Detailed Notes on Civil Law Transactions

Introduction to Civil Law

Legal Transaction, Will Declaration and Contract
Definition of Legal Transaction

A legal transaction is an overall factual occurrence that consists of at least one declaration of intent, but usually consists of multiple declarations of intent and changes the legal situation. For example, when V sells K a car for 5,000 euros, the declarations of intent are expressed in V’s statement: "I sell you the car for 5,000 euros" and K’s statement: "Agreed". The legal situation changes as K now has a claim to the delivery of the car and V has a claim for the payment of 5,000 euros.

Types of Legal Transactions

There are unilateral legal transactions that consist of only one declaration of intent. An example would be M terminating their rental contract with V. Additionally, there are bilateral legal transactions, consisting of two corresponding declarations of intent. An example is when M enters into a new rental contract with Y. The contract is a bilateral legal transaction.

Obligation and Disposition Transactions

German civil law is characterized by the abstraction principle. This principle distinguishes between the obligation transaction (Schuldverhältnis) and the disposition transaction (Verfügung). The obligation transaction and the disposition transaction are legally independent from each other. This separation can be hard to understand, as it splits a unified factual occurrence into two legal events. For example, K acquires the car from V. V receives 5,000 euros from K. There exists a purchase contract under which V must transfer the car (obligation transaction, § 433 I BGB). However, the transfer also requires a contract, known as the fulfillment transaction (§ 929 I BGB). Even if the purchase contract were void, the transfer agreement remains valid. This paradox, where K received the car unjustly due to the void purchase contract, is remedied by the provisions for unjust enrichment in accordance with §§ 812 ff. BGB. The issue of the abstraction principle will be elaborated later.

Declaration of Intent
General Overview

Definition

A declaration of intent is an expression of will through which the desired legal consequence arises by law. The declaration of intent is a component of every legal transaction. Any private expression of will directed towards the creation of a legal consequence can be considered a declaration of intent. Declarations of intent can also occur through so-called “conclusive acts” (Schlüssiges Verhalten).

The law does not provide a definition of the declaration of intent; however, §§ 116 ff. BGB include regulations regarding the handling of declarations of intent.

Components of Declaration of Intent

A declaration of intent consists of a subjective will (inner fact) and an objective statement (outer fact). Both components must be present for a valid declaration of intent to exist.

For declarations of intent to be effective in legal transactions, they must generally be “received,” meaning the other person must be aware of the declaration of intent (Section 130 BGB). Exceptions do exist, for instance, with wills (Section 2247 BGB).

Inner Fact of Declaration of Intent

The inner fact is divided into three elements:

  • Action Will: The behavior of the declarant is will-driven and not merely reflexive.

  • Legal Binding Will: The declarant intends to act in a legally binding manner (also referred to as declaration awareness).

  • Business Will: The declarant intends to conclude a specific legal transaction.

The absence of one of these three elements has the following consequences:

  • If the action will is absent, there is no declaration of intent.

  • If the legal binding will is absent, there is no valid declaration of intent.

  • If the business will is absent, there is a valid declaration of intent, but it may be contestable under certain circumstances.

Outer Fact of Declaration of Intent

The outer fact of the declaration of intent is the statement itself, representing the expression of the subjective fact. Here, it is important to distinguish whether the declarant has stated something explicitly or if something is expressed only through a conclusive action.

Examples of Declarations of Intent

  • Express Declaration: K says to V: "I would like to buy a pack of cigarettes of brand xy for 6 euros from you."

  • Conclusive Declaration: K takes a pack of cigarettes of brand xy from V's shelf and puts it on the counter to pay.

  • However, mere silence is usually regarded as a legal nothing (see § 241a BGB; § 362 I 1 2.HS HGB).

    • For instance, V sends K a book for purchase without K asking for it, and after four weeks, V demands the purchase price. Does V have a claim against K? Refer to § 241a BGB.

The Contract

A contract is the most important legal transaction. For a valid contract, two corresponding declarations of intent (offer and acceptance) must be present (Sections 145–153 BGB). Therefore, an offer must have been made and communicated, and the acceptance of this offer must also have been declared and received.

Creditor and Debtor in Contract

The parties involved in a contract are referred to as the creditor and the debtor. The creditor is the one who has a claim against the other party (the debtor). Thus, the debtor must fulfill something for the creditor.
For example, A sells B a book for the price of 15 euros. A owes B the book. Regarding the claim for the transfer of ownership of the book, A is the debtor and B the creditor, meaning B can demand the transfer from A, and A must give B the book. Conversely, based on the same contract—the purchase contract regarding the book under § 433 BGB—another claim arises: B owes A 15 euros. Regarding the claim for 15 euros, A is now the creditor and B the debtor, meaning B must pay A 15 euros, and A can demand that amount from B. Hence, when using the terms “creditor” and “debtor,” it must be clear to which specific claim they refer. A creditor and a debtor exist only in relation to a specific claim!

The Offer

The offer is a declaration of intent that is subject to receipt and aims to conclude a specific contract. By making the offer (Section 145 BGB), the offeror is bound to it. A revocation can only be validly made if it is communicated before or at the same time as the offer reaches the recipient of the declaration of intent.

Pursuant to §§ 146, 150 II BGB, an offer expires if it is not accepted timely or if it is changed by the recipient. If the recipient changes the offer and accepts it in its new form, this deviating acceptance is regarded as a new offer from the recipient, thereby becoming the offeror.

The Acceptance

The acceptance is also a declaration of intent subject to receipt. However, it must relate in content to a specific offer and accept it. The acceptance can be revoked under the same conditions as the offer.

Consistency

A contract is only concluded when the offer and acceptance of the offer coincide. When the parties to the contract agree on the contents, there is a consensus.

To determine whether the declarations of intent coincide, these must be assessed from the perspective of an objective third party (objective recipient perspective).

Dissensus

Dissensus occurs if the declarations of intent do not coincide after examination. This means that the parties have not established a common contractual content and therefore have not concluded a contract.

Supplementary Contract Interpretation

According to §§ 133, 157 BGB, contracts are to be interpreted in good faith. This applies to the parts of the contract that exhibit a gap. In supplementary contract interpretation, the objective hypothetical will of the parties is to be considered, meaning that the overall contract is examined rather than the individual declaration of intent.

Capacity to Contract
General Overview of Capacity to Contract

Capacity to contract is the ability to independently conclude valid legal transactions. According to BGB, one is considered capable of contracting when reaching the age of 18. Capacity to contract is distinguished from legal capacity, which begins fundamentally with birth (Section 1 BGB). Three stages are established regarding capacity to contract:

  • Incapacity

  • Limited Capacity

  • Full Capacity

Incapacity

A person is incapacitated if they are a child under seven years of age (Section 104 No. 1 BGB), or if they are suffering from mental illness or limited mental capacity (Section 104 No. 2 BGB). An incapacitated person cannot give valid declarations of intent. The declaration of intent of a person who is incapable of contracting is null and void per § 105 I BGB, meaning that a contract with an incapacitated person can never come about, resulting in no legal obligations or rights for the parties involved.

Moreover, the declaration of intent of a generally capable person made while unconscious or under temporary impairment of mental capacity is also void under § 105 II BGB. This provision is particularly relevant in cases of severe intoxication or drug use.

Limited Capacity

Limited capacity occurs when the acting person is no longer incapacitated but not fully capable of contracting, i.e., in the case of a person who is at least seven years of age but still under 18 years (Section 106 BGB). The legislature aims to protect minors from the consequences of their legal actions.

However, in four cases, protection for minors is unnecessary, and contracts concluded with them are valid. These cases are:

  • A legally advantageous legal transaction.

  • A legal transaction with consent.

  • A legally approved legal transaction.

  • A legal transaction whose performance is financially provided by the minor.

Legally Advantageous Legal Transaction

A legally advantageous legal transaction occurs when the minor only acquires rights without incurring any obligations. If a legal transaction completed by a minor is legally advantageous, the minor is not in need of protection, and the legal transaction is therefore valid. Here, it's important to note that the assessment of advantage is solely based on the legal, rather than the economic, perspective.

For instance, let’s say a 16-year-old M buys a used Vespa from an inexperienced O for 100 euros, while its market price is 500 euros, as O mistakenly believes it is worthless. While M has made a very economically advantageous purchase, the legal transaction is still legally disadvantageous due to the obligation to pay 100 euros, and thus invalid.

A legally advantageous legal transaction primarily includes two types of legal transactions: acquisition of ownership and gift. For the acquisition of ownership, it is only the transfer of ownership that is evaluated, not the obligation contract (abstraction principle!). Since § 929 BGB does not entail any legal consequence other than the acquisition of ownership, there remains merely a legal improvement for the minor. Conversely, regarding a transfer from the minor’s side, according to § 929 BGB, ownership loss occurs, which is legally disadvantageous.

Another legally advantageous legal transaction is accepting a gift as per § 516 BGB. Generally, accepting a gift does not create any obligation for the recipient. An exception applies to a gift that comes with a condition (Section 525 BGB). Such a legal transaction is not legally only advantageous for the minor.

Consent (Section 107 BGB)

If a declaration of intent is not legally only advantageous, the minor needs the consent of the legal representative. Here, the legal representative gives consent to the declaration of intent before the declaration is made, making it from the outset effective. For example, a contract concluded by a minor regarding the purchase of a bicycle can be effective from the beginning with the consent of the legal representative.

Approval (Section 108 BGB)

If a legally capable minor makes a declaration of intent that does not only result in a legal advantage and consent from the legal representative is not present, the effectiveness of the declaration of intent depends on the subsequent approval of the legal representative. For instance, if a legally capable minor concludes a purchase contract for a bicycle without prior consent, the contract remains "suspended void" until the legal representative (usually the parents) subsequently approves the purchase or withholds approval.

Performance of the Service with Own Means (Section 110 BGB)

This provision used to be known as the "pocket money rule." The legislature has provided a new title for this section in the context of the law reform on obligations. Section 110 BGB is a sub-section of Section 107 BGB and an exception to §§ 108, 109 BGB. If the limited capacity person concluded a legal transaction that is not only legally advantageous, it can still be effective if the capacity-limited person has performed the service with their own means. An installment plan funded by anticipated pocket money does not amount to performance under § 110 BGB.

Representation
Validity of Representation

Generally, the legal consequences of a declaration of intent are encountered by the person who expressed it. This is different when a valid representation exists. In this case, the legal consequences of the declaration of intent do not fall upon the person who expressed it (the representative) but instead upon the represented party. Such a representation is fundamentally possible and only inadmissible in the case of highly personal legal transactions like marriage (§ 13 Marriage Act).

Own Declaration of Intent of the Representative

The representative gives their own declaration of intent, repercussions of which apply to the represented party. The representative is to be distinguished from the messenger, who merely conveys what they have been told—like a tape recorder being played; the messenger does not express their own but merely foreign declarations of intent. A peculiar feature according to § 165 BGB exists that even a person of limited capacity (but not an incapacitated person!) can be an effective representative. This is because any potential legal disadvantage does not affect the underage representative but rather the fully capable represented party.

Action in Another’s Name

The representative must evidently act for another (§ 164 I BGB). This means that the recipient of the declaration of intent must be able to recognize that the legal consequences of the declaration of intent concerning and against the represented party should apply (principle of openness). The represented person does not need to be named but must at least be identifiable (§ 164 I BGB).
For example, an employee in retail sells you a bar of chocolate. It is clear that it is not the cashier who is selling you the chocolate, but the store owner who owns the product. The employee is merely a representative.
An exception to this principle of openness is in the “business for the person concerned.” If it concerns a cash transaction of daily life and the business partner is indifferent about whom they are dealing with, then the business is concluded automatically with the person “for whom the business concerns.” This does not need to be visibly recognizable externally.

For example, you buy a chocolate not for yourself, but you need it for your neighbor who has already given you the money. If the representative does not evidently act in another’s name—and this is not a “business for the person concerned”—then § 164 II BGB applies. Hence, the business is considered to fall to the representative.

Distinguishing from action in another’s name is acting under another’s name. In this case, the actor uses another’s name to conduct business. This could involve merely a name deception or identity deception: a name deception occurs when a person appears under a false name and it does not matter to the business partner what their specific name is. Here, the actor engages in their own business.
For example, Ms. Müller meets her lover at a hotel and wants to not be recognized. Hence, she presents herself as Ms. Meier to the porter. In the case of identity deception, the business partner specifically intends to conclude a deal with the holder of that name. Here, it must be distinguished whether:

  • A power of attorney existed, then the rules of the §§ 164 ff. BGB apply accordingly.

  • No power of attorney existed, then the rules of §§ 177 ff. BGB apply analogously.

Representative Authority (Power of Attorney)

A representation is only effective if the representative acts with authority. A distinction is made between statutory authority and contractual authority, also known as power of attorney. With statutory authority, both the “ob” and the “scope” are regulated by law. This relates, for example, to the representation of children by parents (§§ 1629 ff. BGB), of those under guardianship by guardians (§ 1823 BGB), or the organs of legal entities (e.g. section 78 of the Stock Corporation Act).

In contractual power of attorney, the “ob” of the power of attorney is gained through a legal transaction, and the “scope” is similarly established either through legal transaction or by law (cf. §§ 167, 170 ff. BGB).

Granting Authority

The authority is granted by giving a declaration of intent subject to receipt. This declaration can be made in written form or orally.

Types of Powers of Attorney

The following types of contractual powers of attorney are to be distinguished:

  • Internal Power of Attorney: Internal power of attorney pursuant to § 167 I 1. Alt BGB, through the declaration of the representative to the representative.

  • External Power of Attorney: External power of attorney pursuant to § 167 I 2. Alt BGB, through the declaration of the representative to the contractual partner.

  • Power of Attorney through Announcement: Power of attorney through announcement according to § 171 BGB, e.g., through the registration of a commercial power of attorney in the Commercial Register.

  • Representation by Appearance: Representation by appearance is not defined by law. Whether there is an appearance of power of attorney is checked whenever authority has not been expressly granted. It is divided into tolerated and apparent power of attorney: In tolerated power of attorney, the principal knows and tolerates the representative's actions, and the opponent relies on the existence of a valid power of attorney. If this is the case, the principal must accept the contract that the representative concluded, as they are responsible for the situation created.

In apparent power of attorney, the principal has conferred the appearance of authorization of the representative to the business partner through attributable conduct. If this is the case, the principal must accept this appearance even if they were unaware of the representative's current conduct, and could have recognized and prevented it with due diligence.

For example, an architect who has entered into a unit-architect contract with a builder, which includes planning and project supervision for the construction of a residential building, concludes all contracts necessary for the execution of the construction project in the name of the builder over a year without being authorized. The construction work begins and is still ongoing. Apparent power of attorney is present if the builder could have reasonably recognized the architect's behavior while taking due diligence in light of the construction works on their property.

Legal Consequences of a Valid Representation

If the four prerequisites for a valid representation are met:

  • Validity of Representation,

  • Own Declaration of Intent of the Representative,

  • Acting in Another’s Name,

  • Authority,
    then the contract concluded comes into effect directly between the business partner and the represented party. The rights and obligations from the contract then apply to the represented party. However, if an error occurs, payment will not depend on the represented party but according to § 166 I BGB of the representative.

For the representative, there are no rights or obligations arising from the concluded contract as they did not become a contractual partner.

Legal Consequences of Missing Representation Authority

If there is no valid representation authority, the contracts are initially void for the represented party (suspended invalid) but can be subsequently approved by them according to § 177 I BGB. Then the contract becomes effective for and against the represented party retroactively—meaning from the beginning—aided by § 184 I BGB. An exception applies in cases of apparent or tolerated power of attorney. Here, the contracts apply for and against the represented party, as they have maintained the appearance of authority.

The legal consequences of having a lack of representation authority for the representative are defined in § 179 BGB. In this case, it must be distinguished whether the representative knew about the lack of authority or not, or whether they should have known about the lack.

  • Section 179 I BGB regulates the liability of a representative who was aware they had no representation authority. When the representative is aware of the lack of authority, they are liable to the business partner for either performance (i.e., execution of the contract) or for damages.

  • Section 179 II BGB covers the scenario where the representative was unaware of the lack of authority. Then, they are only liable for the damage caused to the business partner, resulting from relying on the representation authority.

  • Section 179 III BGB examines when the business partner was aware of or should have been aware of the lack of authority. In this case, the representative bears no liability.

Invalid Representations

There are two instances in which representation is generally impermissible, regulated in § 181 BGB:

  • The self-dealing transaction (first clause of § 181 BGB)

  • Multiple representation (second clause of § 181 BGB).

The self-dealing transaction describes the case where the representative concludes a legal transaction for the represented party with themselves as a person. For example, the managing director of a limited liability company pays themselves a salary. Here, the managing director acts as a representative of the GmbH for the GmbH and as a person themselves. The self-dealing transaction is generally prohibited because of the conflict of interest the representative finds themselves in (Section 181 BGB). However, this prohibition can be lifted through express permission granted by law (e.g., § 35 AktG) or through a legal transaction. If a representative conducts a self-dealing transaction without express authorization, the transaction is suspended invalid but can later be approved by the represented party according to § 177 BGB. A similar conflict of interest arises when the representative represents both parties to the transaction. Again, in this case, validity depends on approval.