Contract – What you should know and consider!
What is a contract?
A contract is a legal agreement between two or more parties (e.g., between individuals, businesses, or between an individual and a business) that establishes certain rights and obligations. A contract can be written or oral and can take different forms depending on what has been agreed and what laws apply.
A contract is a legally binding document that is usually used to avoid misunderstandings or conflicts between the parties and to ensure that each party fulfills its obligations.
How does a contract come into existence?
A contract is formed by the offer and acceptance of the offer between the parties. Here are the basic steps that lead to the formation of a contract:
Offer: A party makes an offer to enter into a contract. This offer can be made in writing or verbally and usually includes details such as the price, quantity, and delivery terms.
Acceptance: the other party must accept the offer in order to enter into a contract. Acceptance can be made by written or oral statement and must accept the terms of the offer.
Negotiation: if there are disagreements or discussions about the terms, the parties can negotiate to reach an agreement. In this case, the offer and acceptance may be modified several times until both parties are satisfied.
Conclusion of Contract: Once both parties agree on the terms, the contract is signed. The contract can be oral or written, depending on the requirements of the law or the parties.
It is important to note that a contract is only legally binding if both parties have a clear and unambiguous intention to enter into a legal agreement and if all terms and conditions are clearly stated.
What types of contracts are there?
In Germany there are different types of contracts, which are regulated in the 2nd book BGB. Here are some examples of probably the best known and most common contracts:
- Sales Contract (BGB §433) – A sales contract is an agreement between the buyer and seller that governs the purchase or sale of goods or services. This contract usually includes details about the purchase price, delivery terms, payment terms, and warranties.
- Lease (Civil Code §535) – A lease is an agreement between a landlord and tenant that governs the rental of a property. A lease typically includes details such as rent, term of the lease, tenant obligations, return conditions, maintenance and repairs.
- Employment Contract (BGB § 611a) -An employment contract is an agreement between an employer and employee that governs the terms of employment. An employment contract usually contains details such as working hours, salary, work duties, vacation entitlements, working conditions and notice periods.
- Loan Agreement (Civil Code Section 488) – A loan agreement is an agreement between a lender and a borrower that governs the terms of lending money. The most common provisions in a loan agreement include the amount of the loan, the interest rate, repayment terms, collateral, and early repayment terms.
How is a contract structured? What should be included in a contract?
Contracts can take different forms. Some are informal (purchase contract), i.e. they do not necessarily have to be in written form, while others, such as the employment contract, must be in written form. Even if the purchase agreement is informal, in many cases a written agreement is drawn up. This provides security and clarity. Should a legal dispute arise, it is good to have the written contract as a proof document.
Of course, the content of the contract depends on the type of contract (purchase contract, rental contract, employment contract or loan agreement), but a written contract should at least contain the following contents:
- Identity of the contracting parties (name, address, …)
- Subject matter/object of the contract (car, real estate, machine)
- Terms of payment (cash, bank transfer, direct debit)
- remuneration (salary in case of an employment contract)
- if applicable, the place of performance
- if applicable, the term of the contract
- terms of termination, if applicable
It is important to note that even though a contract does not have to be in writing, it is often useful to put it in writing. This avoids misunderstandings and clearly documents the terms and conditions.
Contracts in written form are also important documents, which may also be subject to a retention obligation and must be processed and handled in a company in the same way as other documents.
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