THE CONSTITUTIONALISATION OF PRIVATE LAW 37

otherwise the debtor might not be able to generate the means to pay the loan back. In § 930 the BGB actually stipulates for the transfer of the ownership while actual possession remains with the transferor. The difficulty is that full ownership is more than the security interest which would suffice to secure the loan. The courts solved the dilemma by applying § 930 yet not attaching to it the full implications of ‘ownership’, hence developing what in effect is a ‘possession-less’ lien and, remaining faithful to the BGB, calling it ‘security ownership’. (See, eg, BGHZ 72, 141, granting the possessor a right to object to an arrest by creditors of the ‘security owner’; and BGHZ 28, 16, discussing the conditions of specificity.)

6. THE CONSTITUTIONALISATION OF PRIVATE LAW

The classic purpose of human rights (or Grundrechte) as they are laid down in Articles 1 to 19 of the German Constitution (‘Basic Law’, Grundgesetz) is to protect the citizen against intrusions of the state into the private sphere. Whether human rights also bind citizens in private law relationships is a matter of considerable debate.

The original position was that they did not, though already during the period of the Weimar Republic (1919–33) the signs of the first stirrings in the opposite direction can be found. (For instance, article 111 § 1, 2nd sentence, of the 1918 Constitution provided that free speech must not be hampered by any employment relationship and no one should be disadvantaged for exercising such rights.) The Basic Law of 1949 was to prove here, as in so many other respects, the catalyst for change. Academics moved first, Hans Nipperdey—a professor and later the first president of the Federal Labour Court—firing the first serious salvo with an important article published in 1950 (‘Gleicher Lohn der Frau für gleiche Leistung. Ein Beitrag zur Auslegung der Grundrechte’ in Recht der Arbeit, 1950, 121 et seq). His court followed by proclaiming that the Constitution had a ‘direct effect’ (unmittelbare Drittwirkung), only to be moderated a few years later by the famous Lüth decision (The German Law of Torts, case no 36, BVerfGE 7, 198).

There, the Bundesverfassungsgericht (the German Constitutional Court) stopped short of giving the constitution direct horizontal effect—ie allowing the direct invocation of human rights in disputes of private law—yet attributed to it what is usually referred to as ‘indirect horizontal effect’ (mittelbare Drittwirkung) which requires the courts, when interpreting the Civil Code, to give due regard to the Constitutional values. (In The German Law of Torts, pp 28 et seq, we discuss in detail this process of ‘constitutionalisation’ of private law. The present outline should be read in conjunction with those passages, as well as with the remarks as to the different functions of general clauses in the BGB, p 23, section 14.)

Regarding human rights as embodying an authoritative hierarchy of values seems at first a modest claim. Yet it forces one to attach indirect horizontal effect to these constitutional values through means of codal interpretation. When it came to developing private law remedies for the invasion of the right of privacy (which were deliberately not provided for in the Code), the Constitutional Court explained: ‘Occasionally, the law can be found outside the positive legal rules erected by the state; this is law which emanates from the entire constitutional order and which has as

38 INTRODUCTION

its purpose the “correction” of written law.’ (BVerfGE 34, 269.) Thus, occasionally, arguments deriving from the human rights provisions of the Constitution have enabled the courts to develop new private law remedies even where the text of the Code was not susceptible to interpretation.

Yet the weight of an argument derived from the Constitution is all the greater if the provisions of private law leave room for interpretation. General clauses, such as those found in §§ 138 and 242, contain open-textured principles with no clearly pre-defined content. ‘Public policy’ and ‘good faith’ were, applying the broad value-based approach of the Constitutional Court, bound to be interpreted in the light of the Constitution. Human rights as the supreme values of the Grundgesetz have thus acquired special weight in interpreting the general clauses of the Code. A classic statement of this approach can be found in the famous Bürge decision (BVerfG NJW 1994, 36, 38, case no 81 reproduced below):

The Basic Law contains in its basic rights section fundamental decisions in constitutional law for all areas of the law. These fundamental decisions develop through the medium of those provisions which directly control the area of law in question, and above all have significance in the interpretation of general clauses in civil law (references). When § 138 and § 242 of the BGB refer quite generally to good morals, custom (Verkehrsitte) and good faith, they require concretisation by the courts by the standard of value concepts which are primarily determined by decisions of principle in the Constitution. Therefore the civil courts are constitutionally obliged to have regard to the basic rights as ‘guidelines’ in the interpretation and application of the general clauses. If they fail to recognise this, and therefore make a decision which is to the disadvantage of a party to the proceedings, they violate that party’s basic rights . . .

Hence, soon after the adoption of the Constitution of 1949 the general clauses of the BGB came to be regarded as ‘entrance points’ for Constitutional values. Indeed, the Bundesverfassungsgericht regularly reminds the civil courts to give due consideration to human rights issues when applying general clauses and, where it thinks necessary, it has not hesitated to interfere in the resolution of private law disputes by imposing a specific interpretation of the constitution which in effect pre-determines the result of the litigation: eg, BVerfG NJW 1990, 1469; NJW 1994, 36, case no 81; NJW 1994, 2749; NJW 1996, 2021. (For a review of the case law in English, see Markesinis, Always on the Same Path. Essays on Foreign Law and Comparative Methodology, vol II, (2001), chapters 7 and 8.) It is thus mainly through the medium of general clauses that value-judgments regarding the protection of human dignity, the prohibition of discrimination, etc, find their way into the policing of contracts. It should be noted, however, that it is to a great extent ‘accidental’ which of the general clauses is used in justifying the indirect impact of the human rights arguments.

It is perhaps useful to give a few brief illustrations, which will be taken up later in the book.

The first is BAG NZA 1994, 1080, case no 42, discussed in chapter 3, section 2(d), p 123 where the dismissal of an employee was declared contrary to good faith because it was solely motivated by the employer’s aversion to the homosexual orientation of the employee.

The second example concerns the line of succession in the Hohenzollern family. The great-grandchild of the German Emperor Wilhelm II claimed the estate that had been denied to him because he had married a woman of less than equal birth. His

THE CONSTITUTIONALISATION OF PRIVATE LAW 39

disqualification resulted out of a contract of inheritance and the question arose whether this contract was void as being contrary to public policy § 138 I (or contrary to good faith, § 242). The Bundesgerichtshof (NJW 1999, 566) came to the conclusion that the contract was not void under § 138 but the Bundesverfassungsgericht, NJW 2004, 2008, case no 78, quashed the decision because it did not give sufficient consideration to the right of the beneficiary freely to select his spouse (Article 6 I of the Basic Law, freedom of marriage) when interpreting the general clause and overvalued the testator’s right to dispose of the estate as he saw fit (Article 14 I, Testierfreiheit).

The decision is an impressive illustration of how the content of general clauses changes over time. Initially, it was obviously the case that the law of succession of the Hohenzollern family was not contra bonos mores. During the period of the monarchy, these rules were part of the constitutional arrangements. Yet, as the court stressed, with the abolition of the monarchy on 11 August 1919, the laws of inheritance also had to be interpreted in a new light and balanced against the civilian liberty freely to choose a partner for marriage! (See, also, for a discussion in English of the inheritance cases and the BGH decision referred to above: Heldrich and Rehm, ‘Importing Constitutional Values through Blanket Clauses’ chapter 6 in Friedmann and BarakErez (eds), Human Rights in Private Law (2002), pp 113–28.)

Two further examples complete this survey of the constitutionalisation of private law by the means of interpretation of general clauses. The recent vintage of these lines of cases indicates that the tendency is rather towards increasing the importance of human rights in private law; and a growing number of British lawyers seem to share this belief so far as their own law is concerned.

The Bundesverfassungsgericht laid the foundations for a stricter judicial control of the fairness of contract terms in its famous Bürge decision (NJW 1994, 36, case no 81), a case concerning guarantees undertaken by close family members who were in no financial position to pay the loan. In this decision, the court stressed that where the terms of a contract were considerably imbalanced and ‘unfair’ to one party (‘ungewöhnlich belastend und als Interessenausgleich offensichtlich unangemessen’) the civil courts should inquire whether this contract was the result of a systemic imbalance of bargaining power (‘strukturell ungleiche Verhandlungsstärke’; the court also used the term distorted ‘parity’ of contract, ‘gestörte Vertragsparität’). If this were indeed the case, to have upheld the contract would have been to violate that party’s constitutional right to self-determination in matters of private law. Contract as a means of achieving personal autonomy would here amount to heteronomy.

Above, by way of introduction (section 1) we already noted the influence of the Sozialstaatsprinzip on the court’s reasoning in this case. It is necessary at this stage to explain the principle in more detail. (For an overview see, eg, Badura DÖV 1989, 491; Schnapp JuS 1998, 873.) The Sozialstaatsprinzip constitutes first and foremost an obligation addressed to the legislator. (BVerfGE 8, 274, 329: ‘The details of what the social state requires are determined by the legislator.’) Introduced for the first time in 1949, the principle attempts a modification of the classical (liberal) Rechtsstaat tradition and calls for a reduction of glaring social inequalities (BVerfGE 5, 85, 198), the protection of socially and economically weak parties (eg, employees, tenants, women and children, minorities), and a guarantee concerning the most basic preconditions of subsistence through the social security system. One can find judgments from such diverse areas of the law as social security, pension claims, landlord and tenant law,

40 INTRODUCTION

labour law, consumer protection and legal aid law, which contain references to the principle—passing and some times more detailed. (See, eg, BGH NJW 2002, 1269; NJW-RR 2003, 1441: maintenance claims; BGH FamRZ 2004, 1274: pension claims flowing from a life insurance dating back before German reunification in 1990; BGH NJW-RR 2004, 507: margin of subsistence under § 850f ZPO in enforcement proceedings of an alimony order; likewise BGH NJW 2003, 1457: limits of enforcement imposed by ‘social’ legislation; BGH NJW 2003, 2906: termination of employment contracts, Leiharbeitnehmer.)

It is however important to emphasise that unlike the Rechtsstaatsprinzip, which is reflected in many provisions of the Constitution and numerous decisions of the Constitutional Court, the Sozialstaatsprinzip has not been used as a directly applicable legal principle by German courts. Indeed, as indicated by its systematic position outside the catalogue of individual rights and freedoms (Grundrechte), the principle does not establish immediate and legally enforceable rights or obligations (BVerfGE 39, 302, 315). Yet, both the executive and the courts are, however, bound by the Basic Law. In conjunction with other principles, the Sozialstaatsprinzip thus appears to feature as an interpretative tool (Auslegungshilfe: BVerfGE 1, 97, 105). In the decision here under consideration, the Bürge-decision, BVerfGE NJW 1994, 36, case no 81, the principle was also deployed as an interpretative guideline, namely in concretising and fleshing out ‘general clauses’ of the BGB. A contract that places an unusually heavy burden on one of the parties involved in the transaction, and is the result of a ‘structurally unbalanced distribution of bargaining power’ is thus said not to be acceptable in the light of the principle of ‘private autonomy’ and ultimately the Sozialstaatsprinzip. A more prominent role of the latter principle had in fact been demanded previously for instance by the later President of the Court Jutta Limbach, JuS 1985, 10 (the article ‘Das Rechtsverständnis der Vertragslehre’ in which the author expresses the hope that the ‘individualistic’ perspective of private lawyers will be overcome, and is cited with approval in the decision at hand) and Raiser, ‘Vertragsfreiheit heute’ JZ 1958, 1, though the Sozialstaatsprinzip had rarely been used by a court in such a bold fashion in policing a contract. (Approving: Larenz and Wolf, Allgemeiner Teil (9th edn, 2004) § 42, 754 ff.) It comes as little surprise therefore that the Bundesgerichtshof follows only reluctantly the policy oriented stance of the Constitutional Court and many private lawyers strongly oppose the idea of constitutionally guaranteed ‘equality of bargaining power.’ (For an alternative explanation of the Bürge-decision and for a more detailed discussion, see chapter 5, p 256.)

From the vast literature on these topics see further: Adomeit, ‘Die gestörte Vertragsparität—ein Trugbild’ NJW 1994, 2467; Canaris, ‘Grundrechte und Privatrecht’ AcP 184 (1984), 201; AcP 185 (1985), 9 and Grundrechte und Privatrecht (1999); Cherednychenko, ‘The Constitutionalization of Contract Law: Something New under the Sun?’ (2004) 8(1) Electronic Journal of Comparative Law (available at: http://www.ejcl.org/81/art81-3.PDF); Hager, ‘Grundrechte im Privatrecht’ JZ 1994, 373; Hönn, Kompensation gestörter Vertragsparität (1982); Honsell, ‘Bürgschaft und Mithaftung einkommensund vermögensloser Familienmitglieder’ NJW 1994, 565; Singer, ‘Vertragsfreiheit, Grundrechte und der Schutz des Menschen vor sich selbst’ JZ 1995, 1133.

A certain affinity between the court’s blend of criteria for invalidating the contract and Lord Denning MR’s (failed) formula of ‘inequality of bargaining power’ can

THE CONSTITUTIONALISATION OF PRIVATE LAW 41

readily be appreciated, although a good deal of this resemblance is owed to the vagueness of the respective ‘tests’. Lord Denning remarked in Lloyds Bank Ltd v Bundy ([1975] QB 326, at 339) that this principle gives relief to someone who entered into a contract where consideration was ‘grossly inadequate’ and his ‘bargaining power’ was ‘grievously impaired by reason of his or her own needs or desires, or by his own ignorance or infirmity.’ (It should be noted that Lord Denning’s formulation in Bundy has not commanded a strong following in the subsequent general English case law (see Treitel, The Law of Contract (11th edn, 2003), pp 420–3). Such inequality of bargaining power is however relevant under legislation which has granted discretion to the judges to supervise the terms of contracts (see, eg, the Unfair Contract Terms Act 1977, Schedule 2 para (a)) and also has a role in the judicial scrutiny of particular types of contract, such as covenants in restraint of trade (where only ‘reasonable’ covenants will be enforced by the courts: see, eg, Shell UK Ltd v Lostock Garages Ltd [1976] 1 WLR 1187 at 1197).

It is perhaps also worth noting that a parallel development has taken place in English law where the application of EC competition law renders a contract void as a result of Article 81(2) EC. While this EC Treaty rule is not, in the strict sense, traditionally a ‘constitutional value’, the application of the EC law doctrines of direct effect, supremacy of EC law and the need for an effective remedy for a breach of EC law grants this rule a status that is very similar to that of constitutional principles. In the case of Courage Ltd v Crehan (Case C-453/99 [2001] ECR I-6297), a brewery tie agreement was claimed to be contrary to Article 81 EC and the publican, Mr Crehan, sought to claim damages for the higher prices charged to the tied publicans for the beer supplied. Leaving aside the arguments concerning the proper approach in English law to the question of recovery in such circumstances (on which see, eg, Odudu and Edelman’s case note: (2002) 27 EL Rev 327, 337–9), as a result of the Court of Justice’s decision it could be argued that, as a matter of EC law, Article 81 EC can be the basis for such a claim (in this sense Mäsch, ‘Private Ansprüche bei Verletzung des europäischen Kartellverbots—“Courage” und die Folgen’ EuR 2003, 825; the issue is controversial). Further, national law cannot preclude recovery merely upon the ground that the claimant was a party to the contract that was found to restrict or distort competition. Instead, the court gave guidance as to the ways in which national law might and might not restrict the exercise of such a right to claim damages. ‘In particular,’ the court stated (at para 33), ‘it is for the national court to ascertain whether the party who claims to have suffered loss through concluding a contract that is liable to restrict or distort competition found himself in a markedly weaker position than the other party, such as seriously to compromise or even eliminate his freedom to negotiate the terms of the contract . . .’ Thus, for all EC Member States applying the EC competition rules, these factors will be of relevance in assessing the position of the parties to a contract held to violate Article 81 EC. Indeed, in the UK the existence of section 60 of the Competition Act 1998 may apply similar criteria to claims for breach of the analogous national competition law rules. This illustrates what we might term the impact of a ‘quasi-constitutional value’ (the economic goals of free and undistorted competition) upon the enforcement of contracts and upon the very content of national contract law. Certainly, the European Court of Justice has often been accused of reifying such economic goals to constitutional status in the past (see, eg, Coppel and O’Neill, ‘The European Court of Justice: Taking

42 INTRODUCTION

Rights Seriously?’ (1992) 29 Common Market Law Review 669). An alternative analysis is that this case shows an interpretation of the EC (and, a fortiori, the new UK) competition rules as some measure of ‘protection’ for the weaker commercial party, so as to allow recovery of damages as otherwise the protective purpose of the superior rule (here, the EC Treaty) would be frustrated. (At the same time, it should be acknowledged that neither of these analyses would find favour with certain schools of economic thinking in the competition law context: see, eg, Bork, The Antitrust Paradox: A Policy at War with Itself (1993 edn).)

Returning now to developments in German law we note that the Constitutional Court subsequently extended its approach in Bürge to contracts between spouses (Eheverträge) regulating the economic consequences of divorce in advance (FamRZ 2001, 343; FamRZ 2001, 985). The Bundesgerichtshof was thus forced to reconsider its previous practice. (See BGH NJW 2004, 930, case no 83; and for an evaluation: Langenfeld, ZEV 2004, 311; Rauscher, DNotZ 2004, 524) We will return to this subject in chapter 5, section 4(c)(i), 259, where we will examine more closely the notion of (procedural or substantive?) justice put forward by the Bundesverfassungsgericht. However, it should be noted already at this stage that the jurisprudence—according to which general clauses are springboards for constitutional value-judgments—is not without its difficulties. Three such difficulties may be identified at this stage.

First, in private law disputes we are confronted with an exceedingly difficult balancing exercise. Invariably, both plaintiff and defendant are able to rely upon human rights arguments. Thus, in the succession cases we have, on the one hand, the right of the testator to dispose of his patrimony as he thinks fit (Article 14 I) and, on the other, the right of the prospective beneficiary freely to choose wife or husband (Article 6 I). In the Bürge decision all actors were said to be able to rely on the right to selfdetermination through private law acts (Article 2 I). In English law, the recent spate of privacy-related cases brought under the action for breach of confidence has showed a similar dilemma. Thus, at an early stage in the now famous Douglas v Hello! saga (Douglas v Hello! Ltd [2001] QB 967, at [136]), Sedley LJ made it clear that an appeal to Article 10 ECHR could necessarily include a competing Article 8 ECHR right, by virtue of the exceptions laid down in Article 10(2) ECHR (and of course vice versa) and that this was highly significant in interpreting private law in the light of the UK’s Human Rights Act 1998. Further, in the Theakston v MGN Ltd ([2002] EMLR 22) and Flitcroft (A v B Plc and another [2003] QB 195) cases, it is clear that the courts approached the question of publication of the activities of celebrities from the perspective that those with whom Messrs Theakston and Flitcroft had chosen to dally also had a right freely to express their views and experiences under Article 10 ECHR. (On these cases see further, Deakin, Johnston and Markesinis, Markesinis and Deakin’s Tort Law (5th edn, 2003), pp 713–20.)

This leads to the second difficulty. The human rights aspect of a private law dispute is impossible to ascertain in advance with any measure of accuracy. For even if the court takes the view that the basic rights of one of the parties are affected by the conduct of the other party, the balancing of the competing interests is difficult and its outcome difficult to predict. The great number of actions brought after the Bürge decision supports this argument. Indeed, it took the different Senates of the Bundesgerichtshof eight years to develop a consistent jurisprudence regarding the application of the principles ascribed to the Bürge decision (see, for the final episode