Unfair Contracts of Suretyship - a Question about the Horizontal Effect of Fundamental Rights or about the Application of Contract Law Principles

Author:Irene Kull
Position:Professor of Civil Law, University of Tartu

1. Constitutionalisation of private law - 2. Unfair contracts of suretyship and fundamental rights - 3. Civil law protection of the surety - 3.1. Surety as a personal guarantee - 3.2. The argument of fairness in Estonian law - 3.3. Unfairness of surety provided by family members - 3.4. Unfairness of suretyship arising from breach of the information duties - 4. Main principles of contract law in... (see full summary)


Irene Kull

Professor of Civil Law, University of Tartu

Unfair Contracts of Suretyship - a Question about the Horizontal Effect of Fundamental Rights or about the Application of Contract Law Principles

The question about the horizontal effect of fundamental rights and freedoms and constitutional principles on private relationships has again become topical in connection with discussions over the objectives and methods of the harmonisation process of European contract law. Namely, consideration for the horizontal effect of constitutional rights and freedoms and principles is seen as a possible method of harmonisation of European private law and hence also contract law. Article 6 of the consolidated version of the Maastricht Treaty 1 sets out the underlying principles of the EU such as the principles of liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law, i.e., the principles derived from the constitutional traditions of the Member States. Citizens of the EU Member States thus have a right to the protection of not only economic interests, but also their personal interests and fundamental rights. The activities of the EU Commission in harmonising European private law have been influenced by the need to ensure the efficient functioning of the common internal market, underpinned by harmonised private law 2 , the idea of harmonising private law based on legal principles recognised by all the Member States 3 , and the plan to draft a European Civil Code as an opt-in instrument4. The idea of finding common legal principles has by now been replaced with a search for "best solutions" from among the models of national legal systems5. The fact that issues of constitutionalisation of European private law have become topical refers to certain paradigm changes, which arise from reaching the stage of harmonisation where the harmonisation of private law, which is more than harmonisation of the rules but also the harmonised practice of application of the main principles of EU law, has given rise to the question of the horizontal effect on private law of fundamental rights and constitutional values6. This paper attempts to answer the questions of whether courts should use only private law instruments to protect private autonomy and freedom of contract in private law disputes or whether they should directly apply constitutional values and principles to protect these freedoms; which private law instruments in Estonian law allow for the protection of fundamental rights, whether they are sufficient, and whether Estonian private law could offer a "best solution" for harmonised European private law.

1. Constitutionalisation of private law

Although the Constitution was found for a long time not to have a direct effect on private law relationships, law literature has in recent years started to speak about the constitutionalisation of contract law7. In most EU Member States, the vertical effect of fundamental rights and freedoms on relations between individuals is recognised in addition to their horizontal effect on relations between the state and individuals8. On the domestic level the issue of constitutionalisation of private law largely reduces to how disputes in private law relationships should take account of fundamental rights and the needs to protect them, i.e., what role the constitutional system of values should have in the application of private law principles and instruments to the settlement of specific disputes.

Constitutional principles serve for the applier of law as a source material in the interpretation of provisions; they help provide content to the meaning of a provision and provide direction for interpretation purposes, which also delimits the space of interpretation9. However, fundamental rights do not settle a specific legal dispute, but open themselves via the legal provisions regulating the relevant area of law10. The direct horizontal impact of fundamental rights and constitutional principles implies the possibility to rely on them in private law claims. According to the theory of the indirect horizontal effect, a claim itself has to be based on a private law provision, which is interpreted and applied in the light of fundamental rights and freedoms and constitutional principles11. Both theories are actually applied in judicial practice, and as the judicial practice of applying fundamental rights and freedoms in private law relationships varies significantly by country, there is reason to be sceptical about arguments claiming that uniform practice in this area is a prerequisite for harmonising European private law12.

The process of harmonisation of European private law has been associated with the European Constitutional Treaty and the protection of fundamental rights and freedoms since the publication of the manifesto 13 which formulated the idea of social justice in European contract law. One of the areas of application of the idea of social justice is contracts of suretyship, in which the connection between the general principles and rules of contract law, on the one hand, and the need to protect fundamental rights, on the other, is especially vividly expressed.

2. Unfair contracts of suretyship and fundamental rights

The constitutional courts of European countries' interference with private relationships is most frequent in the case-law concerning unfair contracts of suretyship. A typical case of an unfair contract of suretyship involves surety by a family member, which is excessively burdensome in view of the surety's ability to perform the obligor's obligation, the obvious disproportionality of the surety obligation, and the provision of surety under pressure from family members or other close persons. The German Constitutional Court has repeatedly found that courts have the duty to protect private autonomy as a fundamental right by interfering with private relationships on the basis of § 138 (1) and § 242 of the German Civil Code14. Recourse has been had to the argument of the inequality of the parties' structural bargaining ability, violation of the information duty in conditions of the unequal bargaining ability of the parties, as well as taking advantage of the inexperience of the other party and the disproportionality of the surety obligation compared to the surety's income or actual possibilities to cover the owed amount15. By weighing fundamental rights the Constitutional Court ascertained the desired end result or the objective which the court needs to protect by private law means. In the event of surety, the competing aspects have been both parties' right to private autonomy as a fundamental right, and the private law instrument of good morals. The latter has been used, as a rule, without reference to an established system, logic, or prerequisites of application of this instrument. If we compare, e.g., the application logic of the constitutional principles and the private law arguments published in the commentaries to the Estonian Constitution, the same results can be achieved16. It is questionable whether in private law a claim can be dismissed for the sake of protecting the legitimate interests of the parties with a reference to a constitutional principle or whether appropriate private law principles need to be found that serve the same goal17.

In the most frequently cited case of Lüth 18 , the German Constitutional Court finds that constitutional principles have only an indirect effect on private law via the interpretation of private law provisions; this was the foundation for H. C. Nipperdey's theory of indirect effect. According to the theory, disputes over the rights and obligations of parties to private law relationships must remain private law disputes in terms of their substance and procedurally, and must be settled according to private law principles. The later decisions of the German Constitutional Court have weighed, e.g., a party's constitutional right to private autonomy and the idea of a social state and the other party's right to private autonomy, and applied the good morals clause only formally. It has been concluded from German case-law that one can no longer speak about private law influenced by fundamental rights and the needs to protect them, but it is the Constitution that determines the results of a dispute between contracting parties, and the role of contract law has been restricted to providing the formal result and the appropriate instrument19.

Unfair suretyship cases are settled in various European legal orders also using civil law and contract law instruments, which is why it is questionable whether changing the role of the Constitution in settling private law disputes in German law is anything more than simply the transformation of contract law issues to fundamental rights issues. The case-law of the European Court of Justice refers to control exercised via limited constitutional principles, in which fundamental rights have rather the role of additional issues20.

Estonia 's prospects of settling unfair suretyship disputes depend on whether interference with surety relations is deemed necessary on the level of fundamental rights, on the general attitude to the freedom of contract and unfairness in contractual relationships, and how effectively the existing contract law instruments can be used in removing unfairness from contractual relationships.

3. Civil law protection of the surety
3.1. Surety as a personal guarantee

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