How Do German Contracts Do As Much With Fewer Words?

Abstract:     
German business contracts are much shorter than their American counterparts. They also avoid the worst excesses of legalese that American contracts are known for. But they seem to work as well as United States contracts. We seek to understand how German business contracts could do as much with fewer words. Our explanation is predicated on an account of what contracting does. Contracting aims to create a bigger transactional pie in a world where parties' incentives are misaligned and they need to coordinate the production of information, specify future rights, duties, and procedures, and allocate risks. The task of contracting thus has both adversarial and non-adversarial components. The German system permits considerable economics in the adversarial sphere; the economics extend to the non-adversarial sphere as well. The economies take the form of a reduction in transaction costs: transaction documents in Germany are far less custom-tailored to particular parties and their transactions than they are in the United States. Yet parties are not sacrificing much in the way of "getting the deal they want." This is because much custom-tailoring in the U.S. reflects (a) a costly attempt to constrain opportunism using contract language, and (b) a failure to create and accept "good enough" solutions to non-adversarial (and some adversarial) issues parties commonly face. We argue that German contracting does better on both these fronts. It does better at constraining opportunism more cheaply, by cutting short the "arms race" in which U.S. transacting parties and their lawyers too often engage in their negotiation and drafting of contracts. It also does better at creating and using "good enough" standardized solutions to common non-adversarial (and some adversarial) issues. But the German system has its costs. Parties may indeed compromise somewhat on getting, or at least specifying, "exactly the deal they want." And, more importantly, the German system may ultimately be unsustainable: The arms race in customizing contract provisions may be impossible to constrain in the more diffuse transactional community that European integration and globalization are bringing about; with enough customization, the benefits to using and developing standardized provisions diminish greatly.

Number of Pages in PDF File: 38

Keywords: Contracts, relational contracts, default provisions, comparative law

JEL Classification: K12, K33, L84

Accepted Paper Series