Comparative Private Law Judicial Control of Contracts

1. Comparative Private LawJudicial Control of Contracts 10th November 2014 Prof. Dr. Ulrike Babusiaux PLEASE NOTE: The following slides are not complete. The missing words and phrases must be filled in by the students.

2. Judicial Control of Contracts in different European Countries • Abuse of Circumstances and Excessive Benefit: Qualified laesio enormis • Immoral and Illegal Contracts • Change of Circumstances, Hardship and imprévision Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

3. I. Abuse of Circumstances and Excessive Benefit • laesioenormis= a situation, -sinceAntiquity, thereis a discussion, whether  thecontractshouldbevoidonlybecauseofthedisproportion  thecontractshouldbevoidonlyifthedisproportionistheconsequenceoftheabuseofcircumstancesbythestrongerparty • in Civil Law:rulesofpublicpolicyorusury • in Common Law: doctrineof • recentdevelopment: constitutionalisationofthelawofcontracts Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

4. German and French Law: Abuse of circumstances • German Law (Reader p. 27): § 138 BGB as a limit for the freedom of contract • French Law = Cass. soc. 5 July 1965: «intellectual violence» (Reader p. 27-28) • cf. Art. 1111 Code civil • Violence exerted against the person who has contracted the obligation is a ground for annulment even though it was exerted by a third party different from the one for whose benefit the agreement was made. • Art. 1112 • There is violence where it is of a nature to make an impression upon a reasonable person and where it can inspire him with a fear of exposing his person or his wealth to considerable and present harm. Regard shall be paid, on this question, to the age, the sex and the condition of the persons. • Art. 1113 • Violence is a ground for annulment of a contract, where it is exerted not only against a contracting party, but also against the party's spouse, against his or her descendants or ascendants. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

5. Comparision between § 138 BGB and «intellectual violence» according to Cour de cassation: • commonalities: • a situation, in which a contracting party feels obliged to and cannot decide freely to enter into a contract or not • exploitation of this singular situation by the other party (i.e. recognition and willingness to exploit the difficulties for her own benefit) • a contractual imbalance to the detriment of the party in difficulties • differences: • § 138 BGB requests an infringement of public policy (cf. par. 1), i.e. a behaviour that is contrary to good faith in general • according to the Cour de cassation, the disproportion of the reduction, is enough regarding the situation of constraint Maly was in (i.e. an appreciation of the individual case) Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

6. Common Law: Duress • situation where • pressure exerted upon a person to coerce that person to perform an act that he or she would ordinarily not perform. • in the context of contract law it is a defense; the contract may be rescinded, since it is then voidable. • there may be physical or economic . Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

7. Equity: Undue influence • situation, . • equity will investigate the manner in which the intention to enter into the transaction was secured: «how the intention was produced» (Lord Eldon, Huguenin v Basely 1807). • - Two groups of undue influence: • (1) undue influence: the relationship falls in a class of relationships that as a matter of law will raise a presumption of undue influence  the burden of proof lies on the person who took advantage, to disprove undue influence. • (2) undue influence: the facts of thecase indicate, that there was a relationship between the parties that led to undue influence  the victim has to prove that the transaction was brought about by the exercise of undue influence. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

8. Lord Brown-Wilkinson: • «Class 1: actual undue influence. • In these cases it is necessary for the claimant to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction which is impugned. • Class 2: presumed undue influence. • In these cases the complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. • In Class 2 cases therefore there is no need to produce evidence that actual undue influence was exerted in relation to the particular transaction impugned: once a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice.» Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

9. House of Lords: Royal Bank of Scotland v Etridge (N° 2), Reader p. 29-34. • Facts: • 8 cases in which a wife charged her interest in her home in favour of a bank as security for her husband’s indebtedness of a company through which he carried on business. • Later on, the wife asserted she signed the charge under undue influence of her husband. • The House of Lords had to decide, whether there had been undue influence (misuse of the influence one person has over another). • It then had to decide about the burden of proof – is there presumed undue influence between husband and wife? Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

10. Definition and conditions of undue influence according to Royal Bank of Scotland v Etridge • The complainant reposed trust and confidence in the other party or the party acquired ascendency over the complainant. • The transaction is not readily explicable by the relationship of the parties. In the 8 cases: • No presumption of undue influence between husband and wife • No excessive benefit and no sign for misuse of influence. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

11. Bundesverfassungsgericht (German Constitutional Court) on surety, 19 October 1993: • Facts: • A bank had offered a businessman a loan of DM 100.000 on condition that the businessman’s daughter would sign a contract as a surety. • The daughter was 21 years old, uneducated, unemployed and had no property. • A 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.» • When four years later the father’s business had financial difficulties, the bank claimed DM 160.000 (interests included) from the daughter because of surety contract. • The Landgericht held the contract valid and ordered her to pay, the Oberlandesgericht found that the employee had violated his duty of information. The Bundesgerichtshof (Federal Court) did not accept this and held that every adult person is aware of the risks entailed by a surety. • The daughter appealed to the Bundesverfassungsgericht claiming that the Bundesgerichtshof had violated her fundamental rights. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

12. Constitutional Law as a help in this case: • The daughter claimed the violation •  of her right of dignity (Article 1 German Constitution) •  of her party autonomy (Article 2 German Constitution) •  in combination with the principles of the social state (Article 20 and Article 28 of the German Constitution) • The effects of constitutional law on contract law according to the German Constitutional Court: • Fundamental rights serve primarly to protect the citizens against the state but they also represent an objective scale of values, which apply throughout the legal systems. • The content of constitutional law flows into private law , such as § 242 duty to good faith, § 137 nullity of contracts infringing good morals. • The application of these civil law rules must hence be in accordance with fundamental rights and constitutional law. • Courts that do not respect fundamental rights, when interpreting and applying the civil law, violate the constitution. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

13. The Constitutional Court’s decision: • In cases where a 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 and § 242 of the Bürgerliches Gesetzbuch). • This obligation is based the basis right of party autonomy in conjunction with the principles of the social state. • In this case, a contractual imbalance existed because the bank had failed to inform the daughter about the risk relating to the surety although the risk was very important with regard to her income and financial situation. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

14. II. Immoral and Illegal Contracts in Civil Law illegality of contracts(infringement of public order) immorality of contracts(infringement of public policy) Confer and Compare: Art. 15: 101 and 102 Principles of European Contract Law (p. 34) §§ 134, 138 Bürgerliches Gesetzbuch (Germany, p. 34f.) Art. 6, 1131, 1333 Code civil (France, p. 35) Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

15. Germany (p. 34) • § 134: Statutory prohibition • A legal transaction that violates a statutory prohibition is void, unless the statute leads to a different conclusion. • § 138: Legal transaction contrary to public policy; usury • A legal act that is contrary to public policy is void. • In particular, a legal transaction is void by which a person, by exploiting the predicament, inexperience, lack of sound judgment or considerable weakness of the will of another, caused himself or a third party, in exchange for an act of performance, to be promised or granted pecuniary advantages which are clearly disproportionate to the performance. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

16. France (p. 35) • Art. 6 Code civil: Statutes relating to public policy and morals may not be derogated from by private agreements. • Article 1128: Only things which may be the subject matter of legal transactions between private individuals may be the object of agreements. • Article 1131: An obligation without cause or with a false cause, or with an unlawful cause, may not have any effect. •  public order = rules protecting the political, social or economic order •  good morals (bonnes moeurs) = basic principles of family life, social life and economic behaviour •  sanction is linked to the concept of cause Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

17. Switzerland • Art 20 Code of Obligations • 1 A contract is void if its terms are impossible, unlawful or immoral. • 2 However, where the defect pertains only to certain terms of a contract, • those terms alone are void unless there is cause to assume that • the contract would not have been concluded without them. • Art. 27 Swiss Civil Code • 1 No person may, wholly or in part, renounce his or her legal capacity • or his or her capacity to act. • 2 No person may surrender his or her freedom or restrict the use of it • to a degree which violates the law or public morals. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

18. In Common Law • A contract may be void because of its illegal OBJECT or its illegal CONSIDERATION • Two maxims: • Ex turpi causa non oritur actio (no action arises from a bad cause) • Lord Mansfield: « .» • (b) In pari delicto potior est conditio defendentis (where there is equal fault, the defendant is ina stronger position) • Lord Mansfield: « » Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

19. What constitutes Illegality ? • of the positive law (statutes, that expressly declare the contract illegal) • other legislation, which shows the legislative intent or purpose to prohibit the contract or his object • - concepts of public policy (ex.: sexual immorality, attempts to buy honors, interference with the course of justice) Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

20. Consequences of illegality: • an illegal contract is not enforceable • in general, if it is partially executed, the party which has been disadvantaged cannot ask for restitution • exceptions: • - the party repents and repudiates the contract (locuspenitentiae) • - if one party is innocent, she may be entitled to restitution (cf. in pari delicto) • - the party which is protected by statutes, is also entitled to claim restitution Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

21. Queen’s Bench: St. John Shipping Corp v. Joseph Rank Ltd (Reader p. 35) • Facts: • The defendantscharteredtheplaintiff’sshipto carry grainfromthe USA tothe UK. • The ship was overloaded in contraventionoftheMerchantShippingAct 1932; themaster was finedthemaximumfine. • The defendantspaidpartofthefreight but withheld a sumequivalenttothe extra freightearnedbyoverloading. • Legal problem: • (1) DoestheMerchantShippingActmeantoprohibitcontracts? • (2) Doesthecontract in questionbelongtothecontractsthatareprohibitedbytheAct? Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

22. Answers to the legal problems: • «The relevant section of the Act of 1932, section 44, provides that the ship ‘shall not be so loaded as to submerge’ the appropriate loadline. It may be that a contract for the loading of the ship which necessarily has this effect would be unenforceable. (…) But an implied prohibition of contracts of loading does not necessarily extend to contracts for the carriage of goods by improperly loaded vessels. Of course, if the parties knowingly agree to ship goods by an overloaded vessel, such a contract would be illegal; but its illegality does not depend on whether it is impliedly prohibited by the statute, since (…) there is an intent to break the law.» • «In my judgement, contracts for the carriage of goods are not within the ambit of this statute at all. A court should not hold that any contract or class of contracts is prohibited by statute unless there is a clear implication (…) that the statute so intended. If a contract has as its whole object the doing of the very act which the statute prohibits, it can be argued that you can hardly make sense of a statute which forbids an act and yet permits to be made a contract to do it (…).» Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

23. (III) Change of circumstances, Hardship and imprévision Problem, whether a party may be released from her obligations by supervening events which make the contract much more onerous • especially in long-lasting contracts • Period of economic instability • Unforeseen events (war, catastrophes) principle of pacta sunt servanda vs protection of the weak or aggrieved party Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

24. A modern definition of Change of Circumstances, Art. 6: 111 PECL (Reader p. 38) • Characteristics: • performance has become • change of circumstances, i.e. • the occurs after the time of conclusion of the contract and could not be reasonably foreseen. • one party did not accept the risk for the change of circumstance. • Consequences: • (1) the parties are bound to enter into negotiations in order to adapt the contract • (2) the court may terminate the contract, if parties fail to reach agreement, or the court may adapt the contract Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

25. The French Rigidness: Canal de Craponne, (Reader p. 39): • Facts: • By contracts of 1560 and 1567 Craponne untertook the obligation to provide water to the waterers of Pélisanne. The contracts stipulated by way of compensation for a set charge. This charge of 3 sols per unit of water, which was sufficient at the time of the conclusion of the contracts, was no longer sufficient in 1873. • The Cour d‘appel d‘Aix set an increade of 60 centimes per unit of water. • The Cour de cassation: • «Dans aucun cas, il n‘appartient aux tribunaux, quelque équitable que puisse leur paraître leur décision, de prendre en considération le temps et les circonstances pour modifier les conventions des parties et de substituer des clauses nouvelles à celles qui ont été librement acceptées par les parties.» • (English Translation p. 40) Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

26. The argument of the Cour de cassation • art. 1134 Code civil: «Contracts which are lawfully concluded take the place of legislation for those who have made them. They can be modified or revoked only by the parties‘ mutual consent or on grounds which legislation authorises. They must be performed in good faith.» • the contract is for the parties and for the judge as well as would be a statute; it is the parties‘ statute • the parties or to renegotiate their obligations in the contract. • judges are not able to find the parties‘ intentions, if the parties did not think about the future. • the protection of and of parties‘ autonomy is important Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

27. New tendencies in French Law (Reader p. 41f.): • Avant-Projet Catala (2005): • «Art. 1134-1 • The parties may reserve to themselves or to one of themselves a right of withdrawal from the contract, this right being exercised under the conditions set by the contract itself, by custom or by legislation.» • Proposition de loi visant à permettre la renégociation d’un contrat en cas de changements de circonstances imprévisibles durant son exécution. (22.6.2011) • Art. 1134 al. 2 • „Si un changement de circonstances imprévisible, rend l’exécution excessivement onéreuse pour une partie qui n’avait pas accepté d’en assumer le risque, celle-ci peut demander une renégociation à son cocontractant mais dois continuer à exécuter ses obligations durant la renégociation. En cas de refus ou d’échec de la renégociation, le juge peut, si les parties en sont d’accord, procéder à l’adaptation du contrat, ou à défaut y mettre fin à la date et aux conditions qu’il fixe.˝ • (English translation Reader p. 42) Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

28. English Law: • principle of pacta sunt servanda (as in French Law); possibility and duty of the parties to make their provisions; but interpretation of contract is necessary. e.g. Lord Ratcliffe (in: Davis Contractors case):«a court can and ought to examine the contract and the circumstances in which it was made, not of course to vary, but only to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist.» • doctrine of frustration • if events occur which make performance of the contract impossible, illegal or radically different from which was envisaged by the parties at the time of contract. • and if performance of the contract in the new circumstances would be fundamentally different from what was foreseen by the parties at the time of contract. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

29. German Law: «disappearence of the basis of transaction» (Wegfall der Geschäftsgrundlage) • (Reader p. 42-46) • Case lawsincethe time ofthe Reichsgericht (1920th) • Codification in 2002: § 313 BGB (p. 45f.) • a codificationofjudge-made law • verybroadapplicationoftheprinciple • Two-step-solution of PECL: Atfirst, theparties will havetorenegotiatethecontract; ifthey do not succeed, thecourt will havethechoicetoterminateortoadaptthecontract Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux

30. At home: • Pleasecomparethe French reformprojectsandthe German codificationofchangeofcircumstancewiththe PECL! • Do youthinkthedoctrineofchangeofcircumstanceisnowharmonised in both countries? Oraretheredifferencesthatremain? • Pleaseprepareyouranswers in written form, so thatyouareabletoreadthemtotheotherstudentsandthatyouarepreparedtodiscusstheircontributions. • Thankyou. Comparative Private Law HS 2014, Prof. Dr. iur. Ulrike Babusiaux