A. Significance of English contract law
In the view of fact that business is getting more and more international, not only has the role of the English language significantly increased but also the number of contracts drafted under English law. Although there is, generally speaking, little likelihood lawyers in Germany will have to apply English contract law, it may be useful to bear in mind at least some of its basic principles.
Of course, this holds true in particular for such lawyers being concerned with clients from abroad or young lawyers entertaining the idea of working in a law firm with international links, yet, beyond that, others might be affected since a number of contract templates drafted under English law have become the international market standard.
This is particularly promoted by the broad spreading of the English language and therefore its main usage in international business. For instance large loan agreements, so-called syndicated loans (in other words, loans issued by a group of banks and frequently amounting to several millions of euros for the purpose of financing corporations or huge projects) today are mostly rendered according to the Loan Market Association (LMA)1 contract template.
The benefit of a consistent contract template with a great number of standard terms is, in general, an improved efficiency in business as the contracting parties are able to focus on the relevant contractual issues which are of main importance. In terms of loan agreements, the use of standard structures gives banks on top of that the opportunity to assign credit obligations to third parties more easily in order to shift credit risks for the purpose of accomplishing regulatory capital requirements, for example Basel III (global, regulatory standard on bank capital adequacy, stress testing and market liquidity risk).
Due to the growing impact of such standardised contract templates under English law, even contracts drafted under German law are sometimes similar to the English equivalent, not forgetting that these documents are often written in the English language as well. In view of the aforesaid development, this paper intends to introduce the concept of English contract law. After a brief overview of its legal sources it shall be described how a contract is formed according to it. Finally, the basic structure of a loan agreement is considered including some of the most important basic terms.
B. Case law as legal source of English contract law
The main distinction between the English and the German law system with respect to its legal sources is that the former constitutes a common law system whereas the latter is described as a civil law system. A common law system relies mainly on case law going along with its dependence on court precedents, which serve as binding rules in similar cases following.
As a consequence the substantive law, in particular the bulk of contract law, is largely created by the judiciary (“judge-made” law), in fact by applying and developing the existing case law and precedents. Except in England common law systems can be found in other Anglo Saxon countries like the United States, Canada, Australia and New Zealand.
As opposed to this the distinguishing mark of a civil law system like in Germany is that the main legal principles are codified into written rules serving as primary legal sources issued by the parliament, for example in terms of civil law into the German civil code (“GCC” = Bürgerliches Gesetzbuch).
At first sight the case law approach might be strange for such lawyers being familiar only with their domestic civil law system, which leads to the question how precedent and thus common law is formed. Basically, the competent court has to review past judgements in relation to the question as to whether the point at issue in a present legal dispute has been already decided. If this is not the case the judge in charge is entrusted with finding a new rule to provide a solution to the current case by considering previous decisions.
This process is divided into two steps. Having found and followed binding rules established by previous decisions of higher courts in the first place (“doctrine of binding precedent”), the judge will make use of these principles in a broader sense with reference to the present case. He or she herewith has to justify his or her decision whereby new case law will have been created.
Once a precedent is set inferior courts are bound by it, which means they have to obey and to apply the legal principles established by superior courts. All decisions made by the Supreme Court or the Court of Appeal (Civil Division) are binding to all of its respective subordinated courts whereas the High Court is certainly bound by them, but it is not bound by other High Court decisions.
C. Formation of a contract
A contract under English law is generally defined as a legally enforceable obligation between two or more persons, which is created by consent.2 Unlike German law, which merely requires two concurrent declarations of intent for that (cf. sections 145 GCC et seq.), namely offer and acceptance, under common law the formation of a contract can only be assumed if there are additionally consideration and intention to create legal relations.
I. Offer and acceptance
Basically, the formation of an agreement requires offer and acceptance. With reference to the case Stover v Manchester City Council {1974} 1 WLR 1403 an offer is regarded as an expression of willingness to contract on specified terms, made with the intention that it is to be binding once accepted by the person to whom it is addressed.3
Just as under German law an offer must be distinguished from an invitation to treat (invitatio ad offerendum), by which the offeror (person who makes the offer) does not intend to make an offer but invites the offeree (person who receives the offer) to do so.
On the other hand an acceptance is a final and unqualified expression of assent to the terms of an offer. A major distinction from German law exists regarding the formation of a contract between assentees in view of the receipt of the declaration of acceptance. Generally, an acceptance can only have legal effect if it is communicated to the offeror. Worth noting is which requirements this communication holds.
For example, if a consumer ordered goods from a vendor and the latter sent a notice to him, in which he declared that he accepted the order, which, however, never arrived by the recipient, then, the question would arise whether an agreement has been made or not, respectively whether the acceptance was sufficiently communicated between the contracting parties.
Regarding instantaneous forms of communication like telephone calls, the “reception rule” generally prescribes that a contract is said to be formed when the acceptance is received by the offeror. In contrast, such as in the case in hand the “postal acceptance rule” is applicable.4 That rule covers such cases where there is a delay between the communication being sent and received, e.g. by post, and it states that the contract is concluded as early as the acceptance is sent by the offeree, notwithstanding whether the offeror receives the acceptance or not.
With respect to the exemplary case, this means that the notice was sufficient and can be considered as an acceptance, which in turn has the legal consequence that a purchase agreement was formed. Unlike English law according to which the dispatch of the acceptance is sufficient to form a contract, under German law a declaration of intent made in absence becomes effective pursuant to section 130 GCC only at the point of time when this declaration reaches the offeror.
The rule that the acceptance does not even have to reach the offeree to create a binding contract can certainly be waived provided it is stipulated so by the offeror and accepted by the offeree (freedom of contract!).
Finally, apart from that the test whether an agreement is made or not is entirely objective. It is merely asked if a reasonable person would have thought that an offer or acceptance was being made by the offeror respectively by the offeree, and the person receiving that particular declaration believed that a consent was being reached on this basis. In such a case the agreement is effective even if it was not intended to be. Under German law, by contrast, sections 116, 118 and 120 GCC give the party being mistaken a last chance to prevent the formation of a binding contract.5
II. Consideration
Unfamiliar for most German lawyers, presumably, is that a legally binding contract under common law basically requires consideration. In this context consideration means something of value must be given by both contracting parties for their mutual promises, for example the buyer’s promise to pay ordered goods and the seller’s one to deliver them, respectively. Yet the consideration needs not to be adequate in terms of the economic equivalence promised by both parties to each other. In general courts do not want to prevent bargains.
However, in respect of the prerequisites of a legally binding contract it is insufficient to promise something of value without getting anything in return. A donation contract pursuant to section 516 GCC, for example, would not be legally enforceable under English law and a corresponding promise would be insufficient. If contracting parties nevertheless intend to make a promise without consideration legally enforceable there is the possibility of constituting it in the form of a deed.
Consideration became for example important in the case Roscorla v Thomas.6 Having concluded a purchase agreement concerning a horse with the buyer, the seller warranted that it was completely free from any defects. Yet it turned out the horse was, however, defective which is why the buyer sued for breach of contract. The claim was disallowed as the court held the warranty was not legally binding because it was given after the horse had been paid for; in other words there was no consideration promised by the buyer for the warranty given.
III. Contractual intention
Finally, contracting parties must intend to create legal relations, which is supposed to mean the parties want their agreement to be legally binding. When it comes to ordinary commercial transactions it is generally assumed that parties involved aim to have such a kind of relation unless one of them claims the opposite. Then, that party bears the corresponding burden of proof.7
D. Express and implied terms
The first time a German lawyer takes a quick glance at a contract drafted under English law he or she may consider its scope to substantially exceed that of a comparable contract that is drafted under German law. This is due to the fact that the German law provides a great number of written rules (e.g. GCC) replacing numerous express terms in a template- in other words-the terms that the parties would have set out explicitly in the contractual document otherwise.
Implied terms, by contrast, are such which are not expressly set out in the contractual documents but which are implied, either because the parties intended this, or by operation of law, or by custom of usage.8 The issuer of a contract drafted under German law may implicitly refer to the GCC as a kind of set of implied terms unless something different is agreed.
In consequence of a missing civil code, contracts under English law contain many express terms regulating all kinds of issues whose inclusion would be basically unnecessary under German law, for in stance a set-off clause regulated pursuant to section 387 GCC et seq.9 Nevertheless, a contract under English law may also contain implied terms, albeit to a reduced extent. According to the parties´ intention such terms are regarded as implied ones, which they must have intended to include. The courts have developed, among others, the “officious bystander test” in relation to the
question as to whether a term may be implied or not. Subject to this test an unregulated clause may be treated as an implied term if it is so obvious that its inclusion goes without saying from the viewpoint of an obvious bystander.
E. Contract structure
I. Exemplary contract under English law in the form of a loan agreement
In particular contracts under English law of a certain significance are regularly highly detailed, not only because of the lack of a written code but also in order to cover all conceivable circumstances, which may arise regarding the relevant contract. In the end this is all about prevention of litigation by clarifying what are the parties´ contractual obligations.
Hence a loan agreement for the purpose of financing a huge project can easily exceed hundred or more pages. However, most written contracts under English law have a similar structure consisting of certain essential clauses, irrespective of its subject matter. A simplified contract template of a loan agreement may be structured as follows10:
II. Contractual components explained in more detail
1. Loan Agreement in the form of a term
loan facility In most cases written contracts begin with the heading as described in the template outlined above as “loan agreement”. This loan agreement represents a term-loan facility. A term loan taken by itself provides a capital sum up to a maximum amount over a set period to the borrower, including a schedule for repayment in set instalments.
Loans frequently occur in form of loan facilities according to which the borrower is allowed to draw down the loan up to a specified amount during a determined period of time.11 With reference to companies, term loan facilities are frequently used in order to ensure that they can keep their business running, comparable to a regular overdraft credit for consumers.
The heading is followed by the full details of the contracting parties and subsequently the recitals, which fulfil the function of a preamble, introduced by the word “whereas”. Thereunder background facts, the purpose of the agreement and the determined utilisation of the loan money are stated in order to serve as an interpretation support in case a dispute arises concerning the operative provisions.
2. Preliminary provisions
The actual content of the loan agreement template is divided into eleven clauses. At the beginning in Clause 1 the most important definitions of certain contractual terms are listed and explained, especially such terms, which appear frequently in the document, for example “Borrower” or “Lender”. To make these terms more recognisable they are written throughout in the contract with capital initial letters. Thereafter, basic provisions are listed determining aspects such as the loan facility and its aggregate amount and the commencement day in more detail.
Subsequently under Clause 4 the conditions precedent are set out which the Lender requires the Borrower to fulfil before a part or all of the loan agreement comes into effect.12 Apart from the contract template (in fact the observance of the prerequisites mentioned under Clause 4 in connection with Clause 7 and 8) borrowers in many cases are obliged to provide the corresponding lender with additional documents such as verifications about its legal status (e.g. that the lender´s corporation is duly incorporated).
3. Operative provisions
The main part of the contract is, however, occupied by operative provisions, which embrace particularly terms such as those creating rights and obligations. Therefore, the contract template stipulates pursuant to Clause 5 the conditions under which the Borrower is entitled to make use of the loan and subject to Clause 6 in connection with Schedule 1 when and to what extent the repayment of the loan and interest rate must be made.
In addition, a standard contract includes regularly several provisions with regard to different kinds of representations, undertakings, and financial covenants. In accordance with Clause 7 the Borrower warrants thereby that he or she will comply not only with the provisions stated in the agreement but also with the law. Assuming a representation is untrue when made then it will trigger an event of default (see below).13
What is more, borrowers often commit themselves to tendering lenders with financial documents about their situation on a regular basis in order to keep the latter updated, and thereby stand a chance of reacting immediately in case of an adverse change in the state of business. As a whole these provisions are supposed to ensure the repayment of the loan by the borrower as fitly as possible. Lest the borrower breaches important contractual provisions every loan contract contains a list of reasons, or more specifically “events of default” like in Clause 8, under which the lender is entitled to terminate the contract without prior written notice.
The reasons thereunder will apply if the borrower offends provisions regarding either repayment or the representations. At the end of every contract there are, most of the time, several standard clauses, among others a set-off clause, an assignment clause and a governing law and jurisdiction clause. Thereinafter a loan agreement usually includes some schedules regarding, for example, the payment dates.
F. Conclusion
In the light of the increasing internationality of business, at least the examination of the basics of English contract law if only to a limited extent is to be recommended. Though the differences between its principles and those of German contract law might not be, in the final analysis, enormous, there are however some important variations which must be considered both in the process of drafting and negotiating.
„Fußnoten“
* The author was lawyer at CMS Hasche Sigle, Hamburg, in the Banking & Finance department. He would like to thank Mr Stephen Pegg for reviewing this paper.
1 The Loan Market Associaton, formed in 1996 in London, counts over 250 members made up among others of banks and law firms.
2 Jewell, An Introduction to English Contrat Law, 2nd edt. 2002, p. 21.
3 Stover v Manchester City Council {1974} 1 WLR 1403.
4 Henthron v Fraser {1892} 2 Ch 27; the same applies if the letter may be lost, delayed or destroyed, Adams v. Lindsell {1818} 1 B & Ald 681.
5 Jewell, An Introduction to English Contrat Law, 2. edt. 2002, p. 25.
6 Roscorla v Thomas {1842} 3 QB 234.
7 In the end there is no essential difference between the English and German law in reference to this point. The latter also provides a good deal of rules to ensure that agreements are not legally binding if there is no corresponding intend, for instance section 117 or 134 GCC. Apart from that many
social arrangements are concerned like arrangements between spouses.
8 Advocates for international development, Basic principles of English contract law,
http://a4id.org/sites/default/files/user/documents/english-contract-law.pdf, p. 7 et seq., effective 13.12.2013.
9 Another example for an important standard clause in many contracts under English law is the socalled “force majeure” clause aiming to release parties from liability for risks outside their reasonable control. Non-exhaustive examples are: acts of God, fire, flood, earthquake, war riot, explosion, breakdown of machinery, strikes, and lockouts. Under German law a clause of this kind is redundant as a claim for damages since a breach of contract basically requires culpable negligence of one contracting party. Pursuant to section 280 para. 1 liability embraces both intention and negligence. It states that a claim for damages can only arise if the obligor is responsible for his or her breach of duty. In accordance to section 276 paragraph 2 GCC this means
that this person must have failed at least to exercise reasonable care.
10 Cf. http://www.formsmadesimple.co.uk/form_sample/loan_agreement.pdf, effective 13.12.2013.
11 Cf. Adams, Banking and Capital Markets, 2012th edt., p. 22 et seq.
12 Adams, Banking and Capital Markets, 2012th edt., p. 41.
13 Adams, Banking and Capital Markets, 2012th edt., p. 57.
