CONTRACT AND COMMERCIAL LAW IN THE UNITED STATES
Anybody doing business in the US is sure to have often been surprised by the scope and length of contracts in the United States. The following article will explain why this is the case and the reasons behind it.
It’s down to the legal system
As is widely known, the legal system on the European continent originates from the Roman legal system (the Codex Justinianus, or Code of Justinian) and dates back to the sixth century. Back then, various legal texts were compiled to create a collection. The system it formed was used until the 19th century and still applies today. But this is “only” true in the sphere of the classical Roman Empire, which essentially included continental Europe, but not the British Isles.
While the Roman legal system developed on the basis of written laws and other legislation as a foundation for interpreting law and justice, this was not the case in the British Isles and the lands influenced by Great Britain or England (later known as the Commonwealth). There, a legal system developed that became known as the common law, which was based not on written legal texts but on previous court rulings. Thus, while in continental Europe a “standardized” understanding and interpretation of laws developed on the basis of their written texts, the common law system requires a constant search for court decisions that might fit a particular legal issue and serve as a basis for new court decisions. This is actually quite a cumbersome and not necessarily legally secure procedure, since every legal case is naturally different, and there will be hardly any previous court decision that is an exact fit for the current legal problem. Since the territory of the US was dominated by the British from the early 17th century until independence in 1776, English common law continues to shape the legal system in the US to this day.
The difference compared to German contract law
If you have a legal text in front of you, you can refer to legal passages in contractual documents (e.g., by citing specific paragraphs) without having to say much more about them. Therefore, if there is a question about how a contract should be interpreted, you can quickly clarify it by taking a look at the statute.
This “privilege” doesn’t generally exist under US contract law. In order to arrive at an interpretation of the contract that is as unambiguous as possible, it is therefore necessary to set out the underlying facts in the contract in as much detail as possible. This is why a typical German or Austrian contract of 3–5 pages can quickly assume a volume of 15–20 pages in the US. And because the United States does not have a comprehensive civil code like the German Civil Code, Commercial Code, or similar laws, but rather a legal system based on decisions by courts or judges, contracts in the US are structured differently and follow different rules than a European company is used to.
Freedom of contract in the United States
The almost unlimited freedom of contract – the freedom of the parties when drafting a contract – is therefore not bound by mandatory legal regulations. This means that the parties are free to manage their commercial relationships themselves, but it also means that the law does not provide a safety net in the form of provisions that take effect if a point has not been precisely addressed by the parties in the contract. And this is precisely what then leads to contracts that are the length of novels by European standards.
Important contractual clauses
In the US, there are no generally applicable regulations regarding principles such as good faith, the status of a merchant, or impossibility and default. If such aspects are not precisely set out and regulated in the contract, there is a risk that they will be interpreted to the detriment of the German-speaking company because it has mistakenly relied on the familiar standards of interpretation in Europe.
It is also of no use simply inserting a clause at the end of the (US) contract stating that “German” or “Austrian” law is to apply and/or that the place of jurisdiction is to be Germany or Austria.
Contract law in the US is governed by state law rather than federal law, which is why you won’t find a closing clause stating “the laws of the United States of America shall apply” in contracts. A state’s laws always apply, for instance the laws of Delaware, New York, California, and so forth. The decisive factors here include the focus of the contract or where a contracting party is headquartered. This then provides the contract what is known with a nexus to a particular state and to the application of contract law in force there.
It is always important to note that anything not set out in the proper form in a US contract is mercilessly disregarded and struck out when interpreted by a judge. So, to make sure the entire content of the contract does not fall victim to the “legal ax,” in which case all the efforts would have been in vain, you should always and absolutely include a severability clause in the contract. If any clause of the contract is then invalid or unclear, this will not affect the validity of the rest of the contract.