THE CONSTITUTIONALIZATION OF CONTRACT LAW Something New under the Sun? Olha Cherednychenko(1) Readers are reminded that this work is protected by copyright While they are free to use the expressed in it, they may not copy, distribute or publish the work or part of it, in any electronic or otherwise, except for reasonable quoting, clearly indicating the source. Readers are permitted to make copies, electronically or printed, for personal and classroom use Contents 1. Introduction 2. Different solutions to the same problem 3. Two parallel tendencies in modern private law 4. The constitutionalization of contract law what is this all about? 5. The Burgschaft case: A top-down approach by the German Constitutional Court 5. 1 From the theory of indirect effect of constitutional rights in private law indirectly to the theory of direct effect? 5.2 Balancing competing interests: The right to party autonomy v. the right to party autonomy in conjunction with the principle of the social state? 5.3 Party autonomy v. party autonomy in conjunction with the principle of the social state: Is there a possibility to strike an appropriate balance? 6. The O'Brien and Van Lanschot Bankiers v Bink cases: A bottom-up approach by the English House of Lords and the Dutch Supreme Court 7. Conclusion Constitutional rights and contract law -these notions, which were originally considered to be far apart from each other due to the sharp analytical and historical distinction common in European legal systems between public and private law, have recently started to move towards each other with increasing speed. The role of constitutional rights, which were conceived as an instrument for he protection of the individual against the power of the State, is no longer only limited to this kind of relationship. Purely private law relations, including contractual relations to which the State is not itself a party, have been rapidly losing their immunity from the effect of constitutional The constitutionalization of contract law is a part and an inevitable consequence of the general phenomenon of the constitutionalization of private law- the topic which has been most widely debated in Germany by both public and private lawyers. However, not only the minds of German
THE CONSTITUTIONALIZATION OF CONTRACT LAW: Something New under the Sun? Olha Cherednychenko(1) Readers are reminded that this work is protected by copyright. While they are free to use the ideas expressed in it, they may not copy, distribute or publish the work or part of it, in any form, printed, electronic or otherwise, except for reasonable quoting, clearly indicating the source. Readers are permitted to make copies, electronically or printed, for personal and classroom use. Contents 1. Introduction 2. Different solutions to the same problem 3. Two parallel tendencies in modern private law 4. The constitutionalization of contract law: What is this all about? 5. The Bürgschaft case: A top-down approach by the German Constitutional Court 5.1 From the theory of indirect effect of constitutional rights in private law indirectly to the theory of direct effect? 5.2 Balancing competing interests: The right to party autonomy v. the right to party autonomy in conjunction with the principle of the social state? 5.3 Party autonomy v. party autonomy in conjunction with the principle of the social state: Is there a possibility to strike an appropriate balance? 6. The O'Brien and Van Lanschot Bankiers v Bink cases: A bottom-up approach by the English House of Lords and the Dutch Supreme Court 7. Conclusion Notes 1. Introduction Constitutional rights and contract law - these notions, which were originally considered to be far apart from each other due to the sharp analytical and historical distinction common in European legal systems between public and private law, have recently started to move towards each other with increasing speed. The role of constitutional rights, which were conceived as an instrument for the protection of the individual against the power of the State, is no longer only limited to this kind of relationship. Purely private law relations, including contractual relations to which the State is not itself a party, have been rapidly losing their immunity from the effect of constitutional rights. The constitutionalization of contract law is a part and an inevitable consequence of the general phenomenon of the constitutionalization of private law - the topic which has been most widely debated in Germany by both public and private lawyers. However, not only the minds of German
lawyers have been preoccupied with this issue. Lawyers in other countries, following the developments in Germany, have also become concerned. One Dutch lawyer, M. B w. Biesheuvel expressed a rather pessimistic view on this problem. He describes its tragedy as follows: 'If one writes about the horizontal effect of constitutional rights from a public law perspective, the aspects are described so theoretically that civil law lawyers tend to give up on the exercise. And if the latter dare to embark upon this issue, then the principal aspect will remain underexposed. (2) What can be done in order to avoid the tragedy as signalled by Biesheuvel? In my view, it could make things at least much clearer for both public and private lawyers if one were to ask oneself whether, to use the words of the famous English saying, there is something new under the sun in the constitutionalization of contract law. However general it may seem at first sight, it is this very question which I would like to address in this paper. In order to provide an illustration of what is involved here, I will discuss three cases which have arisen in three different legal systems during nearly the same period of time and which are of particular importance to the present issue 2. Different solutions to the same problem On 19 October 1993, the German Constitutional Court(Bundesverfassungsgericht)delivered an interesting judgment in the Burgschaft case. 3)In that case, a bank had offered a businessman a loan of DM 100,000 on the condition that the businessman's daughter would sign the contract as a surety. Prior to the signing, the bank employee told the daughter: Would you just sign this here please? This won,'t make you enter into any important obligation; I need this for my files. The daughter, who was 21, uneducated, unemployed and without any property, accepted to act as a guarantor for the whole of her father's debt. Four years later, the father's business experienced financial difficulties and the bank claimed dm 100.000 with interest. amounting to a total of dm 60.000. from the daughter under the original contract By the tir case had reached the Bundesverfassungsgericht, the daughter was a single mother come. In the courts her defence met with alternating success. while the Landesgericht held that the contract was valid and ordered her to pay, the Oberlandesgericht maintained that the bank employee had violated his duty to inform the daughter. This decision was overturned by the Bundesgerichtshof, which did not accept such a duty, reasoning that any of age knows that signing a surety ship entails a risk. The father was solvent at the time of signing and therefore the information provided by the bank was correct However, this was not the end of the matter. The daughter appealed to the Bundesverfassungsgericht and claimed that the Bundesgerichtshof, through its decision, had olated her right to dignity(Article I(l)of the German Grundgesetz(GG) and party autonomy (Article 2(1)of the GG) in conjunction with the principle of the social state(Article 20(1)and Article 28(1) GG). Her constitutional claim was successfuL. According to the Bundesverfassungsgericht, in cases where a structural imbalance of bargaining power has led to a contract which is exceptionally onerous for the weaker party, the civil courts are obliged to
lawyers have been preoccupied with this issue. Lawyers in other countries, following the developments in Germany, have also become concerned. One Dutch lawyer, M.B.W. Biesheuvel, expressed a rather pessimistic view on this problem. He describes its tragedy as follows: 'If one writes about the horizontal effect of constitutional rights from a public law perspective, the aspects are described so theoretically that civil law lawyers tend to give up on the exercise. And if the latter dare to embark upon this issue, then the principal aspect will remain underexposed.'(2) What can be done in order to avoid the tragedy as signalled by Biesheuvel? In my view, it could make things at least much clearer for both public and private lawyers if one were to ask oneself whether, to use the words of the famous English saying, there is something new under the sun in the constitutionalization of contract law. However general it may seem at first sight, it is this very question which I would like to address in this paper. In order to provide an illustration of what is involved here, I will discuss three cases which have arisen in three different legal systems during nearly the same period of time and which are of particular importance to the present issue. 2. Different solutions to the same problem On 19 October 1993, the German Constitutional Court (Bundesverfassungsgericht) delivered an interesting judgment in the Bürgschaft case.(3) In that case, a bank had offered a businessman a loan of DM 100,000 on the condition that the businessman's daughter would sign the contract as a surety. Prior to the signing, the bank employee told the daughter: 'Would you just sign this here, please? This won't make you enter into any important obligation; I need this for my files.' The daughter, who was 21, uneducated, unemployed and without any property, accepted to act as a guarantor for the whole of her father's debt. Four years later, the father's business experienced financial difficulties and the bank claimed DM 100,000 with interest, amounting to a total of DM 160,000, from the daughter under the original contract. By the time the case had reached the Bundesverfassungsgericht, the daughter was a single mother without an income. In the courts her defence met with alternating success. While the Landesgericht held that the contract was valid and ordered her to pay, the Oberlandesgericht maintained that the bank employee had violated his duty to inform the daughter. This decision was overturned by the Bundesgerichtshof, which did not accept such a duty, reasoning that any person of age knows that signing a suretyship entails a risk. The father was solvent at the time of signing and therefore the information provided by the bank was correct. However, this was not the end of the matter. The daughter appealed to the Bundesverfassungsgericht and claimed that the Bundesgerichtshof, through its decision, had violated her right to dignity (Article 1(1) of the German Grundgesetz (GG)) and party autonomy (Article 2(1) of the GG) in conjunction with the principle of the social state (Article 20(1) and Article 28(1) GG). Her constitutional claim was successful. According to the Bundesverfassungsgericht, in cases where a structural imbalance of bargaining power has led to a contract which is exceptionally onerous for the weaker party, the civil courts are obliged to
intervene on the basis of the general clauses($ 138(1)and 242 of the Burgerliches Gesetzbuch (BGB) concerning, respectively, good morals and good faith). This obligation is based on their duty to protect the basic right to party autonomy in conjunction with the principle of the social state. In the case at hand. a contractual imbalance existed because the bank had failed to ufficiently inform the daughter about the risk relating to the surety, although the risk was relatively high compared to her income This case represents one of the most famous examples of the effect of constitutional rights on private law and is widely believed to have far-reaching consequences as far as the law of contracts is concerned. Far less famous, however, are similar 'surety' cases which have arisen in other jurisdictions and in which similar results ched, though in different ways Thus, in Barclays Bank plc v. O'Brien(the O'Brien case), (4) in which a wife had charged the matrimonial home to secure her husbands business debts, the House of Lords prevented the bank from enforcing the charge on the following ground The bank knew that the debtor and the surety were in the kind of relationship in which misrepresentation, undue influence or duress was likely and it also knew that the transaction was not to the wife,s advantage. Unless under thes circumstances it had satisfied itself that the practical implications of the proposed transaction had been brought home to the wife, the bank would be fixed with constructive notice of any wrong by the husband, 1. e the notice the bank has of the husbands impropriety, whether undue influence or misrepresentation, that creates the wife s right to set aside the transaction. Due to this oversight, the bank had not advised the wife to take independent advice and, as the husband had misrepresented the effect of the charge as being for a limited amount when in fact it was unlimited the charge was unenforceable In the Netherlands, the same type of case is exemplified by the Van Lanschot Bankiers v Bink case, (5)in which the Dutch Supreme Court(Hoge Raad) had to deal with the situation where a mother had provided surety in order to enable her son to obtain credit for his business. In this case ng under a duty to inform a non-professional party of the risks involved in providing a surety What can be seen in these two cases is that relief for the weaker party can be granted not only on the basis of constitutional rights, but also on the basis of duties to inform of a private law character which were also at stake in the subsequently overturned judgment of one of the lower German courts in the burgschaft case 3. Two parallel tendencies in modern private law The three cases described above illustrate two tendencies which can nowadays be traced in modern private law. On the one hand, the growing effect of constitutional rights on private law (6) in particular in the field of contract law, which is illustrated by the German case, makes it possibl to speak about the tendency towards a so-called ' constitutionalization of private law. The idea
intervene on the basis of the general clauses (§ 138(1) and 242 of the Bürgerliches Gesetzbuch (BGB) concerning, respectively, good morals and good faith). This obligation is based on their duty to protect the basic right to party autonomy in conjunction with the principle of the social state. In the case at hand, a contractual imbalance existed because the bank had failed to sufficiently inform the daughter about the risk relating to the surety, although the risk was relatively high compared to her income. This case represents one of the most famous examples of the effect of constitutional rights on private law and is widely believed to have far-reaching consequences as far as the law of contracts is concerned. Far less famous, however, are similar 'surety' cases which have arisen in other jurisdictions and in which similar results were reached, though in different ways. Thus, in Barclays' Bank plc v. O'Brien (the O'Brien case),(4) in which a wife had charged the matrimonial home to secure her husband's business debts, the House of Lords prevented the bank from enforcing the charge on the following ground. The bank knew that the debtor and the surety were in the kind of relationship in which misrepresentation, undue influence or duress was likely and it also knew that the transaction was not to the wife's advantage. Unless under these circumstances it had satisfied itself that the practical implications of the proposed transaction had been brought home to the wife, the bank would be fixed with constructive notice of any wrong by the husband, i.e. the notice the bank has of the husband's impropriety, whether undue influence or misrepresentation, that creates the wife's right to set aside the transaction. Due to this oversight, the bank had not advised the wife to take independent advice and, as the husband had misrepresented the effect of the charge as being for a limited amount when in fact it was unlimited, the charge was unenforceable. In the Netherlands, the same type of case is exemplified by the Van Lanschot Bankiers v Bink case,(5) in which the Dutch Supreme Court (Hoge Raad) had to deal with the situation where a mother had provided surety in order to enable her son to obtain credit for his business. In this case, the Hoge Raad laid down a rule according to which a bank, as a professional credit supplier, is under a duty to inform a non-professional party of the risks involved in providing a surety. What can be seen in these two cases is that relief for the weaker party can be granted not only on the basis of constitutional rights, but also on the basis of duties to inform of a private law character which were also at stake in the subsequently overturned judgment of one of the lower German courts in the Bürgschaft case. 3. Two parallel tendencies in modern private law The three cases described above illustrate two tendencies which can nowadays be traced in modern private law. On the one hand, the growing effect of constitutional rights on private law,(6) in particular in the field of contract law, which is illustrated by the German case, makes it possible to speak about the tendency towards a so-called 'constitutionalization of private law'. The idea
behind this development is that private law is not in itself a closed system for the regulation of private relationships, but that it is totally subordinate to the value system of constitutional rights As a result of this tendency the sharp analytical and historical distinction made in European legal systems between public and private law is put under pressure On the other hand, the dutch and English cases provide evidence that within private law itself one can speak of the tendency towards a more society-oriented private law which manifests itself in the growing protection of the weaker party, in particular in contract law. (7)The idea behind this development is that a party, in different phases of the contract's life, should no longer be guided only by his or her own interests, but also by the justified interests of the other party. In other words the party is no longer only responsible for him or herself, but also for the other party. In this context, some authors even speak of a so-called 'consumerization of private law in contrast to its commercialization. (8) Among the main indicators of this tendency is the development of various duties to inform not only in consumer law, but also in general contract law on the basis of the principle of good faith. (9)Such an attitude towards the other contracting party would have been unthinkable in the 19th century, when the prevailing doctrine of laissez-faire, presupposing the idea of unlimited self-reliance, made it possible, as is said in English, to buy a pig in a poke 4. The constitutionalization of contract law what is this all about? It appears to be clear from the foregoing that both tendencies aim to achieve an adequate level of protection for the weaker party. What is not clear, however, is how they relate to each other. Many authors have recognized the existence of these tendencies in general or with regard to a particular legal system (10) However, the striking feature of the existing literature is that, except in a few instances, (11) in most cases the two tendencies are dealt with separately. As a consequence,at present it is not very clear what the practical benefits are of the constitutionalization of contract law for the protection of the weaker party in comparison with the solutions provided by the concepts that are already well established in contract law. Accordingly, the question which one may ask in order to discover this is what the constitutionalization of contract law is all about is it a mere transformation of contract law issues into constitutional law issues or is it a more substantial transformation? In other words. the question which arises is whether, in the process of constitutionalization, contract law concepts are merely replaced by constitutional concepts with the same meaning and thus, here, there is really nothing new under the sun, or whether there are constitutional values which do not exist in contract law at present and should be introduced thereinto in order to ensure the protection of the weaker party In the light of this, it appears interesting to return to the three cases once again and to look more closely at the reasoning employed by the judges in the three different legal systems
behind this development is that private law is not in itself a closed system for the regulation of private relationships, but that it is totally subordinate to the value system of constitutional rights. As a result of this tendency, the sharp analytical and historical distinction made in European legal systems between public and private law is put under pressure. On the other hand, the Dutch and English cases provide evidence that within private law itself one can speak of the tendency towards a more soci ety-oriented private law which manifests itself in the growing protection of the weaker party, in particular in contract law.(7) The idea behind this development is that a party, in different phases of the contract's life, should no longer be guided only by his or her own interests, but also by the justified interests of the other party. In other words, the party is no longer only responsible for him or herself, but also for the other party. In this context, some authors even speak of a so-called 'consumerization' of private law in contrast to its commercialization.(8) Among the main indicators of this tendency is the development of various duties to inform not only in consumer law, but also in general contract law on the basis of the principle of good faith.(9) Such an attitude towards the other contracting party would have been unthinkable in the 19th century, when the prevailing doctrine of laissez-faire, presupposing the idea of unlimited self-reliance, made it possible, as is said in English, to 'buy a pig in a poke'. 4. The constitutionalization of contract law: What is this all about? It appears to be clear from the foregoing that both tendencies aim to achieve an adequate level of protection for the weaker party. What is not clear, however, is how they relate to each other. Many authors have recognized the existence of these tendencies in general or with regard to a particular legal system.(10) However, the striking feature of the existing literature is that, except in a few instances,(11) in most cases the two tendencies are dealt with separately. As a consequence, at present it is not very clear what the practical benefits are of the constitutionalization of contract law for the protection of the weaker party in comparison with the solutions provided by the concepts that are already well established in contract law. Accordingly, the question which one may ask in order to discover this is what the constitutionalization of contract law is all about: is it a mere transformation of contract law issues into constitutional law issues or is it a more substantial transformation? In other words, the question which arises is whether, in the process of constitutionalization, contract law concepts are merely replaced by constitutional concepts with the same meaning and thus, here, there is really nothing new under the sun, or whether there are constitutional values which do not exist in contract law at present and should be introduced thereinto in order to ensure the protection of the weaker party. In the light of this, it appears interesting to return to the three cases once again and to look more closely at the reasoning employed by the judges in the three different legal systems
5. The Burgschaft case: A top-down approach by the German Constitutional Court 5. 1 From the theory of indirect effect of constitutional rights in private law indirectly to the theory of direct effect? The official position of the Bundesverfassungsgericht regarding the way in which constitutional rights should affect private law was expressed in its decision in the Luth case ( 12)Considering the general question whether constitutional rights are applicable in private law, the Court remarked that it was confronted with two extreme positions 13) the first was the view that public and orivate law are two distinct systems and, therefore, that public law in general and constitutional law in particular have no bearing on private law(14) The second, 'extreme view was a diametrically opposed position. Before the Luth case, a number of scholars had advanced the view that the most important basic rights are not only directed against the state, but are also fully and directly applicable among individuals in private relationships. The implication of this theory was that certain constitutional rights should ordinarily be binding on individuals and private groups in approximately the same manner and to the same extent as they apply to the government (15) Having taken note of both of these 'extreme positions, the Court, however, did not adopt either of them, but rather opted for an intermediate theory, which permitted only a certain degree of constitutional control over the relations of private law. According to the Court basic rights are primarily to protect the citizen against the state, but as enacted in the gg they also incorporate an objective scale of values which apply, as a matter of constitutional law, throughout the entire legal system. A certain intellectual content flows from constitutional law into private law and affects the interpretation of existing civil norms, especially general clauses in the BGB such as$ 242(the duty of good faith),$ 138(1)(nullity of agreements infringing good morals) and$ 826(wilful damage contrary to public policy ), but it is nonetheless the civil law rules that are ultimately applied. Even in such cases, the Court emphasized, the dispute 'remains substantively and procedurally a civil law dispute! (16) In reaching this conclusion, the Court adopted what has to be alled the doctrine of the 'indirect effect of constitutional values on private legal relations( 17)-as opposed to the theory of direct effect mentioned above Thus, the main distinction officially drawn by the bundesverfassungsgericht is that between the direct and the indirect approach. The main difference between the two lies in the fact that while in the former case a private party has, in his action against another private party, a claim or a defence which is directly based on a constitutional right which overrides an otherwise applicable rule of private law, in the latter situation, the claim or defence is based on a provision in the Civil Code e.g. on a general good faith clause in contract law cases or on a provision for liability in tort law cases, which is interpreted in the light of the constitutional right in question. As a result, under the public values of constitutional law and, formally, the distinction between private law and public law is therefore preserved However, in practice it is highly questionable whether the Bundesverfassungsgericht still follows the theory of indirect effect of constitutional rights in private law. The rule which it established in
5. The Bürgschaft case: A top-down approach by the German Constitutional Court 5.1 From the theory of indirect effect of constitutional rights in private law indirectly to the theory of direct effect? The official position of the Bundesverfassungsgericht regarding the way in which constitutional rights should affect private law was expressed in its decision in the Lüth case.(12) Considering the general question whether constitutional rights are applicable in private law, the Court remarked that it was confronted with two 'extreme' positions;(13) the first was the view that public and private law are two distinct systems and, therefore, that public law in general and constitutional law in particular have no bearing on private law.(14) The second, 'extreme' view was a diametrically opposed position. Before the Lüth case, a number of scholars had advanced the view that the most important basic rights are not only directed against the state, but are also fully and 'directly' applicable among individuals in private relationships. The implication of this theory was that certain constitutional rights should ordinarily be binding on individuals and private groups in approximately the same manner and to the same extent as they apply to the government.(15) Having taken note of both of these 'extreme' positions', the Court, however, did not adopt either of them, but rather opted for an intermediate theory, which permitted only a certain degree of constitutional control over the relations of private law. According to the Court, basic rights are primarily to protect the citizen against the state, but as enacted in the GG they also incorporate an objective scale of values which apply, as a matter of constitutional law, throughout the entire legal system. A certain intellectual content flows from constitutional law into private law and affects the interpretation of existing civil norms, especially general clauses in the BGB such as § 242 (the duty of good faith), § 138(1) (nullity of agreements infringing good morals) and § 826 (wilful damage contrary to public policy), but it is nonetheless the civil law rules that are ultimately applied. Even in such cases, the Court emphasized, the dispute 'remains substantively and procedurally a civil law dispute'.(16) In reaching this conclusion, the Court adopted what has to be called the doctrine of the 'indirect' effect of constitutional values on private legal relations(17) - as opposed to the theory of 'direct' effect mentioned above. Thus, the main distinction officially drawn by the Bundesverfassungsgericht is that between the direct and the indirect approach. The main difference between the two lies in the fact that while in the former case a private party has, in his action against another private party, a claim or a defence which is directly based on a constitutional right which overrides an otherwise applicable rule of private law, in the latter situation, the claim or defence is based on a provision in the Civil Code, e.g. on a general good faith clause in contract law cases or on a provision for liability in tort law cases, which is interpreted in the light of the constitutional right in question. As a result, under the indirect approach private law values should retain considerable potency when confronted with public values of constitutional law and, formally, the distinction between private law and public law is therefore preserved. However, in practice it is highly questionable whether the Bundesverfassungsgericht still follows the theory of indirect effect of constitutional rights in private law. The rule which it established in
the burgschaft case makes it clear that civil courts are obliged to protect a constitutional right to party autonomy in conjunction with the principle of the social state and hence to exercise control over the content of a contract. If the content of the contract is exceptionally onerous for the weaker party the courts are obliged to intervene within the framework of the general clauses of the civil law in force. (18)In that way, the Bundesverfassungsgericht followed the new theory of so-called grundrechtlicher Schutzpflicht, which has been defended by Canaris( 19)and which was first introduced by the Court in the Handelsvertreter case (20) The change in the relationship between constitutional rights and the State is quite striking: while constitutional rights were originally conceived as defences against the State, now they are supposed to be protected by the State, i.e. by all its bodies including the civil courts. As a consequence, now in German private law the State has an obligation to protect the constitutional rights of individuals from encroachment by other individuals-an obligation which is no different from the one which is incumbent on the State in public law, in particular in criminal law. (21) Although the Bundesverfassungsgericht did not formally reconsider the theory of the indirect (as it referred to the existing general clauses of civil law), by imposing on the civil courts an obligation to protect constitutional rights, in reality it reached the same results which are comparable to that of the theory of direct effect ( 22) It does not seem to be an exaggeration to say that the obligation of the civil courts to protect constitutional rights in the field of contract law leads in practice to the direct applicability of constitutional rights in contractual relationships. This means that contractual parties are in reality bound by constitutional ights and may have a claim or a defence on the basis of a constitutional right, as a result of which private law rules can easily be replaced by constitutional law rules. Accordingly, if both private parties have a claim or a defence on the basis of a constitutional right, a balance has to be struck between the two constitutional rights, and the role of the general clauses of private law seems to be limited to providing a shelter for this balancing process conjunction with the n ng interests: The right to party autonomy v. the right to party autonomy in It can be seen that in the burgschaft case the weaker party- the daughter of the bankrupt father without sufficient means of subsistence- won a major victory on the basis of her right to party autonomy(Article 2(1)GG) in conjunction with the principle of the social state(Articles 20(1) and 28(1)GG). The question which thereby arises is to what extent the constitutional right to party autonomy can serve the interests of the weaker party to the detriment of the interests of the onger party-the bank. In other words, how absolute is the protection of the weaker party on the basis of the constitutional right to party autonomy? It is interesting to note that the reasoning of the bundesverfassungsgericht in the case at hand expressed in very broad terms, boils down to the following. Normally, contracts must be upheld by as an expression by both parties of their constitutional right to party autonomy. However, in cases where a structural imbalance of bargaining power has led to a contract which is exceptionally onerous for the weaker party, the civil courts are obliged to intervene in order to secure relief for the weaker party. This obligation on the part of the civil courts follows from their
the Bürgschaft case makes it clear that civil courts are obliged to protect a constitutional right to party autonomy in conjunction with the principle of the social state and hence to exercise control over the content of a contract. If the content of the contract is exceptionally onerous for the weaker party the courts are obliged to intervene within the framework of the general clauses of the civil law in force.(18) In that way, the Bundesverfassungsgericht followed the new theory of so-called grundrechtlicher Schutzpflicht, which has been defended by Canaris(19) and which was first introduced by the Court in the Handelsvertreter case.(20) The change in the relationship between constitutional rights and the State is quite striking: while constitutional rights were originally conceived as defences against the State, now they are supposed to be protected by the State, i.e. by all its bodies including the civil courts. As a consequence, now in German private law the State has an obligation to protect the constitutional rights of individuals from encroachment by other individuals - an obligation which is no different from the one which is incumbent on the State in public law, in particular in criminal law.(21) Although the Bundesverfassungsgericht did not formally reconsider the theory of the indirect effect of constitutional rights (as it referred to the existing general clauses of civil law), by imposing on the civil courts an obligation to protect constitutional rights, in reality it reached the same results which are comparable to that of the theory of direct effect.(22) It does not seem to be an exaggeration to say that the obligation of the civil courts to protect constitutional rights in the field of contract law leads in practice to the direct applicability of constitutional rights in contractual relationships. This means that contractual parties are in reality bound by constitutional rights and may have a claim or a defence on the basis of a constitutional right, as a result of which private law rules can easily be replaced by constitutional law rules. Accordingly, if both private parties have a claim or a defence on the basis of a constitutional right, a balance has to be struck between the two constitutional rights, and the role of the general clauses of private law seems to be limited to providing a shelter for this balancing process. 5.2 Balancing competing interests: The right to party autonomy v. the right to party autonomy in conjunction with the principle of the social state? It can be seen that in the Bürgschaft case the weaker party - the daughter of the bankrupt father without sufficient means of subsistence - won a major victory on the basis of her right to party autonomy (Article 2(1) GG) in conjunction with the principle of the social state (Articles 20(1) and 28(1) GG). The question which thereby arises is to what extent the constitutional right to party autonomy can serve the interests of the weaker party to the detriment of the interests of the stronger party - the bank. In other words, how absolute is the protection of the weaker party on the basis of the constitutional right to party autonomy? It is interesting to note that the reasoning of the Bundesverfassungsgericht in the case at hand, expressed in very broad terms, boils down to the following. Normally, contracts must be upheld by the courts as an expression by both parties of their constitutional right to party autonomy. However, in cases where a structural imbalance of bargaining power has led to a contract which is exceptionally onerous for the weaker party, the civil courts are obliged to intervene in order to secure relief for the weaker party. This obligation on the part of the civil courts follows from their
duty to guarantee a constitutionally protected right to party autonomy in conjunction with the principle of the social state (23) It follows from this reasoning that both parties- the stronger and the weaker -enjoy a constitutional right to party autonomy. There is, however, a difference in the interpretation of this ight by the Bundesverfassungsgericht in respect of each of the parties. On the one hand, it appears that the stronger party simply enjoys a constitutionally protected freedom of contract which is derived from the right to party autonomy guaranteed by Article 2(1)GG. (24)On the other hand the same constitutional right to party autonomy pertaining to the weaker party, invoked in conjunction with the principle of the social state, entails protection from an extremely burdensome contract which was entered into when exercising a constitutionally protected freedom of contract. (25) Thus. we can see that what is at stake in this case is the conflict between the two constitutional rights, more explicitly between the two sides of one constitutional right, ie. the right to party autonomy which protects the interests of the weaker party on the one hand, and the one which protects the interests of the stronger party, on the other 5.3 Party autonomy v party autonomy in conjunction with the principle of the social state: Is there a possibility to strike an appropriate balance? Since both parties have constitutionally protected rights, which can be invoked as a claim or as a defence if a dispute arises, an appropriate balance should be struck between them. In the case at hand, this balance had to be found between two sides of the right to party autonomy- party autonomy in the sense of freedom of contract and party autonomy in the sense of the right to be protected from an extremely burdensome contract. That this task is not an easy one can already be seen from the broad formulations of the two constitutional rights involved. Accordingly, the interpretation of the general clauses($ 138(1)and 242(BGB) concerning, respectively, good morals and good faith) on the basis of constitutional rights means, in essence, the interpretation of general clauses of a private law character on the basis of general clauses of a public law nature The question arises whether the Bundesverfassungsgericht in the Burgschaft case managed to provide appropriate criteria for carrying out this kind of balancing between the opposite interests of the two parties, both of which are entitled to protection on the basis of the Constitution. For this urpose, it is necessary to look at the implications which are generally believed to follow from the easoning of the Court (26) In the german literature there seems to be agreement about the three most important consequences of the Burgschaft case, which are, in particular, pointed out by Wiedemann (27)First, according to the Bundesverfassungsgericht the Constitution requires the protection of private parties from themselves. This protection should take place through legislation and judicial decisions (28) Second, it is in accordance with the value system contained in constitutional rights and the principle of the social state that private autonomy in general and contract law in particular should fulfil not only the task of establishing order, but also the task of protection(29)Third, in typical
duty to guarantee a constitutionally protected right to party autonomy in conjunction with the principle of the social state.(23) It follows from this reasoning that both parties - the stronger and the weaker - enjoy a constitutional right to party autonomy. There is, however, a difference in the interpretation of this right by the Bundesverfassungsgericht in respect of each of the parties. On the one hand, it appears that the stronger party simply enjoys a constitutionally protected freedom of contract which is derived from the right to party autonomy guaranteed by Article 2(1) GG.(24) On the other hand, the same constitutional right to party autonomy pertaining to the weaker party, invoked in conjunction with the principle of the social state, entails protection from an extremely burdensome contract which was entered into when exercising a constitutionally protected freedom of contract.(25) Thus, we can see that what is at stake in this case is the conflict between the two constitutional rights, more explicitly between the two sides of one constitutional right, i.e. the right to party autonomy which protects the interests of the weaker party on the one hand, and the one which protects the interests of the stronger party, on the other. 5.3 Party autonomy v. party autonomy in conjunction with the principle of the social state: Is there a possibility to strike an appropriate balance? Since both parties have constitutionally protected rights, which can be invoked as a claim or as a defence if a dispute arises, an appropriate balance should be struck between them. In the case at hand, this balance had to be found between two sides of the right to party autonomy - party autonomy in the sense of freedom of contract and party autonomy in the sense of the right to be protected from an extremely burdensome contract. That this task is not an easy one can already be seen from the broad formulations of the two constitutional rights involved. Accordingly, the interpretation of the general clauses (§ 138(1) and 242 (BGB) concerning, respectively, good morals and good faith) on the basis of constitutional rights means, in essence, the interpretation of general clauses of a private law character on the basis of general clauses of a public law nature. The question arises whether the Bundesverfassungsgericht in the Bürgschaft case managed to provide appropriate criteria for carrying out this kind of balancing between the opposite interests of the two parties, both of which are entitled to protection on the basis of the Constitution. For this purpose, it is necessary to look at the implications which are generally believed to follow from the reasoning of the Court.(26) In the German literature there seems to be agreement about the three most important consequences of the Bürgschaft case, which are, in particular, pointed out by Wiedemann.(27) First, according to the Bundesverfassungsgericht the Constitution requires the protection of private parties from themselves. This protection should take place through legislation and judicial decisions.(28) Second, it is in accordance with the value system contained in constitutional rights and the principle of the social state that private autonomy in general and contract law in particular should fulfil not only the task of establishing order, but also the task of protection.(29) Third, in typical
cases of structural inequality between parties the content of every legal transaction is to be scrutinized by civil courts as to its onerousness for the weaker party (30) All kinds of contracts and corporate decisions are open for intervention by the courts. The phrase a contract is a contract'in isolation cannot provide sufficient legal basis for the binding force of a contract; this is equally rue for the phrase ' a majority is a majority with regard to corporate decisions All this seems to boil down to the creation by the Bundesverfassungsgericht of what Adomeit calls a new general clause which gives a new character to the whole of German civil law. (31)This new clause can be formulated as follows: 'A contract which is exceptionally onerous for one of the arties and which is the result of inequality in the bargaining power is void.'(32)What is striking is the apparent vagueness of this formulation as it is not clear which concrete criteria are to be used in practice in order to determine whether a contract is in fact void. As Adomeit rightly observes, the classical general clauses of$ 138 and 242 of the BGB, which caused well-known methodological problems, were much easier to grasp than the new clause by which they are now replaced (33) Moreover, formally, this new clause was created by the Bundesverfassungsgericht in an attempt to strike an appropriate balance between the two clashing constitutional rights. To what extent this clause in reality struck an appropriate balance between the two constitutional rights in the present case is, however, rather doubtful as it seems to imply that certain contractual obligations, although they were freely entered into, can be considered to affect one of the contracting parties so seriously in its right to private autonomy in conjunction with the social state that the obligation is contrary to the Constitution and is therefore void. This conclusion means that the scales are no longer wavering between the two constitutional rights of both parties, but rather are considerably tipped in favour of the weaker party while the interests of the stronger party are not properly taken into account. Thus, the new constitutional clause provides a perfect illustration of the fact that the protection of"social rights" and their balancing against other rights such as freedom of contract might very well lead judges to override solutions and principles encoded in other acts, notably in private law codifications, because they do not live up to what the judge regards, i.e. feels',as ocial"or"socially just".(34)This is, in fact, the major danger of the top-down approach taken y the bundesverfassungsgericht in the Burgschaft case, i.e an approach in which justice in a concrete case is imposed from above on the basis of a vague norm of the higher (eg constitutional)order which can easily be interpreted by the judge according to his or her own political convictions and not on the basis of the objective criteria which are so important in legal practice. It is this top-down approach which is at stake when the function of the protection of the weaker party is assumed by constitutional rights Presumably, guided by a desire to avert this danger- which was created by the reasoning of the Bundesverfassungsgericht in the Burgschaft case the Ninth Civil Senate of the Bundesgerichtshof tried to reintroduce clarity into contract law when it had the opportunity to hear the Burgschaft case once again after the Bundesverfassungsgericht. (35)The Bundesgerichtshof held that a legal transaction is only void under s 138(1) if its entire character, resulting from its content, motivation and purpose taken together, offends good morals, for which purpose only those circumstances which prevailed at the
cases of structural inequality between parties the content of every legal transaction is to be scrutinized by civil courts as to its onerousness for the weaker party.(30) All kinds of contracts and corporate decisions are open for intervention by the courts. The phrase 'a contract is a contract' in isolation cannot provide sufficient legal basis for the binding force of a contract; this is equally true for the phrase 'a majority is a majority' with regard to corporate decisions. All this seems to boil down to the creation by the Bundesverfassungsgericht of what Adomeit calls a new general clause which gives a new character to the whole of German civil law.(31) This new clause can be formulated as follows: 'A contract which is exceptionally onerous for one of the parties and which is the result of inequality in the bargaining power is void.'(32) What is striking is the apparent vagueness of this formulation as it is not clear which concrete criteria are to be used in practice in order to determine whether a contract is in fact void. As Adomeit rightly observes, the classical general clauses of § 138 and 242 of the BGB, which caused well-known methodological problems, were much easier to grasp than the new clause by which they are now replaced.(33) Moreover, formally, this new clause was created by the Bundesverfassungsgericht in an attempt to strike an appropriate balance between the two clashing constitutional rights. To what extent this clause in reality struck an appropriate balance between the two constitutional rights in the present case is, however, rather doubtful as it seems to imply that certain contractual obligations, although they were freely entered into, can be considered to affect one of the contracting parties so seriously in its right to private autonomy in conjunction with the social state that the obligation is contrary to the Constitution and is therefore void. This conclusion means that the scales are no longer wavering between the two constitutional rights of both parties, but rather are considerably tipped in favour of the weaker party while the interests of the stronger party are not properly taken into account. Thus, the new constitutional clause provides a perfect illustration of the fact that the 'protection of “social rights” and their balancing against other rights such as freedom of contract might very well lead judges to override solutions and principles encoded in other acts, notably in private law codifications, because they do not live up to what the judge regards, i.e. “feels”, as “social” or “socially just”'.(34) This is, in fact, the major danger of the top-down approach taken by the Bundesverfassungsgericht in the Bürgschaft case, i.e. an approach in which justice in a concrete case is imposed from above on the basis of a vague norm of the higher (e.g. constitutional) order which can easily be interpreted by the judge according to his or her own political convictions and not on the basis of the objective criteria which are so important in legal practice. It is this top-down approach which is at stake when the function of the protection of the weaker party is assumed by constitutional rights. Presumably, guided by a desire to avert this danger - which was created by the reasoning of the Bundesverfassungsgericht in the Bürgschaft case - the Ninth Civil Senate of the Bundesgerichtshof tried to reintroduce clarity into contract law when it had the opportunity to hear the Bürgschaft case once again after the case had been returned to it by the Bundesverfassungsgericht.(35) The Bundesgerichtshof held that a legal transaction is only void under § 138(1) if its entire character, resulting from its content, motivation and purpose taken together, offends good morals, for which purpose only those circumstances which prevailed at the
conclusion of the contract are to be taken into account. ( 36) The mere fact that the content of the contract placed a considerable bu urden on the daughter and only the daughter cannot in itself question the validity of the guarantee. By operation of law, the content of such a contract will as a ule be a unilateral obligation in favour of the creditor. Generally, the content and purpose of such a contract consist merely in providing the creditor with security for certain claims against the principal debtor. By its structure, the guarantee is therefore not characterized by an appropriate and, in principle, equal consideration of mutual interest but, by its legal nucleus, is aimed at providing benefits to one party only. According to the Bundesgerichtshof, the Constitution guarantees freedom of contract within the legal framework, which includes the freedom to design the rules of a contract. This forms an important foundation of the present private legal order. It follows from the freedom of contract that a person must generally be free to enter into risky transactions on his or her own responsibility and to take an obligation which can only be performed under particularly favourable circumstances. At the same time, the bundesgerichtshof pointed out that the freedom of contract, which enjoys protection as a basic right, can only justify the conclusion of risky and yet unilaterally burdensome contracts if both parties are in a position to decide freely in favour of or against being bound by a contract. As this was not the case in the Burgschaft situation because the bank did not inform the daughter about the inherent risks of providing surety, the Bundesgerichtshof held that the contract was contrary to good morals($ 138(1)) and was therefore void 6. The O'Brien and Van Lanschot Bankiers v Bink cases: A bottom-up approach by the English House of Lords and the dutch Supreme Court As was mentioned above, the English House of lords and the Dutch Supreme Court in the two other cases- the facts of which were quite similar to the german burgschaft case - arrived at the same result as the Bundesverfassungsgericht, i. e protection of the weaker party. What was entirely different, however, was the reasoning by which the same result was attained As was the case with the Bundesverfassungsgericht. the House of lords in the o Brien case was also concerned with striking an appropriate balance-in this case, however, not between opposing constitutional rights, but between the opposite interests of the two parties. One can clearly see this from the policy considerations provided by Lord Browne-Wilkinson. According to hir although the concept of the ignorant wife leaving all financial decisions to the husband is utmoded, the practice does not yet coincide with the id In a substantial proportion of marriages it is still the husband who has the business experience and the wife is willing to follow his advice without bringing a truly independent mind and will to bear on financial decisions. The number of recent cases in this field shows that in practice many wives are still subjected to, and yield to, undue influence by their husbands. Such wives can reasonably look to the law for some protection when their husbands have abused the trust and confidence reposed in them. (37) At the same time, however, Lord Browne-Wilkinson emphasized the importance of keeping a sense of balance in deciding what degree of protection should be afforded. As he put it
conclusion of the contract are to be taken into account.(36) The mere fact that the content of the contract placed a considerable burden on the daughter and only the daughter cannot in itself question the validity of the guarantee. By operation of law, the content of such a contract will as a rule be a unilateral obligation in favour of the creditor. Generally, the content and purpose of such a contract consist merely in providing the creditor with security for certain claims against the principal debtor. By its structure, the guarantee is therefore not characterized by an appropriate and, in principle, equal consideration of mutual interest but, by its legal nucleus, is aimed at providing benefits to one party only. According to the Bundesgerichtshof, the Constitution guarantees freedom of contract within the legal framework, which includes the freedom to design the rules of a contract. This forms an important foundation of the present private legal order. It follows from the freedom of contract that a person must generally be free to enter into risky transactions on his or her own responsibility and to take an obligation which can only be performed under particularly favourable circumstances. At the same time, the Bundesgerichtshof pointed out that the freedom of contract, which enjoys protection as a basic right, can only justify the conclusion of risky and yet unilaterally burdensome contracts if both parties are in a position to decide freely in favour of or against being bound by a contract. As this was not the case in the Bürgschaft situation because the bank did not inform the daughter about the inherent risks of providing surety, the Bundesgerichtshof held that the contract was contrary to good morals (§ 138(1)) and was therefore void. 6. The O'Brien and Van Lanschot Bankiers v Bink cases: A bottom-up approach by the English House of Lords and the Dutch Supreme Court As was mentioned above, the English House of Lords and the Dutch Supreme Court in the two other cases - the facts of which were quite similar to the German Bürgschaft case - arrived at the same result as the Bundesverfassungsgericht, i.e. protection of the weaker party. What was entirely different, however, was the reasoning by which the same result was attained. As was the case with the Bundesverfassungsgericht, the House of Lords in the O'Brien case was also concerned with striking an appropriate balance - in this case, however, not between opposing constitutional rights, but between the opposite interests of the two parties. One can clearly see this from the policy considerations provided by Lord Browne-Wilkinson. According to him, . . . although the concept of the ignorant wife leaving all financial decisions to the husband is outmoded, the practice does not yet coincide with the ideal . . . In a substantial proportion of marriages it is still the husband who has the business experience and the wife is willing to follow his advice without bringing a truly independent mind and will to bear on financial decisions. The number of recent cases in this field shows that in practice many wives are still subjected to, and yield to, undue influence by their husbands. Such wives can reasonably look to the law for some protection when their husbands have abused the trust and confidence reposed in them.(37) At the same time, however, Lord Browne-Wilkinson emphasized the importance of keeping a sense of balance in deciding what degree of protection should be afforded. As he put it:
It is easy to allow sympathy for the wife who is threatened with the loss of her home at the suit of a rich bank to obscure an important public interest, viz the need to ensure that the wealth currently tied in the matrimonial home does not become economically sterile. If the rights secured to wives by the law renders vulnerable loans granted on the security of matrimonial homes, institutions will be unwilling to accept such security, thereby reducing the flow of loan capital to business enterprises. It is therefore essential that a law designed to protect the vulnerable does not ender the matrimonial home unacceptable as security to financial institutions (38) Starting out from these considerations, in his judgment Lord Browne-Wilkinson established the following principles for dealing with situations where one cohabitee has entered into an obligation to stand as surety for the debts of the other cohabitee and the creditor is aware that they are cohabitees ( 1)The surety obligation will be valid and enforceable by the creditor(in the present case, the bank) unless the suretyship was a result of the undue influence, misrepresentation or other legal wrong of the principal debtor (in the present case, the husband) (2)If there has been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the creditor has taken reasonable steps to satisfy himself that the surety (in the present case, the wife) entered into the obligation freely and in the knowledge of the true facts, the creditor will be unable to enforce the surety obligation because he will be fixed with constructive notice of the surety's right to set aside the transaction; a creditor is put on inquiry by the combination of two factors, namely, when: (a) the transaction is on its face not to the financial advantage of one of the cohabitees; (39)and(b) there is a substantial risk in transactions of that kind that, in procuring one cohabitee to act as surety, the other has committed a legal or equitable wrong that entitles the wife to set aside the transaction (3)unless there are special exceptional circumstances, a creditor will have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warns the surety at a private meeting not attended by the principal debtor of the amount of her potential liability and of the risks involved and advises the surety to take independent legal advice The importance of this judgment by the House of lords lies in the fact that it per se boils down to the establishment of the new general duty to inform, which is contrary to the basic principle of English law as laid down in the Smith v Hughes case. (40)Under that principle, even if the vendor was aware that the purchaser thought that the article possessed that quality, and would not have entered into the contract unless he had so thought, still the purchaser is bound unless the vendor was guilty of some fraud or deceit upon him, and that a mere abstinence from f that impression is no fraud or deceit; for, whatever may be the case in a court of morals, there is no legal obligation on the vendor to inform the purchaser that he is under a mistake, not induced by the act of the vendor (41) This development within English private law demonstrates its ability to react to new situations and to strike a fair balance between, on the one hand, the vulnerability of the weaker party and, on the
It is easy to allow sympathy for the wife who is threatened with the loss of her home at the suit of a rich bank to obscure an important public interest, viz. the need to ensure that the wealth currently tied in the matrimonial home does not become economically sterile. If the rights secured to wives by the law renders vulnerable loans granted on the security of matrimonial homes, institutions will be unwilling to accept such security, thereby reducing the flow of loan capital to business enterprises. It is therefore essential that a law designed to protect the vulnerable does not render the matrimonial home unacceptable as security to financial institutions.(38) Starting out from these considerations, in his judgment Lord Browne-Wilkinson established the following principles for dealing with situations where one cohabitee has entered into an obligation to stand as surety for the debts of the other cohabitee and the creditor is aware that they are cohabitees: (1) The surety obligation will be valid and enforceable by the creditor (in the present case, the bank) unless the suretyship was a result of the undue influence, misrepresentation or other legal wrong of the principal debtor (in the present case, the husband). (2) If there has been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the creditor has taken reasonable steps to satisfy himself that the surety (in the present case, the wife) entered into the obligation freely and in the knowledge of the true facts, the creditor will be unable to enforce the surety obligation because he will be fixed with constructive notice of the surety's right to set aside the transaction; a creditor is put on inquiry by the combination of two factors, namely, when: (a) the transaction is on its face not to the financial advantage of one of the cohabitees;(39) and (b) there is a substantial risk in transactions of that kind that, in procuring one cohabitee to act as surety, the other has committed a legal or equitable wrong that entitles the wife to set aside the transaction; (3) unless there are special exceptional circumstances, a creditor will have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warns the surety at a private meeting not attended by the principal debtor of the amount of her potential liability and of the risks involved and advises the surety to take independent legal advice. The importance of this judgment by the House of Lords lies in the fact that it per se boils down to the establishment of the new general duty to inform, which is contrary to the basic principle of English law as laid down in the Smith v Hughes case.(40) Under that principle, even if the vendor was aware that the purchaser thought that the article possessed that quality, and would not have entered into the contract unless he had so thought, still the purchaser is bound, unless the vendor was guilty of some fraud or deceit upon him, and that a mere abstinence from disabusing the purchaser of that impression is no fraud or deceit; for, whatever may be the case in a court of morals, there is no legal obligation on the vendor to inform the purchaser that he is under a mistake, not induced by the act of the vendor.(41) This development within English private law demonstrates its ability to react to new situations and to strike a fair balance between, on the one hand, the vulnerability of the weaker party and, on the