Introduction

Overview of the German Legal System and its Role in Light of Germany’s Membership in the European Union

B. Tremml

Foreigners interested in starting a business or investing in German companies are generally attracted by the prospect of expanding into other European markets. Germany’s membership in the European Union (EU) is a beneficial factor when deciding whether to invest in Germany, especially, because of the recent broadening of the EU. On 21 December 2007, nine new countries (Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovenia and Slovakia and the Czech Republic) joined Europe’s travel zone, the Schengen area. This means there will be no more border checks on people travelling between these and other Schengen countries by land or sea, and checks at airports are set to end in March 2008. In addition, travelers from outside the EU need just one visa to travel to all Schengen states. In addition, the new EU treaty (the so called Lisbon treaty) that was signed on 13 December 2007 and is expected to be in force by the next European elections in June 2009, improves the decision making in the EU and, therefore, contributes to the complete establishing of a common market.

However, there also have been concerns about the implications of the dual European and German legal systems. Investors may wonder whether a German venture requires familiarization with two, often-conflicting bodies of law, or if businesses in Germany frequently have to deal with administrative authorities at both the national and international level with regard to the same transaction. The answer to such questions is “no.” Given the structure of the EU and particularly the manner in which EU institutions pass laws, an investment in Germany does not place investors in a legal quagmire. Nevertheless, there are some legal areas where European law is directly applicable, for example, in antitrust law.

As a fundamental principal, the EU and its institutions possess the power to pass legislation in only those areas in which an express delegation of national authority exists. For this reason alone, many regulatory areas remain outside of the EU’s control. For example, most civil, criminal, and administrative laws remain the sole province of the Member States. In general, the EU’s authority is limited to those regulatory areas which are essential to the establishment of a common market. Furthermore, the laws that have been passed by the EU tended to take the form of “directives.” As will be explained in detail in the chapter entitled “Institutions of the EU”, directives do not, as a general principal, take effect until after they have been incorporated into national law. This special characteristic of directives is intended

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to give Member States the flexibility of choosing the manner in which a directive becomes law in their own country. Accordingly, Member States can choose a directive that is most compatible with their particular legal system. For individuals and business enterprises alike, it is often not easy to recognize whether or not a national law is based on a European directive. In summary EU directives do not constitute an overlay of regulations which investors must familiarize themselves with, but rather comprise an integral part of a Member State’s national law.

However, that is not to say, that the EU’s influence should be downplayed. The numerous areas of law impacting the establishment and operation of businesses in Germany are often reflective of EU law. Nevertheless, for the most part EU laws have been incorporated into national law and are subject to Germany’s legal system. It is within this system that foreign investors will predominantly conduct their business transactions.

For the most part, Germany’s legal system is stable and smooth working. It is based on the Continental European legal tradition as opposed to Anglo-Saxon law upon which the U.S. legal system is based. The primary difference between the two systems is that the Continental European legal system is based on “code law” as opposed to “case law.” In accordance with the Continental tradition, the German legal system consists essentially of written laws. Nearly all potential regulatory areas are the subject of formal and detailed codification. Many of Germany’s legal codes are the final product of decades of careful deliberation and refinement. This offers foreign entrepreneurs and investors considerable advantages. German law is so clearly structured and transparent that contract terms can be standardized to a very large extent. All the standard practices and regulations governing a business’s conduct are codified in the German Civil Code (BGB, or “Bürgerliches Gesetzbuch”). Therefore, if no special terms are agreed upon between the parties, the terms and provisions of the BGB automatically apply. In other words, in the U.S., business contracts require the clear and detailed statement of all the terms the parties agree to. Contracts in Germany tend to be considerably shorter, which lowers their drafting costs accordingly.

German law has undergone numerous reforms in recent years, which, for the most part, have had a very positive impact on business activities, even though there have been some less favorable developments. The Commercial Code was liberalized by broadening the definition of “merchant”, thus, making it easier for people to get started in business. Additionally, the Handcrafts Code (“Handwerksordnung”) was modified to make it easier to demonstrate professional qualification. Business activities in the domestic market were also facilitated through a considerable loosening of the laws regulating unfair trade.

On the other hand, disadvantageous are the new regulations in contract and civil process law. Contract law now ensures an extraordinary high degree of consumer protection at the expense of merchants. Furthermore, the extent and complexity of the reforms have led to a certain degree of legal confusion. The changes made in civil process law make it more difficult to acquire access to appellate courts, which very often necessitates cost-and-effort intensive proceedings right from the start.

As in the U.S., it is the task of the courts to interpret the written law. Because a number of German codes are more than a hundred years old, the case law pertaining

to certain individual provisions of them is very extensive. The courts have the primary task of interpreting the statutes, regulations, and Constitution, and they also play a role in filling in the gaps of laws where necessary. However, the reliance on precedence plays a much smaller role in the German legal system than in American jurisprudence, since German laws are explicitly detailed and codified.

The sharp differentiation between the various areas of law in Germany and the separate codification of them have led to a strict division of subject-matter jurisdiction among the different types of courts. As in the U.S., there are separate civil courts responsible for deciding legal disputes among private persons, and there are criminal courts for criminal prosecutions brought by the State against individuals. In contrast to the U.S. legal system, there are also separate court systems for administrative matters or legal disputes involving measures taken by public authorities against residents and for labor-law and financial matters. Germany has a special body of law governing taxation and a court system specialized in trying tax cases as well. It should also be noted that, in contrast to the U.S. judicial system, there is no duality between state and federal courts. In Germany, their areas of jurisdiction are clearly kept separate. Each of the various court systems has its own supreme court. The Constitutional Court is the final authority.

The judges who serve on the courts are judges by profession and are specialized in one type of law. They do not rotate from one type of court to another as U.S. judges do, but generally serve on only one type of court throughout their careers. They are not elected but rather appointed by the government of the particular state of Germany where the court is located. Germany does not make use of the jury process. However, in certain cases the judges are assisted in making their decisions by common citizens who do not necessarily have a legal background of any kind (“Laienrichter/lay judge”) and who are chosen to serve on the court for a limited time period.

Regardless of which type of court is handling a particular dispute, the parties’ trial preparation consists primarily in the drafting and presentation of legal briefs in which evidence is presented and the issues in dispute are argued. In doing so, the parties rely on the court’s special procedural rules. Each type of court has its own rules, such as determining case procedure, the kind of evidence it will admit, etc. The courts make extensive use of independent public-appointed experts (“Sachverständiger”), whose professional input almost always influences the ruling to a very large extent and often determines the outcome of a case. Due in part to the judicial system’s reliance on the parties’ briefs, the reports of independent experts and other written submissions, the trial itself (in particular the in-court presentation of live testimony and other evidence) takes considerably less time and involves less costs than U.S. court proceedings. This will be discussed extensively in chapter “Enforcement of Rights and Claims”. With the exception of criminal cases, most trials last no longer than one or two days.

An overview of Germany’s legal system would not be complete without a few comments about the governmental administrative apparatus. The Federal Republic of Germany is, as its name expresses, a federal state. That means that legislative powers are divided between the federal government and each of the country’s states.

The most important areas of law are the exclusive domain of the federal government. However, because individual states of Germany are generally vested with the authority to enforce federal laws and the majority of the administrative offices necessary to accomplish this task are established by the states, the states have an important influence on the interpretation and development of federal laws. Similar to the state subdivisions in the U.S., the states of Germany are comprised of districts (“Bezirke”), counties (“Landkreise”) and communities (“Gemeinde”). A striking difference between the two administrative systems is in many cases the higher degree of authority and competence exercised by the more local and regional units in Germany, which often allows them to take action and make decisions affecting both residents and businesses more efficiently and quickly.

In conclusion, it can be said that the legal system in Germany is precisely structured. Its areas of court jurisdiction are clearly defined and its laws so explicitly codified that overlapping and ambiguities are largely ruled out. This makes it relatively easy for foreigners to orient themselves within the system. They will find the drafting of business contracts to be a relatively swift and inexpensive process as opposed to the process in the U.S., where effort and costs generally tend to be considerably higher, because its laws allow a vastly wider degree of interpretation and all the terms of agreement must be contained in the contract itself. In contrast, the terms of the German Civil Code (BGB) regulating contracts automatically come into effect in the absence of other terms. Contracts between business partners are necessary only if the parties wish to agree to terms that differ from the standard provisions of the BGB. When looking at business operations, the clearly structured German system encourages fair, free trade and the minimization of conflicts.

Part I

How to Establish or Acquire a Business in Germany