commercial & contracts bodenheimer herzberg legal

Contracts come in different sizes and shapes.

Freedom of Contract and Its Impact on Contract Typology

Freedom of contract means businesses are not stuck with an exhaustive and potentially outdated list of contract archetypes.

Instead, parties are free to craft new types of contracts on which no legislation has yet been passed. This actually happens very frequently and does not hinder the validity or enforceability of a contract.

Relevance of Contract Typology in Practice: Some Examples

Contract typology still has an important role to play in legal practice. Some of the questions that can arise in this respect – in particular when parties have not clarified them in their respective contracts are:

  • Is a manufacturing contract subject to the rules applicable to the sale of goods (e.g., on quality requirements), even when it is the customer who provides raw materials to be used in the manufacturing process? (Read more on our CISG page.)
  • Do a sales representative’s aftersales obligations cause her to be qualified as a distributor rather than as a commercial agent, and does that have an impact on compensation claims in case of termination of the distributor relationship?
  • Is a software-as-a-service agreement that also foresees data mining services on the part of the licensor a lease contract, a service contract, or a mixed contract with elements of both, and what impact does this have on the licensee’s remedies in case of breach of contract?

Civil Law Systems’ Approach to Contract Types

In civil law systems, a Civil Code, Code of Commerce, or Code of Obligations will regulate a number of contract types by

  • defining the parties’ key obligations under the relevant type of contract, and by
  • providing for a default set of statutory rules applicable to the contract, most of which may be derogated from by way of mutual – as the case may be: implied – agreement of the parties.

The systematic structure of German sales law may serve as an illustrative example of these mechanics.

The rules in §§ 433 to 479 of the German Civil Code and §§ 373 to 381 of the German Commercial Code chiefly operate as non-mandatory fallback clauses. They will apply if the parties’ contract is silent on any given issue.

  • This allows parties – at least as far as contract types regulated in one of the codes are concerned – to enter into very brief contracts if they are confident that the non-mandatory fallback rules foreseen by the legislator will not be counter to their interests.
  • At the same time, parties desirous of defining the parameters of their relationship in an exhaustive manner in their contract will often find it necessary to make sure that at least some of the statutory fallback provisions are expressly excluded to avoid interfacing issues.
  • German law restricts parties’ freedom of contract, even in B2B transactions, when the general terms and conditions of one party derogate substantially from the non-mandatory statutory default framework. While such deviations are valid in an individually negotiated contract, they may not be valid if foreseen in general terms and conditions.

Parties often enter into one or several contract(s) which

  • is or are not contemplated by one of the codes at all (examples, under German law: franchising; software licensing), or which
  • combine(s) elements of multiple types of contract (examples: sales contract for an assembly line for folding carts, with aftersales maintenance obligations; contract for the construction of a bridge, commercially coupled with a concession contract allowing for the operation of a toll station on the bridge once constructed over a defined period of time).

In both cases, a question arises as to whether statutory provisions on types of contract that are more or less close to the contract(s) envisaged by the parties, or that revolve around the same elements, must be applied.

Another question that arises is whether any such application must work to the exclusion of any other statutory rules on other types of contract still (but not quite as) close to the contract(s) envisaged by the parties. While some theories have been put forward to deal with this question in the abstract, in legal practice, determining the parties’ (as the case may be: hypothetical) intention through contract interpretation is pivotal in sorting these issues out.

Common Law System’s Approach to Contract Types

In the common law world, there is usually no systematically arranged canon of type of contracts, brought together in one single code. This said, statutory rules exist on multiple types of contract, and they also contain (often: non-mandatory) provisions, frequently employing the technique of “implied terms”. In principle, similar typological issues to the ones outlined above for civil law jurisdictions may therefore arise in the common law world. The rules of statutory and contractual interpretation, allied with a tradition of judicial restraint towards devices such as analogy, will often cause results that are closer to the – as the case may be: fragmentary – wording of the parties’ contract(s) than under civil law. This is one of the reasons why Anglo-Saxon contracts tend to be significantly more voluminous than their Continental counterparts.