legal
consequence will have to be interpreted and construed on basis of the intended purpose of
the specific form requirement (purpose might be: To facilitate proof? Ascertain seriousness?
Warning against rash and precipitant declarations?)

Please mind: Very often such interpretation will show that such formal defect will “just”
trigger non-enforceability (therefore obligation affected by the lack of form will be not “null
and void” or voidable but often “only” not enforceable at court).

Other breaches might trigger absolute nullity or will even trigger no legal consequence at all:
any consequence (if any) of formal defects depends on the intended purpose of the form
requirement (made by mandatory law or made by a contractual formal requirement
(contractually agreed “in-writing”-requirement).

Interpretation of a Contract = Construction of a Contract

Any interpretation of a contract (of course also any interpretation of laws and statutes) shall
always endeavour to understand the intention of the “lawmakers” (=in case of contracts: the
"contracting parties") expressed in their law (respectively: in their contract) , in other words
how the lawmakers understood “their law” (in case of contracts: the “law of the parties” = the
contract). The interpreter has to leave his personal subjective own opinion aside, only the true
intention of the lawmakers respectively of the contracting parties is key and exclusively
relevant for a true and robust interpretation.

Of course many “interpreters” try to convince and to present their own intentions and own subjective goals as
the "objective result of an objective interpretation of the law/contract" (which is of course not the case, such
“interpreters” try to manipulate and (ab)use the wording made by the lawmakers/contract makers). Such
declarations might impress non-legals, but usually fail to persist vis-à-vis any qualified lawyer or judge.

Therefore, any interpreter shall make a fundamental distinction between his role as an interpreter and the –
other - role of the lawmakers/contract-makers.

• So, any interpreter shall seek the true intention of the lawmakers of the interpreted

rule only.

• Interpreter’s own intention shall not be merged with the interpretation procedure
and shall never exchange/replace the intention of the original lawmakers/contract-
makers by his own personal wish of the outcome.

Apart from this general rule, also the applicable contract law decides which specific
interpretation rules shall be applied for the interpretation of the contract.

Each contract law provides its own characteristic interpretation rules for contracts.

For instance, in a CONTINENTAL LEGAL SYSTEM ("CIVIL LAW LEGAL SYSTEM"), such as for
instance Austrian contract law, any interpreter of contracts shall respect following
interpretation procedures in a certain sequence (as the interpretation procedures are
different steps, these steps are also often addressed as “interpretation methods”
[“method”=approach]).

As a first step, a literal interpretation based on the common literal understanding of

the agreement (specific meaning, usual meaning, customs, of course also common
sense). So – not surprisingly – at the first stage the “objective” meaning of the
wording used in the agreement is relevant. If this first step leads to a clear and decisive
result, then this first step of interpretation indicates already the final result of
interpretation.
 In case no clear and decisive result can be achieved on basis of the literal
interpretation – and also to back up a result already indicated by a literal
interpretation - , as a second step the true intention of the parties has to be
evaluated (this step of course requires that such intention can be demonstrated and proved: so if this
is the case, the result might even exceed and deviate from the express wording: if demonstrably the
parties meant “ten kilos” but wrote by mistake “one hundred”, nevertheless “ten” are agreed
irrespective of the explicit wording stating “ten”!). “Falsa demonstration non nocet” = “A mutual false
or mistaken description by the parties does not vitiate their agreement”. The parties have “natural
consent”, they agree but expressed their true/natural agreement incorrectly.).

If this step also leads to no clear and decisive result, then the next third step is an
evaluation of presumptive reasonable parties in the shoes of the specific parties, also
taking into consideration customary meaning of the usual wording and standard
practises.

If then the interpretation leads to no clear and decisive result, then - forth step - the
wording might be that unclear, so that insofar the unclear wording used by the parties
is not valid but null and void due to ambiguity and uncertainty and may be replaced by
“dispositive” law of the Civil Code (=i.e. optional law in the Civil Code which may be
altered, amended and completed by agreement of contractual parties [which
failed due to ambiguity and uncertainty of the respective agreement]).

So such dispositive law would serve as a substitute in this situation.

In case it is clear that the contracting parties would not have entered into the
contract if this “dispositive” provision of the Civil Code would be applied to their
contract, then the entire contract is void. The same is true in case there is no such
“dispositive” law to close the gap/loophole caused by the unclear and uncertain null
and void clause.

In ANGLO-AMERICAN LEGAL SYSTEMS ("ENGLISH COMMON LAW"), the legal interpretation

(what the lawyers call also “construction”) is generally up to the courts and very focused on
a word ("literal") interpretation (which is often made in a “hair splitting way” from an
“European point of view”): so the Anglo-American courts are focused on the words
used in the contracts. Usually the documents and “materials” (documentation) of a
contract (for instance minutes of meetings, protocols, tender documents, emails for the
preparation of the specific contract and other documents relevant for the contract making
procedure) are not taken into consideration (please note: all such documents and materials
are used for interpretation purposes in Continental interpretation procedures, as stated
above). Therefore, any evidence of negotiations made prior to the contract conclusion is left
aside. So the “plain and literal wording” is in the centre of interest of Anglo-American Law
(Common law) interpreters.

"PREAMBLE": some contracts start with a preamble which talks in a narrative way about the
circumstances, the basis, the expectations of the parties and the purpose of the contract. Such
Preamble is not just "for fun" without any true legal significance made, but serve as an
interpretation instrument to understand the contract better and to justify interpretation
variants in the light of the Preamble. Therefore also a Preamle must be carefully drafted and
reviewed by all involved parties (which is unfortunately often forgotten).

“DEFINITIONS” of terms/wording used in the contract are not very recommendable if these
terms are already sufficiently defined by acts or statutes or laws or by clear court practise,
because such “private” definitions in parallel create easily confusions. In Anglo-American
contracts however definitions are often used and practised very broadly – due to the lack of
such thing as a Civil Code (some think definitions are made excessively and even define
“person” and the like). In Continental legal systems definitions should only be made in case not
already clarified legal terms are used in the contract or in case the parties really intend to
deviate from the usual meaning of the term already set forth clearly by the applicable Civil
Code. Please note that sometimes such "private [=made by contracting parties] definitions" of
terms already defined by legislation are violating mandatory understanding of legal terms! So
for instance in Continental Legal Systems usually it is not admissible to define the
meaning of the term “negligence” deviating from the meaning of the applicable contract law,
because “negligence” is already mandatorily defined in Civil Codes and practised by the courts.

Please mind: In Anglo-American Legal Systems “negligence” is not defined by a statute or law but by
courts (often by juries!) and therefore the definition of “negligence”, “wilful act” may be defined and
must be defined by contractual parties to have anywhere a rule stating what kind of meaning the term
“negligence” shall have. Such agreement is court-binding. However, such meaning defined by the parties
is of course not binding for others. Therefore, in Anglo-American legal systems it is hard or even
impossible to give a general – uniform - definition what “negligence” shall mean in a contract governed
by Common Law.

In addition, as said above, in Anglo-American Legal Systems, the literal interpretation is usually “the one
and only” and courts put much emphasis on the “objective” wording as such. The “natural consent”
of the parties is not in the centre of a Common Law’s judge’s interest.

Defect of Consent

When the meeting of the minds (i.e. the consent of a contract) is made, such consent may have
a defect: a “defect of consent” or - in other words - a defect in the “roots” of an agreement.
Any legal system cannot ignore such defect of consent and cannot only respect the external
and formal consent irrespective of any events happened during the meeting of the minds.

The different legal systems deal with this problem – what shall happen in case the consent of
the contracting parties has defects – in divergent ways. Any legal system has its own legal
solutions to this problem (and is often convinced that its own solution is the only logic and
meaningful one).

Certain jurisdictions favor the stability of once made contracts and make it quite difficult for one of
the parties to get rid of a contract due to the argument of a “defect of consent”.

But no jurisdiction can ignore completely the fact that it might make no real sense to keep up
a contract by any means and ignoring massive defects during the formation of the
respective contract: for instance in all legal systems a contract – although objectively made
because offer met acceptance - cannot remain in case made by deceit or "at gun point"
["Mafia offer that cannot be refused"]).

The defective “roots” of consent may radiate and even totally erase the consent (i.e. "avoid
the contract").

So "Avoidance of a contract" means that the contract made can be challenged and cancelled
based on a certain reason. The reason might be a specific "defect in consent" if the
requirements (legal rules) and elements of such defect in consent are fulfilled.

The legal rules concerning defects of consent conflict to some degree with the general
understanding and general principle that once a contract is made such contract has to be
executed if one of the parties requests to do so. So any solution must be balanced and be
justified, that a contract "is taken away" from one party on request by the other party.

Thus, the rules concerning “defects of consent” deal with the question if a consent can be
regarded as null and void (“absolute nullity”, i.e. legally inexistent) or void (“relative nullity”,
i.e. existent but can be avoided at court) or if the consent (=contract) prevails irrelevant of
certain defects in the offer/acceptance of the parties.

Which defects of consent may be relevant and under which conditions such defects of consent
might trigger which legal consequences depend on the applicable contract law (=depend on
the respective jurisdiction).

Each legal system has its own categories and philosophy under which conditions a consent (=a
formation of a contract) might be void or voidable. Some legal systems prefer to have a once
concluded contract continuing and have very restrictive rules for an avoidance based on defect
in consent, others prefer to have contracts only continuing if made without any defect and are
therefore "liberal" by making avoidance of a contract based on error "easier".

The rules governing “defect of consent” may sound quite abstract and far away from business life
reality.

But defects of consent have a practical importance in everyday business and court life:

In case of stranded or frustrated investments, often the only legal way for an investor to rectify
such situation lies in the avoidance of the investments based on mistake or error (and to have
declared the investment as null and void and – as a condition – to be legally entitled to request
repayment of the investment!

Usually civil law knows four different defects of consent: Mistake/Error, Deceit/Fraud, (Im- )Possibility,
Permissibility/Violation of Prohibitive Law.

The requirements for avoidance of a contract based on defect of consent are considerably
different in various legal systems.
 1. MISTAKE/ERROR

Usually, legal wise, a mistake/error (both terms are synonyms) is understood as an incorrect
understanding of the reality in direct connection with the contract and - in addition –
concerning an actual situation already present at contract conclusion:

• error concerning the facts, the meaning and the consequences of its own
offer/acceptance (=a person did not realize making an declaration of will, a person did
not understand the real legal meaning of his declaration of will): error concerning the
the declaration (offer or acceptance) as such;

• error concerning the factual or legal content of the contract (=a person thought he
bought a real Picasso but bought a simple forged copy, a person thought that he gets
a contract free of charge, however got a contract against payment): error concerning
the object of the deal/contract ,

• error concerning contractual significant issues concerning the other party to the
contract (=a person buys from a criminal but thought he buys from a licensed expert).

An error/mistake as such usually does not automatically invalidate a contract; usually a person
has to go to court and to try to avoid such contract based on error/mistake.
Usually additional circumstances and conditions have to be proved for a successful
avoidance (= the person who wants to avoid the contract has to prove qualified justification
for his move: example: the error was caused by the other party in an unjustified way or was
obvious for the other side).
But – as always – the applicable contract law shows the specific conditions and requirements
to raise the argument of “error” or “mistake”. (usually, all contract laws require that such
error/mistake is related to the question “what” the party at error really wanted: only issues
covered by the agreement may be relevant!)

Usually an error in motive (“why” the party at error really wanted the contract) is legal wise
irrelevant (=issues not covered by the agreement are usually not relevant): an error in motive
concerns an issue besides the consent (and has nothing to do with the declarations of will,
nothing with the object of the contract and nothing with the other party: therefore such
motive is “the own business” of the person in error).
However, an error in motive may be relevant if
a) the corresponding condition (=the motive) is included in the contract, or
b) the incorrect motive was caused by the other party with bad intention.
c) in case of gifts (contracts without counter-performance)

Common Law provides unfortunately just some unstructured, contradictory and ambiguous
rules for the problem what shall happen in case a party is mistaken. Therefore it is very
recommendable to have a comprehensive own wording in a Common Law contract dealing
with possible mistakes, otherwise the legal situation as to mistake/error would be very
unclear.
BUSINESS PRACTISE: Usually in the industry, business partners (=contractual parties) try to
waive the possibility to avoid a contract based on error and mistake in order to have
increased legal validity of the contract (and to avoid upfront discussions later if there was a
mistake or not).

Therefore it is "good international business practice" to exclude the possibility to avoid a

contract based on error and mistake.

Please mind, that consumer protection laws in many countries interdict such exclusion:
therefore consumers usually can always try to avoid their contracts based on the argument of
an error or a mistake and have good chances at court to be successful by doing so.

2. DECEIT/FRAUD/COERCION

Deceit and fraud and coercion ("undue force"/"at gun point") is not only subject to criminal
law, but also triggers legal consequences in private law (for instance damage compensation
and as to contracts as follows:)
In case a contract was made based on deceit/fraud/coercion, such contract will be avoidable
or even be null and void (=depends on the applicable contract law: for instance on basis of
Austrian contract law, a contract based on deceit/fraud is TEMPORARILY valid but can be
avoided at court).

So in Austria in case the mafia forces a shopkeeper into a contract at gun point ("mafia made an
offer that cannot be refused"), in Austria the shopkeeper has to revert to a court to get this
contract legally extinguished otherwise the contract remains valid! (Limitation period for
coercion/undue force: three years after contract conclusion.

Please mind that usually in civil law a party acting fraudulently does not necessarily needs
intent to cause damage to the other side (which is usually necessarily the case in criminal law).
So, in civil law, unlike in criminal law, it is not necessary to show that a person had the intention
to cause damage or unlawfully enrich himself before fraud will be made out. Therefore f.i.
vendors (or its representatives) act with deceit/fraud/coercion in civil law sense when
knowing that a client does not need a certain good but nevertheless persuade the respective
client to buy needlessly such a good.

But – as always – the applicable contract law shows the conditions and requirements to raise
the argument of “deceit” or “fraud” or “coercion”.

3. IMPOSSIBILITY

"Impossibility" means "permanent obstacle" to perform a contract.

Most jurisdictions make a distinction, if the obstacle already existed at contract formation or
occurred on a later stage. Reason: existence of contract that never could be performed makes
no sense.
So many jurisdictions (contract laws) stipulate that a "permanent obstacle" for the
performance of a contract already existing at the moment of contract conclusion makes the
contract null and void or at least voidable.
 Austrian law stipulates that only contacts with a legal or factual absurd impossible content already
in the moment of contract formation may make the contract null and void. “Absurd” impossibility
is supposed to be anything against logic (as practiced in western societies); therefore for
instance contracts with religious promises might be null and void on basis of Austrian law
because “against logic as practiced in enlightened western societies”.
“Legal impossibility” would be any legal obstacle lying in the structure and categories of the
Austrian legal system (sometimes difficult to distinguish from permissibility).

3. PERMISSIBILITY

It goes without saying, that a contract shall not violate any mandatory (=imperative) laws.
If a contract violates any mandatory law, the applicable contract law decides which
consequences such violation on the contract shall apply.

Three different consequences are possible:

a) Contract is thus null and void (in order to protect society/legal community: for
instance contract with contract killer, heroine purchase contract, slavery contract)

b) Contract is thus voidable and thus can be avoided by a party at court (in order
to protect an individual interest, for instance violations of consumer protected rights,
violations of rights of employees etc)

c) irrespective of the violation of mandatory law, the contract remains valid

(because the violation has no private law related unlawfulness) but a fine based on
administrative or even on criminal law is applied (for instance sale of a product
breaching mandatory opening times for shops).

Conditions of Substantive Validity of a Contract

In general and usually, any contract – irrespective of the applicable contract law - has to meet
following minimum requirements in order to represent a valid and un-appealable contract:

1. Legal Capacity of the Parties

2. Lack of Defect of Consent of the Parties

3. Valid Cause

4. Possibility

5. No violation of Permissibility

6. Understandable, clear and not ambiguous content

As to the points 1., 2., 4., 5. and 6. please refer to above made comments.

Some legal systems require additional "must-have’s" (as we already know: a common law
based contract for instance requires also a "consideration".)
As to point 3 “CAUSE”:

CAUSE: As already said in short above, usually any contract has to be justified by a certain
“cause” which is laid down and expressed (at least implicitly) in the text of the contract itself.
So a certain “economic purpose” (=the “cause” in this respect) has to be shown in the
contract. Otherwise the contract would be “abstract” and therefore be not valid and not
enforceable.

The cause (the economic purpose) is sufficiently shown in the contract’s description of its type
(sales, work contract, leasing etc) and detailed description of the object of the contract (goods,
specific result, lease object).

This principle shall make possible to evaluate if the contract is in accordance with applicable
mandatory and imperative laws, not in conflict with criminal law etc.

Example: A contract stating “A shall pay 1.000.0000 USD on March 1, 2016” is usually invalid, because
such contract does not tell the cause (the economic purpose) why and what for such payment has to be
made (payment has to be made for drugs? Or for a contract killer? For a construction work? For labour?)

Example: A contract states: “A shall pay 1.000.000 USD on March 1, 2015 for the construction of a house
as further described in Appendix 1 of this Contract”: this represents an agreement with a valid cause,
because this contract tells the economic purpose why such payment has to be made: for the
construction of a house.

So usually a contract has to explain for which economic purpose (not the motive but the
performances/deliveries!) the specific duties and obligations (in particular for payment) are
agreed. Sometimes such explanation is made implicitly because it deals with everyday
transaction or purpose.

Exceptionally, some contracts and transactions might be admissible even without a cause in
the strict sense. For instance assignments, bills of exchange, and – to some degree – bonds
do not have to carry a cause in the strict sense.

Contents of a Contract

COMMON LAW GOVERNED CONTRACTS.

Contracts governed and based on Common law need a more comprehensive wording by the
parties, because such contracts cannot be supported and completed by something like a civil
code. Therefore it is up to the contractual parties to find for each and any of their
contractual agreed obligations, duties, and entitlements and rights a sufficient proper and
exhaustive wording. Lack of or insufficiency of wording means and triggers lack of legal
enforceability at court.

Therefore Common law contracts (i.e. Anglo-American contracts) are sometimes drafted
voluminous as "telephone-books" in order to cover each and every aspect of possible
scenarios in connection with the contract in the contract.
Therefore, as said before, to a large extent, common law based contract do not have explicit
limits and requirements made and set forth by statutes or laws (in particular not by a civil
code) and to a large extent it is up to the parties to agree whatever they feel might be
appropriate and necessary. Finally, the court (the judge and/or a jury) decides if it is of the
opinion if the agreed clauses shall be valid or not. By doing so, the court will take
“precedents” (past cases with similar and comparable facts) into consideration.

Therefore contract drafting based on Common Law needs top experience and knowledge
about the court practice and thus is "big business" of law firms: law firms provide
comprehensive contract drafts for companies which would be lost without such legal
support. Law firms "sell" their contract drafts in the market and make a fortune out of it.

Please mind: In Common Law Systems courts are bound to decisions made by other courts (in the same
jurisdiction! Therefore courts of Texas are not bound to similar decisions of courts of Alaska [and even
not of Federal Courts of the USA! Remember: Each member state of the USA has its own private law
practiced by its state courts: Texas courts practice Texas family law, Texas contract law , courts in
California practice Californian contract law, Californian family law etc: And in addition also on a federal
level there is a separate and different private law practiced by federal courts of USA]) in similar and
comparable cases: the reasons for past decisions in similar cases have to be applied also by a court in a
similar present case. So courts have in principle to stick to the stated reasons in decisions of other courts
of its jurisdictions made for similar cases. This principle is called “stare decisis”(=Latin: ”to stick to the
decisions” meaning: a court shall stay to the legal principles set out in past decisions of other courts
decided and stated in similar/comparable past cases). Such past decisions made by other courts in the
same jurisdiction are called precedencies. This is a core principle of “Case Law” as practiced in
Common law. A court may deviate from precedencies only in case a court is of the opinion that the
in principle applicable precedent case law is incorrect or that the facts of the present case is divergent,
then a court might deviate from past Case Law and may create and generate a new decision (often then
published by newspapers as sensational news).
The "freedom” of the contracting parties on basis of Common Law looks at a first step as if not very
restricted by Common law, but at the end of the day in case of a court proceeding initiated by one of
the parties the agreement may be corrected comprehensively and/or not accepted by courts).

CIVIL LAW JURISDICTIONS.

On the other hand, contracts governed by civil law jurisdictions, are completed and
supported by the relevant and applicable stipulations in the relevant statutes (in particular
civil codes and commercial codes). Also contracting parties in a contract based on civil law
jurisdictions are free to agree whatever they might find appropriate, however they have to
take already from the very beginning upon contract drafting and negotiating imperative and
mandatory laws and statutes and principles (and court practice) into consideration in order to
enter into a valid and sustainable agreement. For instance a mandatory principle states that
it is not admissible to exclude liability for damages also in case of intent or gross negligence.
(Exclusion for cases of slight negligence however usually admissible except for bodily injury).

CONDITIONS AND LIMITATIONS

In each jurisdiction conditions represent a delicate issue. Why?

“Conditions” in this sense are specific contract clauses which affect a contract by bringing it into
force or by extinguishing a contract.
Because each jurisdiction intends to grant and to favor legal certainty: In case of conditions
agreed by contractual parties, the parties inject uncertainties into their agreements and thus
the legal certainty is – of course – reduced.

So any condition makes reference to UNCERTAIN EVENTS and may kick-off (Suspensive
Condition) or may stop (Resolutive Condition) a contract (or contractual clause).
Conditions can be suspensive ones and make entering into legal force (legal effect) for a legal
act dependent on the occurrence of an uncertain future event: "green light for the contract
in the moment suspensive conditions are fulfilled" (CONDITION PRECEDENT).

Conditions can be resolutive ones and may extinguish the validity of already existing legal acts
dependent on the occurrence of an uncertain future event. "red light for the contract in the
moment resolutive conditions are fulfilled" (CONDITION SUBSEQUENT)

Examples:
Real estate transaction concerning a real estate with a Russian buyer in Vienna is concluded on basis of
following suspensive condition: contract shall enter into force in case the Russian buyer obtains the
relevant authority approval for the deal. (In Vienna foreigners need an authority approval for any real
estate transaction; upfront general exception is made only to EU-citizens). In case no approval can be
obtained, the contract does not enter into force.

Employment contract with football trainer shall end in case of relegation at the end of the season:
resolutive condition.

Another example for a condition in business practice:

“Reservation of Title” (“Eigentumsvorbehalt” / “оговоoрка о сохранеeнии права
собственности” / reserva de dominio prolongada / riserva della proprietà):

Please imagine following situation:

Seller wants to fix a deal, interested buyer is willing to contract, but has no sufficient money
at this given time but needs and wants the object of the transaction now fixed as well. In order
to get the deal legally fixed, the seller is fine with an agreement that he – the seller – will hand
over the good (=that he performs the delivery) but he will credit the purchase price. Therefore
the buyer receives the (possession of the) good already now but does not have to pay on the
spot in full but may make the payment at a later stage. In order to be on the safe(er) side, the
seller transfers just the possession but not the ownership (not the title): The seller “reserves”
the title upon payment in full. Such a clause in is often called “Reservation of Title”: in other
words, the seller transfers possession of property to the purchaser, while withholding
ownership until – AND IN CASE (therefore such a clause represents a condition!) - the
purchase price (the last partial payment) has been paid fully. The ownership shall pass to the
buyer in the moment the buyer has paid (completely) the purchase price. Such a “reservation
of title” represents a condition (because the fact, if the entire price once will be paid in full is
an uncertain event: furthermore, it is a suspensive condition: the transfer of ownership enters
into force dependent on the future payment of the buyer).

In many jurisdictions transfer of title not admissible for real estate transactions but only for
sale of movable goods (f.i. Austria and Germany) or not admissible at all (f.i. Switzerland,
however, for goods imported to Switzerland being subject to a reservation of title properly
agreed abroad the corresponding reservations of title remain for three months [transition
period] valid but then extinguish finally). A reservation of title is an absolute standard clause
in international business transactions and relations and a must-know for anybody involved in

international business. As said above, please mind that each jurisdiction has its own rules
concerning such “reservation of title” (=even within the Germanistic legal family completely
different legal solutions!). Any agreement of a reservation of title is mandatorily governed by
the jurisdiction in force at the place where the respective good/real estate is located. In case
agreed, a seller may in case of default payments request the return of the good/real estate
based on his ownership. Therefore he is entitled even in bankruptcy/insolvency of the buyer
to request the return of the good/real estate. Another advantage of retention of title over a
pledge is that there are no strict publicity requirements. Of course any valid agreement on
retention of title must happen before delivery to the buyer.

In case the future event is not uncertain but certain, then such clauses are called
“limitations” (and not “conditions”).

Conditions are “sensitive” clauses because they introduce uncertainty to a transaction/to a

contract. Therefore many jurisdictions impose controls and reservations and allow such
clauses with restrictions (in particular with regard to real estate transactions).
Limitations are not that “sensitive” or “delicate” as conditions because limitations make
reference to a “sure”=”certain” event which will happen in any case, therefore by injecting
limitations into an agreement no so uncertainty is injected and therefore limitations need not
to be that only restricted by law as conditions are. Limitations do not inject uncertainty into a
contract.

Therefore please be always critical whenever drafting a contract making legal effect
dependent on uncertain future events: in particular the validity of such clauses have to be
checked by a lawyer sufficiently familiar with the applicable contract law.

So: The rules concerning "Conditions" are very different between the different legal
systems: what is admissible and legally "OK" in a contract subject to Austrian contract law
may be illegal and not "OK" in a contract subject to Swiss contract law!

Privity of Contract

Privity of Contract means the principle, that contract produces legal effects only among and
between the contractual parties.

Not surprisingly, as a principle, only signatory parties can be subject to a contract and may be
entitled or obliged by a clause of a contract (privity principle). Therefore contracts at the
expense/on the account of others ("others": "those who did not sign and are not duly
represented in the agreement") (such persons are often called “third parties”: whenever
persons not directly subject to a legal act are addressed, they are called third parties: so a
person standing next to a family of five members is “a third party” to the family members) are
invalid and not admissible: “Holy principle” of civil law! (also in Common Law): No
possibility on basis of private law to imposing duties on a third person without his consent.
NO VALID CONTRACT IF ENTAILING LEGAL OBLIGATIONS ON THIRD PARTIES. Such contracts
who try to impose duties on a third person, i.e. at the expense of others/third parties however
are often not automatically null and void, but usually understood as a promise of one of the
contractual parties to try to persuade this third person to perform; the third person of course
cannot be forced to perform.

Please mind that within a company group, group-members not signing an agreement are "Third
Parties" to the signing group-members and thus cannot be legally burdened with any obligations!

Contracts in Favor of Third Parties are valid, however the Third Party cannot be forced to
make use of such a contract. In case such third party can make a demand with legal effect
enforceable at court directly on such contract, then such contract is often called “true”
contract in favor of third parties.
Sometimes an interpretation leads to the conclusion that a contract includes third persons
into the protective effect of a contract. Such contracts are called “Contract with Protective
Effect for Third Parties” (either expressly stated in the contract or implied).

Example: Contract for coloring/painting an apartment: in case it is clear for the service provider (for the
painter) AT CONTRACT SIGNING (!) that in this apartment not only the receiver of the painting services
(his contract partner), but also the contract party’s family is living there, then the service provider and his
assistants have to protect the entire family from getting damaged/injured during painting (=during
contract performance) and in case of damages each member of the family living there has
CONTRACTUAL rights to claim damages (although only “the father” is party to the contract with the
painter and not the damaged family member).

Transfer of contractual rights – Contract Transfer – Delegation of contractual

duties – Collateral promise to pay a debt

1.
A creditor may transfer his right to claim payment or any other right to claim
performance to another person (=to a third person). This change of person is called
assignment (cession): the right is transferred from the “assignor” (the “old” creditor”) to
the “assignee” (the “new” creditor) and therefore the debtor (“debitor cessus”) has to pay
now to his “new creditor” (=the assignee).

Please mind that all these Latin and French terms are used in Legal English as well.

Usually such change does not require the consent of the debtor (“debitor cessus”),
because usually for him it is usually irrelevant to whom he has to pay: for the debtor the
assignment (cession) did not change anything to his disadvantage: on this condition his
consent is not necessary. So whenever the legal situation for the debtor is amended or
even worsens due to such assignment, the debtor’s consent is necessary for such
transfer.

In case a person makes assignments on a professional permanent basis, his business might
be called “factoring”: Often Banks are buying others “premature” payment
obligations/rights (=before they are due) at a lower price: factoring is therefore also a
method of financing whereby the client sells the accounts receivable from his costumers
to a third party (=such parties are often banks) – the factor – at a discount. In factoring
 without recourse, the credit risk is assumed by the factor, in factoring with recourse it is
assumed by the client.

Usually in the trade, it is agreed that the credit risk is assumed by the client who has to
warrant that the assigned right is correct and will be paid on maturity.

Please mind: that in Legal English the term “assignment” has – unfortunately - different legal
meanings. For instance the term “Assignment” is also used for instructions to an employee to work at
a different working place (“командировка”).

2.
In case an entire contract shall be transferred to another person, such transfer requires the
consent and agreement of all involved persons (all “old” contractual parties and all new
contractual parties to the respective contract): "Contract Transfer".

3.
The same is true in case if a duty/obligation is transferred from one debtor to another person
(from an old debtor to a new debtor) (also called: delegation of contractual duties): also in
this case the creditor has to be asked for his consent otherwise the transfer of the
obligation/duty is null and void.
Only in case the third person is just entering into the contract additionally to the “original”
debtor as a co-debtor then the creditor’s consent is not necessary and not required (such
joining is often called: collateral promise to pay a debt (also called: accession/adhesion to a
contract).

End of a Contract – Execution of a Contract – Expiration of a Contract –

Frustration – Novation, Settlement, Recognition

A contract usually “ends” upon complete performance, upon completion and payment in full
(=in the moment when the contractual duties of all contractual parties are performed in full:
work is done and price is paid, for instance).

Please note that there are two types of contract in this respect to be kept separate from each
other due to different legal consequences:

A. Target contracts (contracts uno actu): contracts which have to be executed “with one
shot”, which have to be executed by fulfilling a specific target: for instance sales contract:
target: transfer of possession and ownership against price. For instance works contract:
completion of the work (for instance construction works) against payment of a price etc. The
performance may last some time (in case of works contracts) or may be performed
immediately (purchase contract concluded and performed in a shop). The element of a result
characterizes the contract.

Such target contracts cannot be “terminated” (termination is always referenced to interrupt

and stop a period) and such target contracts have no “validity period”, but a “due date” or
“deadline” for execution (performance/delivery)!

B. Contracts for the performance of a continuing (or recurring) obligation: such

contracts put emphasis on the time and/or on a plurality of similar performances: for instance
leasing, employment contract, service contracts, and residential right. For such contracts time
is
essential for the (quantity of the) performance and for the amount of the
price/”rent”/”remuneration” (the price for rental contracts is often called “rent”, the price
for service contracts is often called “remuneration” or the like).

Only Contracts for the performance of a continuing or recurring obligation may have a validity
period and end by reaching a certain date and may be “terminated”. Target contracts
end by realization/performance of the agreed target (and therefore never can have a “validity
period” and are not subject to “termination”).

Both types of contracts end when executed in full. The fullness of target contracts consists in
target realization. The fullness of contracts for the performance of a continuing obligation
consists in performance made during the agreed period.

Please mind that at the end of the contract (when the performance and the
payment were made in full), the contract is still not completely to be closed and
"over": as a rule, upon completion of performance and payment, periods for
liability for the outcome of the performance start to run (such as liability for
damages, liability for warranty etc). Only after these periods have ended/elapsed
as well, then any contractual consequences are closed. Some legal systems call
this moment “final acceptance”. In addition also the agreement on jurisdiction or
on arbitration persists. Please mind parties may agree on lasting obligations as
well: in particular secrecy obligations: parties should never tell others about
disclosed facts of their contractual partners. (sometimes such secrecy
agreements are unlimited and “everlasting”, some are agreed in a limited way for
some years).

Please mind that the term “expiration” usually means that a contract for the performance of
a continuing obligation has reached the end of its validity period. The rules of “limitation”
however are applicable to both types of contract and shall not be mixed up with
“expiration” and also not with the term “limitation” (in the sense of a clause with a certain
future event):
In case a right is not executed within a certain time set forth by law, then such right loses its
action ability at court. The applicable contract law states the length of the different
limitation periods (for instance in Austria various limitation periods between 6 months and 30 years: 6
months for payments of everyday contracts (repair works in private households; for damage claims 30 years
after occurrence of the damage and within these 30 years three years of actual knowledge of the victim about
the fact of the damage and the data of the person who caused the damage).

Frustration/Collapse of foundation of Contract.

"Frustration" or "Collapse of foundation of a Contract" represents a fundamental

unforeseeable change of circumstances on which the contract was based (implicit and
inherent basis and purpose of a contract which parties always assume in connection with the
type and scope of the contract in discussion).
“Frustrated parties” may avoid or adapt their agreement at court based on the argument of
"frustration" (in case the other party does not voluntarily agree to the avoidance or
adaption). “Frustration” is also sometimes called “Collapse of foundation of Contract”.

So when both parties are mistaken about the assumptions of fundamental circumstances
which were the basis of the transaction/contract by one or both parties and such
preconditions for the contract/transaction can no longer be fulfilled, this might lead to the
collapse of the contract (in case none of the parties is not responsible for such situation) if
requested and proven by one party at least successfully at court (claim for avoidance).

Therefore also avoidance based on frustration/collapse may end (“destroy”) a contract.

Usually in the industry the contracting parties stipulate in their contracts comprehensive
special arrangements (such special clauses are often called “Force Majeure”, “Act of God”,
“Höhere Gewalt”, “forza maggiore”): in the business contractual parties usually intend to
agree on specific solutions acceptable for the both of them applicable for any scenarios, even
for apocalyptic ones such as terrorist attacks (if relevant for the contract) or death of
employees or catastrophes or the like.

In such clauses the parties describe the situations which shall be considered to be a valid cause
for such avoidance or – even more often - for adaption (which means the contract is kept up
and maintained, but amended and adapted to the new situation.

Examples: war; terrorist attacks; outstanding bad weather; death of an employee; death of a
party; riots; coup d'etat.

Often matter of negotiations if covered by Force Majeure or not: the scenario of a workers'
STRIKE:
An argument during contract negotiations to take strike as a reason to terminate the
contract: it might make no sense to continue if employer/contracting party cannot force
effectively his employees to work (to perform the contract).
Argument not to accept strike as a reason for making an end to the contract: strike of own
employees represents an internal problem of the employer which he has to avoid and in case
not, then shall bear the financial consequences by himself and not to shift this problem to his
business partners.
If a workers' strike is not injected into a force majeure clause, then such scenario would
represent delay on behalf of the employer.

Novation, Settlement and Recognition

A contract may also find its end when "novated". This usually means that the parties amend
and vary the contract in a way that the contract is transformed to another type or character:
the “old” contract” gets replaced by a “new” contract (the old one is “novated” by
replacement).

Please note that simple amendment of certain clauses in a contract does NOT represent a
“novation” in the technical legal sense. “Novation” means that an existing contract shall be
completely replaced by another contract in full. A Novation never can amend the legal
situation of third parties to their disadvantage.

In case the novation is invalid (for whatever reason), the replaced contract/situation arises
"like a Phoenix" again to legal life

A practical special example for a novation: A settlement agreement usually finishes up with
a dispute between the parties and represents a final and binding arrangement and mutual
compromise: the old dispute (may be a contract) is fully replaced by a "settlement
agreement" that shall settle (replace) the old conflict (old agreement).

In case only one of the parties waives its position, then such party recognizes the position of
the other party (one sided / unilateral settlement called “acknowledgement” or
“recognition”). So recognition is understood as a subset of a settlement.

In case a settlement is made and intended to be “constitutive”, then the dispute is solved with
full legal effect and the agreement (compromise) can be enforced at court (both parties
agreed by exchanging corresponding “declarations of will” in order to solve the dispute).

In case the settlement, in particular a recognition, is made on basis of “declarations of actual

knowledge” only (and not on basis of declarations of will), then such settlement
(recognition) is called “declaratory” and can just be used as a refutable proof.

In real life sometimes it can be hard to identify a legal valid settlement agreement/recognition
(which is legally binding and therefore cannot be “corrected” one- sided) or a “declarative
settlement/recognition” (which cannot be enforced in court and can be “corrected” one-
sided).

For instance, in case of traffic accidents “recognitions” made after an accident (“Yes, yes, I am to
be blamed for this accident”) are legally usually not taken as a constitutive recognition, but only as
a declaratory. Anyway, better always to be clear when making statements in order to avoid to be
understood as a legally binding “recognition”.

Another example for NOVATION: Debt reconstructuring with a bank (without switching to
another bank)

Overview Specific Contracts

Types of Contracts - Specific Contracts

In general, Anglo-American Legal Systems are characterized by "court-made-law" and not by law on
basis of statutes produced by acts of parliaments. Therefore they do not have "Civil Codes" providing
definitions and rules for specific contracts. So Anglo-American Legal Systems also do not provide a
typology of contracts ready-made to be used by contracting parties.
Therefore in case of contracts subject to Anglo-American laws it is up to the parties to define
the specific purpose and characteristics and rules in their contracts and to agree on any aspects of their
agreements in their contracts.

Of course also in Common law typical contracts like sales contracts and alike are practiced for decades and
centuries by contracting parties and by courts. Some few statutes/acts also exist in USA and UK regulating
certain types of contracts but never in general and comprehensively but try to regulate unsolved and
unsatisfactory legal questions not already harmonized by courts or not solved by courts to the
satisfaction of politics. Therefore such statutes/acts in Common law have “replying character”(=Common
law statues enacted by legislators [parliaments] give specific replies to legal issues that were not
satisfactorily solved by courts yet).

“Civil law jurisdictions” (jurisdictions practicing law on basis of pre-defined general rules
in codes and statues enacted by legislators) on the other hand offer a variety of different contract
types defined comprehensively in their civil codes or in other
codes or statutes/acts. Contracting parties may make use of these contract models and by doing so they
do not have to inject each and any detail into their specific individual agreements: their contracts
may be completed and added by the stipulations in the various civil law statutes and acts and civil codes.
Of course parties are also free to deviate from the content of the Civil Codes (as far as the rules in the Civil
Codes are not of mandatory character) in a contract type (for instance they may agree on different payment
methods or on a cap or even some sort of exclusion of liability for damages) and are also free to mix or to
merge the different contract types:
for instance a “leasing” contract governed by Civil Law jurisdictions often means a mix of purchase/sale
elements and lease elements: A “pure” lease car contract is called “rental contract” but a “Leasing car
contract” is usually a long-term rent PLUS an option to purchase the car at the end of the rental period (but
in Common law rental contract and leasing contract are terms expressing in principle the same).

Parties may also agree on a contract absolutely different from the types mentioned in the civil codes: for
instance in Austria franchise contracts are not regulated as such anywhere and are therefore entirely up to
parties’ agreed wording.
Following contract types are usually mentioned in the civil codes respectively practiced in Common Law:

Contracts related to Gifts: Donations/Presents

A donation/present legally understood is a CONTRACT between a DONOR (=the one promising and
transferring the present) and a DONEE (the one receiving the present) concerning a performance free
of charge/free of any consideration. So a transfer is made without counter-performance (without
consideration), for free, EX BONO (based on generosity). Therefore not any contract free from any
counter-performance (=free from any price) constitutes “automatically” a donation in legal sense, but
only if made ex bono gratuitously (=based on generosity).

For the protection of potential donors who maybe are promising gifts not thinking sufficiently about
the entire consequences of such promise, many civil codes require a qualified formality in order to warn
the donator about his own intention and better to think twice before (=giving something away for free):
written form or even an increased written form (for instance written by a notary), certain “must-have”
warning language, presence of witnesses and the like. Such formalities should serve as a signal to the person
who intends to make a donation that he is actually doing something of serious kind and maybe better to
think twice before making such a (legal binding!) promise. Prominent exception: The Swiss Civil Code does
NOT require a formality, thus any donation in Switzerland (also related to values of millions) can be based
on a simple oral agreement (promise).

In many civil law jurisdictions usually a notary has to be involved (Germany, Austria, Italy for instance).
Please remember: in Switzerland no written form is needed, so any oral serious promise of a donation
(also real estate, also yacht, also billion dollars) is valid on basis of Swiss contract law! If the oral promise
is not kept, such promisor can be sued at courts in Switzerland.

However, in case if the gift is actually transferred simultaneously with the declaration of the promise, then
no formality is needed (“…otherwise a notary would have to sit at the birthday party table….”), because
obviously the donor is aware of the seriousness of the consequences of his promise. For instance
on basis of Austrian contract law, in case a person declares orally a donation of a real estate and
simultaneously hands over the keys to such real estate, no further formality is required and the transfer is
valid.

Please mind: General rule in Law of Obligations:

in case the law stipulates a certain contractual formality for the protection of a person who is
supposed to be obliged to perform/transfer anything, he cannot successfully be sued at court
for such performance/transfer in case this formality was not fulfilled. THE LACK OF ANY REQUIRED
FORMALITY IS A SUCCESSFUL OBJECTION AGAINST ANY CLAIM RAISED ON BASIS OF SUCH
CONTRACT NOT FULFLLIG THE RQUIRED FORMALITY.

BUT if this person transferred/performed already on basis of such – from a formality point of view –
invalid contract, then such already rendered performance/transfer CANNOT BE CLAIMED BACK if
the only reason for such claim is the lack of formality!
Usually no warranty or guaranty is provided by the law for the quality of the gift (except in case given with
bad ntent: in such a case the donator gets usually responsible for damages caused. Example: donor donates
a horse with infection in order to infect donee’s horses ).

Donations are contracts and therefore once agreed irrevocable as such, but in many jurisdictions in
case of justified important reasons might be revocable: “Qualified Ingratitude”: criminal act of
the receiver against donator: physical injury, defamation, etc, donor ends in qualified poverty after the
donation was made, reduction of owed maintenance (for instance divorced father makes donations
to his new girlfriend and consequently cannot provide due maintenance to his children of minor age: in
such case the children may claim the return of the donation or the payment of the maintenance by the
girlfriend of their father).

Donations are in many countries subject to tax (for instance in Germany but – at present time - not in
Austria). Usually where a tax for donation, there also a tax for succession. Where a tax for succession, there
also a tax for donations (in order to avoid bypassing the tax payment obligation).

Please mind that donations are usually made on basis of generosity (or out of gratitude). If the reason
for a “gift” without consideration is not generosity as such (for instance to motivate employees by granting
them a bonus [plural: boni]), the legal rules for gifts are not applicable (in particular also not the mandatory
formalities!).

Donations can be agreed "inter vivos" or "mortis causa":

"inter vivos" ("between means that the donation takes effect during the lifetime of the donor.
"mortis causa" means that the donation takes effect at the death of the donor.

Sales Contracts – Purchase Contracts

This contract type provides a transaction of movable or immovable good(s) against payment: An asset is
sold for cash.

In a sales contract (=purchase contract) the parties agree the following:

• Transfer of ownership (title) and possession of the good/real estate (=asset) Against
(=for)
• transfer of ownership (title) and possession of money (cash).

The simple agreement on the specific object and the price is in Civil Law Systems usually sufficient, the
parties do not have to agree on additional stipulations if they do not like/know (these supplying and
supporting stipulations are anyway provided by the applicable civil codes).

The object (good) of transaction/purchase must not necessarily already exist and/or be in the possession
of the seller at contract conclusion. In such case it is the obligation of the seller to have the object ready for
hand-over at the agreed due date: in particular:
 “`Forward purchase agreement”
 “Drop shipping”
No special form for a sale is usually necessary (for instance orally made contracts in the supermarket:
quittance/invoice is issued after the contract was made). Some jurisdictions require written or even notary
form for real estate purchase contracts (not the case in Austria).

The agreed price must be determinable, agreement on the exact amount is usually not necessary (if price
can be determined by industrial practice, by price lists, by bills of fare, by sufficiently published terms and
conditions (f.i. public transport, private taxis). Please note that the agreement on the price may consist in
an implicit (tacit) agreement on the price as
• flagged out on the price list pinned up/circulated in the shop/office/restaurant as usual
in the specific sector of the industry.

In many jurisdictions purchaser and seller even can also leave the specification of the price to a specified
third party (unfair specification made by such third party may be challenged at court).

VAT usually to be paid by buyer if not agreed otherwise.

In case of doubt, usually most courts in Europe rule that any stated price is to be understood as inclusive
VAT.

The risk of accidental loss (risk of performance) shifts from the seller to the buyer with physical take-over
of the specific of specified goods. After takeover, the risk lies with the buyer and its him to pay the price
and he bears the risk of performance and the risk of price. In case of purchaser’s delay (no takeover due to
purchaser’s delay), the risk of accidental loss shifts to the purchaser at the date of the agreed hand-over
and not at the date of the (future) actual take-over.
“Accidental” means any event not attributable to seller and buyer, for instance act of god, acts of third
party criminals, accidents not attributable to seller and buyer etc.

In cases of shipments, the risk of shipment is to be taken by the buyer if the buyer has determined or
approved the manner of shipment. In all other cases the risk of shipment lies with the seller. Please mind
that “shipment” legally means any kind of transport not only if made by ships, but also by car, train,
aircraft.

The International UN-Convention of the International Sale of Goods (CISG) provides a comprehensive
uniform law concerning international (=cross border) purchase contracts (sales contracts) for movable
goods only which replaces all other laws in case this UN-Convention is applicable (the UN Convention is
applicable in case both parties have their seats in two countries which signed this UN Convention or in case
the rules of the International Private Law make a law of a signatory country applicable).

This UN Convention is a mixtum-compositum (mixture) of any kinds of jurisdictions (because based on a

compromise in the competent UN institutions) and is not very popular in legal practice and in the industry.
Therefore this “UN-convention on the International Sale of Goods” is in practice often excluded by mutual
agreement (which is admissible and legally valid).

However, for small and not complicated transactions with the Arabic world and with China this UN
Convention of the International Sale of Goods is sometimes used (because authentic Arabic and Chinese
versions of this UN-Convention available).

Many countries signed up to this Convention: for instance Israel (2002), Russian Federation (1994),
Switzerland (1990), Austria (1988), Germany (1990), France (1980), USA
(1980), Belarus (1990), Ukraine (1990), Colombia (2001), Venezuela (1981), Hungary (1980). NOT party
to this convention for instance United Kingdom and Portugal. (This UN-Convention represents a very
rare UN-document providing civil law).

Exchange Contracts – Barter Agreements

Barter [agreements] (or less legalwise correctly spoken: exchange contracts) are a subset of purchase
contracts: assets against assets (and not assets against cash).

Historically in less economically developed societies (without developed currencies) this contract type
was of utmost importance.

Nowadays in particular used in the international business when dealing with countries lack of convertible
currency (in particular in the 20th century with Communist states) or with countries undergoing difficult
times after war, economic crises (f.i. Venezuela) or natural catastrophes.

May rules for the contract for sales are applicable mutatis mutandis (="with the necessary changes") to
exchange contracts (because also a sales contract is to some degree an exchange contract: exchange of a
good against money).

Work Contracts = Contracts for work and services

On basis of a work contract (or: contract for work and services) an independent (=self employed)
“contractor” has to perform a certain work ("work" in the sense of a specific outcome/result/"success").

A “contractor” is thus never an employee, but always self-employed, never is required to take out an
“employment-permit” but to take out entrepreneurial licenses and the like. The contractor is obliged to
perform the work in person or subject to his personal responsibility (by availing of “subcontractors” (=”self
employed sub entrepreneurs”) or employees (on the contractor’s payroll). The receiver is usually called
"principal" or "client" or "employer"
(irrespective of the fact that there is no employer-employee relationship).

“Work” in the meaning of a specific result (=successful performance) within the agreed time. The “specific
result” (successful performance) has to be handed over (to be transferred) against payment of the
agreed price. So in principle the contractor only is entitled to recieve payment upon successful finalization
of his work and upon handing over his work to his client (also called: principal).

Of course, in certain branches of the industry (in particular construction and engineering contracts and any
other works contracts with high capital investment structures) it is good industrial practice and therefore
often contractually agreed that the works contractor receives already during the work performance partial
payments (“installments”), even advance payments (=payments before commencement of work
activities). Such practice is often commercially justified, because a works contractor usually has to buy
material and tools, has to pay his subcontractors and cannot pre-finance such expenses
(“preinvestments”). Therefore on basis of a traceable calculation made together during contract
negotiations, advance payment and partial payment shall cover such expenses so that the work contractor
does not suffer a negative cash-flow during his performance. Nevetheless it is of course a risk to pay upfront
(an advance payment) without receiving anything in return (and the works contractor may subsequently
become insolvent [Corona f.i.] or may disappear for whatever reason). Therefore it is also good industrial
practice (and mandatory for any manager assigned to manage a transaction) to pay any advance payment
only "against presentation" (=and of course handing over) of a "advance bank guarantee" in the same
amount: in case the advance payment is not followed by corresponding activities/partial performances, the
principal (receiver of the bank guarantee) may "draw" (=cash) the advance bank guarantee at the premises
of the issuing bank (Securisation of Advance Payment).

Example for works contracts:

• construction contracts (successful performance, specific result: construction, =the

“turn-key” built house.) in case this work is done against a "lump sum", then such contract are often
called "Lump-Sum-Turn-Key" or "LSTK-Contract").
• certain contracts with medical treatments (health check, certain dentist works).
• Portrait painting contract
• Contract with soccer coach linked to certain achievements

A work contractor shall not be integrated in the principal’s organization (otherwise massive problems with
labor law), has to be independent and free in determining his resources (and may avail himself of
subcontractors and other vicarious agents) and is not entitled to claim compensation (payment, price) in
case the success is not achieved but failed (also if the reason for the failure lies in pure accidental
circumstances!).

Only in case the principal (=client) can be made accountable for the failure of the work, the contractor is
entitled to claim compensation without having performed a successful performance (but the contractor
has to set-off what he saved due to the non-performance of the work or acquired due to alternative work
or service or willfully missed to acquire.

So a works contract gives the client a comfortable package, but usually the increased risk exposure of the
work contractor (to receive no payment in case the successful outcome of the work fails) is covered by a
“works contract overlay (surcharge)”. Therefore work contracts are usually more expensive than simple
service contracts (pls rf below “5. Service Contracts”)

Sometimes it is a matter of tough negotiations if a contract shall be agreed as a Works Contract (therefore:
“guaranteed result/successes”) or as a Service Contract (no guaranteed success but performance just “best
efforts”).

Service Contracts

On basis of a service contract the service contractor owes performance with “best efforts” but does NOT
owe a result, not a successful performance (no result is guaranteed). The contractor has to make best
efforts with best intent applying his due professional diligence and expertise. By doing so, the service
contractor fulfilled his contractual obligations and performanceincompliancewith the law and receives
theagreed price/compensation/remuneration even if the intended result fails. Most medical contracts are
based on such “service contracts”, because usually no doctor/hospital can effectually guarantee a happy
outcome.
The service provider (=the contractor) is entitled to claim compensation (payment, price) even if the final
result fails and without successful performance: best efforts sufficient. No guarantee of any successful
outcome.

A Service contractor may be an “independent contractor” similar to work contractor. In such a case such
independent contractor is an entrepreneur, not an employee. Therefore an independent contractor is not
subject to client’s instructions and orders, but has to perform the upfront agreed services with best
efforts. Such independent contractor is not an “employee” in terms of employment law because he is
not integrated in the structure of his client and does not fulfil the criterion of an employee based on labor
law (and therefore has no rights on basis of employment law: no paid holiday, no paid sick leave, no paid
maternity

leave, no social security co-financed by the employer, no protection against lay-off (and therefore can be
“hired and fired”) and the like).

Sometimes in order to avoid restrictive, expensive and harsh employment laws, a company decides to hire
not (additional) employees, but hire them as “free-lancers” (=independent service contractors). Such
independent service contractors shall not be integrated in client’s structure and organization but
determine his working time and place. If this is in fact not true, such “independent” service contract may
represent in reality an Employment contract and all labor laws are therefore applicable. Such freelancers
therefore have no protection and rights on basis of employment law can therefore be kicked out (“fired”)
anytime but receive in return often 10 times higher wages than ordinary employees (protected by
employment law): win-win situation for client and freelancer. Many jurisdictions intend to apply
employment law mandatorily also in such situations (in order to avoid having different “classes” of
workforce working for “bad capitalists”). Independent service contractors do not have to perform their
contractual obligations in person but can avail themselves of subcontractors, thus substitution is
legally admissible (if such right of substitution is contractually excluded, then authorities often
suspect that such contract represents in reality a dependent service contract which is therefore subject
to imperative Labor law regulations).

“Dependent service contracts” are usually “Employment contracts” subject to mandatory and imperative
protective regulations of Labor Law (Employment law) such as paid holiday, paid sick leave, paid maternity
leave, social insurances co-financed by employer. Employees (=dependent service contractors) are obliged
to perform their contractual obligations in person, therefore no “sub-contractors” or substitution is legally
admissible. Employees are “dependant” on the instructions of their employer.

Typological arguments to identify a service contract as “dependent service contract” are

• Service contractor has to work at the premises of the client (dependent on client’s place of work).

Problem now: Home Office (Corona Times)

• Service contractor has to work during the same working time as client’s employees
(dependent on client’s working time)
• Service contractor has to follow client’s orders and instructions (dependent on client’s work

organization and structure)

• Service contractor shall not use own devices for work but shall use client’s infrastructure

In case the service contract is to be identified as a Dependent Service Contract, then:

Employment Contracts

Employment contracts represent “dependent service contracts” and usually called

“Employment Contracts”. The employment contract is subject to special mandatory and
imperative Labor laws protecting the employee and obliging the employer to protective methods for the
benefit of the employee. In return, the employee has to follow instructions of the employer as to time,
place, manner, means and efforts (and therefore is “dependent” on “his master’s voice”). The
extent and range of employer’s entitlements are comprehensive but limited by Labor law.

In many jurisdictions Employment contracts cannot be easily terminated or not at all terminated by
the employer (no “hire and fire”).

Employment contracts also often trigger social security contributions on behalf of employer (co-finance
pension, co-finance insurance against illness, co-finance insurance against work accidents, co-finance
against chomage).

In international employment contracts usually the mandatory laws in force at the place of main contract
performance is applicable.

More details to Employment law Business Law Marketing/Finance” Fifth Semester.

Tenancy and Lease Agreements

Tenancy and Lease agreements contain the permission to use an asset against payment for a defined or
indefinite period of time. In many jurisdictions in Western Europe lease agreements concerning
apartments or even business premises are subject to protective and mandatory laws (sometimes even an
overkill of regulations, such as in Austria). Even for experienced and specialized lawyers it is often hard to
realize the true legal situation of a lease agreement.
In Austria for the rent of moveables and of office space a rent tax has to be paid. This tax was abolished for
residential rent agreements.

Contracts for Custody (and Control) – Deposit Contract

Object of such kind of contracts are custody and safekeeping for another person’s assets without
entitlement to use such assets: the depositary shall keep the entrusted asset safe for the specified period
and shall return it to the depositor upon expiry of such period in the same state in which it was taken over
together with all accession. Usually a deposit contract is agreed against payment and compensation of all
necessary expenses. The depositor may claim early return.
Applicable in banking business, luggage deposit etc.
"Self-storage" contracts often want to avoid to be identified as a "deposit contract" in order to limit the
responsibilities of the self-storage-entrepreneur.
Agency

An agency contract is special type of service contract and also often called a “mandate”. An agent has to
perform legal activities (a signature) or even services (in any case in the name of the client or in his own
name, but in any case on the accounts of the client) best efforts but without guarantee about the outcome
(a contract of agency is therefore a “special type of service contract”).

In case the agent has to act in the name of the client, in addition to the agency contract, the client has to
provide the agent with a power of attorney (sometimes already injected and included in the agency
contract). For instance mandates with lawyers, tax advisors, notaries, but also with any other persons who
shall assist in legal transactions are subject to agency contracts.