FREEDOM OF CONTRACT 43

of this saga, BGH NJW 2002, 2228). The ‘guidelines’ laid down by the English Court of Appeal in the Flitcroft case illustrate this point very well from an English perspective, as does their application by a subsequent Court of Appeal in the Naomi Campbell litigation (Campbell v MGN Ltd [2003] QB 633). Both cases concerned claims by very public figures to a private life under Article 8 ECHR. In the former, Lord Woolf CJ (giving the judgment of the Court of Appeal) gave great weight to the importance of the role of the press as a vital conduit for the dissemination of freely expressed views and information, even to the extent of justifying disclosure of Mr Flitcroft’s extra-marital affairs to the world via the tabloid press, simply because ‘the public have an understandable and so a legitimate interest in being told the information.’ In the latter, however, their Lordships were at pains to point out that Lord Woolf had ‘not [been] speaking of private facts which a fair-minded person would consider it offensive to disclose.’ The House of Lords eventually upheld Miss Campbell’s claim against The Mirror newspaper for breach of confidence ([2004] 2 WLR 1232), in spite of her celebrity status, which she had done much to cultivate. (Again see Markesinis and Deakin’s Tort Law, pp 713–20 for further discussion.) And, lest the reader should think that this citation of tort cases suggests that the contractual law of confidential obligations is immune to such human rights-influenced reasoning, it should be noted that, in the recent contractual confidence cases of Campbell v Frisbee [2003] ICR141 and Lady Archer v Williams [2003] EWHC 1670; [2003] EMLR 38, the courts made clear and explicit reference to the significance of the Human Rights Act 1998 in their reasoning. In the Frisbee case, it led the court to refuse to grant a summary judgment of breach of confidence as it raised an arguable issue for the trial ([23]ff, especially [33]–[34]); in the Archer case, the argument based upon Article 10 ECHR failed to convince the court that this was sufficient reason to override the contractual duty of confidentiality owed by a secretary and personal assistant to her employer relating to confidential information learned during the currency of that post (see, in particular, [64]–[67]).

Finally, from an institutional point of view, the controversial question arises as to what extent, if at all, the Constitutional Court is justified in interfering with private law disputes.

7. FREEDOM OF CONTRACT

Atiyah, The Rise and Fall of Freedom of Contract (1985); Canaris, Die Bedeutung der iustitia distributiva im deutschen Vertragsrecht (1997) and ‘Wandlungen des Schuldvertragsrechts. Tendenzen zu seiner “Materialisierung” ’ AcP 200 (2000), 273; Drexl, Die wirtschaftliche Selbstbestimmung des Verbrauchers (1998); Fastrich, Richterliche Inhaltskontrolle im Privatrecht (1992); Hofer, Freiheit ohne Grenzen? Privatrechtstheoretische Diskussionen im 19. Jahrhundert (2001); Junker, ‘Individualwille, Kollektivgewalt und Staatsintervention im Arbeitsrecht’ NZA 1997, 1305; Kramer, Die ‘Krise’ des liberalen Vertragsdenkens (1974); Limbach, ‘Das Rechtsverständnis der Vertragslehre’ JuS 1985, 10; S Lorenz, Der Schutz vor dem unerwünschten Vertrag (1997); Mayer-Maly, ‘Der liberale Gedanke und das Recht’ in Festschrift Merkl (1970), 247; Medicus, ‘Abschied von der Privatautonomie’ in

44 INTRODUCTION

Einheit und Vielfalt der Rechtsordnung (1996), 9; Neuner, Privatrecht und Sozialstaat (1999); Oechsler, Gerechtigkeit im modernen Austauschvertrag (1997); Pflug, Kontrakt und Status im Recht der Allgemeinen Geschäftsbedingungen (1986); L Raiser, ‘Vertragsfreiheit heute’ JZ 1958, 1; Rittner, ‘Über das Verhältnis von Vertrag und Wettbewerb’ AcP 188 (1988), 101; E Schmidt, ‘Von der Privatzur Sozialautonomie’ JZ 1980, 153; Schmidt-Rimpler, ‘Grundfragen einer Erneuerung des Vertragsrechts’ AcP 147 (1941), Singer, Selbstbestimmung und Verkehrsschutz im Recht der Willenserklärungen (1995); Thüsing, ‘Vertragsfreiheit, Persönlichkeitsschutz und Effizienz’ ZGS 2005, 49; Trebilcock, The Limits of Freedom of Contract (1993); Weitemeyer, ‘Das Gesetz zur Regelung der Miethöhe und die Vertragsfreiheit’ NZM 2000, 313; HP Westermann, ‘Sonderprivatrechtliche Sozialmodelle und allgemeines Privatrecht’ AcP 178 (1978), 150; M Wolf, Rechtsgeschäftliche Entscheidungsfreiheit und vertraglicher Interessenausgleich, (1970).

(a) Preliminary Observations

It is to state the obvious that the importance one attaches to freedom of contract depends largely on the view one takes, explicitly or implicitly, on matters of political theory. This is as true in Germany as it is elsewhere. On the one hand, there are the more liberally inclined writers who favour the view that the parties to a contract are best left to their own devices, whereas on the other there are those who emphasise the ‘social’ function of private law and the need for the courts to step in and protect the ‘weaker’ party. To the reader of the previous section it will come as no surprise that, in German law, a further dimension is added to these aspects of freedom of contract, namely that provided by the wider constitutional context. It is not for us to put forward and defend a specific interpretation of freedom of contract. Rather, the task of this book is to determine the position of contemporary German law.

The history of freedom of contract is in many ways the history of its restrictions. It is more through the scope and nature of the restrictions and less by examining abstract pronouncements of principle that we get a glimpse of the current state of affairs. The reader will also recall Sir Henry Maine’s classic analysis of the movement of progressive societies ‘from Status to Contract’:

Starting, as from one terminus of history, from a condition of society in which all the relations of Persons are summed up in the relations of Family, we seem to have steadily moved towards a phase of social order in which all these relations arise from the free agreement of Individuals. In Western Europe the progress achieved in this direction has been considerable. (Ancient Law (1864), p 165.)

However, after the progressive dissolution of family ties, many other factors have, over time, weighed heavily on freedom of contract. Various restrictions have flowed from birth, guild, or social position in the feudal system of times past. Only slowly did freedom of contract come to be regarded as the crucial asset of nations built around manufacture and trade, Adam Smith’s An Enquiry into the Nature and Causes of the Wealth of Nations (1776) representing the high-water mark of this faith in the forces of the market. (See, for a discussion of the impact of his ideas in the common law, Atiyah, Essays on Contract (1988), chapter 12, pp 355–85.) It is no coincidence that we begin this section on freedom of contract under the BGB with a reference to Adam Smith.

FREEDOM OF CONTRACT 45

(b) The Initial Position

Initially, the number of restraints on freedom of contract in the BGB was very limited. The guiding principle, though nowhere expressly proclaimed in the text of the Code itself, was summarised by Flume thus: ‘The idea behind contract is that what has been agreed is binding because in making the contract the parties have agreed that it should determine their rights and liabilities’ (Allgemeiner Teil, vol 2, p 7, in the translation of Tony Weir in Zweigert and Kötz, An Introduction to Comparative Law, p 325). In the Motive (vol 1, p 126) this was reduced to the formula: ‘A legal transaction is a private declaration of intention aiming at a legal consequence which the law sanctions because it is intended.’ The advocates of a more paternalistic approach to private law, however, severely criticised the BGB for containing only a few ‘drops of social oil’ (Otto von Gierke, Die soziale Aufgabe des Privatrechts (1889), p 10). At the time these debates were taking place, the latter were bound to lose the argument.

It will be recalled that contract is but one instance of a legal transaction; freedom of contract is accordingly only one aspect of the more fundamental idea that a person in possession of legal capacity, not influenced by mistake or undue pressure, is fully capable of determining his fate as far as legal relationships of private law are concerned. This wider idea is referred to by the fathers of the BGB as the principle of personal autonomy (Privatautonomie), in Motive, vol 1, p 10. The importance of personal autonomy can be also seen from the fact that the concept of legal transaction is one of the three basic concepts of the General Part of the BGB (persons, things and legal transactions).

The only conditions for the validity of a ‘legal transaction’ contained in the General Part are, naturally, legal capacity (§§ 104–13), absence of mistake or vitiating factors (§§ 116–24), compliance with form (§§ 125–9), proper notification of the addressee of a declaration of intention inter absentes (§§ 130–2). To this list we must add the ‘negative criteria’ of absence of a statutory prohibition (§ 134), no violation of public policy (§ 138 I), or the creation of a grossly inadequate and unduly obtained bargain (§ 138 II). These are all conditions of validity of legal transactions envisaged by the fathers of the BGB—the wording of § 242 (good faith), being originally limited to the manner of performance. The very fact that nothing more is required gives credit to the liberal spirit in which the BGB was drafted. § 134 was meant mainly to ensure that the provisions of criminal law were also given effect in private law while, as already indicated above, the general clause of § 138 I was expected to be interpreted by the courts in a narrow fashion.

Of particular note is the absence of the requirement of a ‘just’ price which would have enabled the courts to police contracts much more extensively than under § 138 II, which demanded (in addition to a gross inadequacy of consideration) the presence of vitiating factors (which basically required there to have been some exploitation of the lack of judgement or grave weakness of will of the other party). The doctrine of laesio enormis (allowing a contract to be avoided if the disparity between the values of what was exchanged was beyond a certain multiplier—in Roman law, this was two to one or greater) was expressly rejected by the drafters of the BGB (Motive, vol 1 (1888), p 321), though it did make a limited appearance in the French Code in the context of transactions concerning land). (For the historical perspective, see Zweigert and Kötz,

An Introduction to Comparative Law, p 329, and Zimmermann, The Law of Obligations, p 259.)

46 INTRODUCTION

A number of other significant aspects must be mentioned in order to reveal the full scope of freedom of contract under the BGB.

Generally speaking, the parties can contract out of the rules of law contained in the first two books of the BGB concerning the law of obligations arising out of contracts. These rules constitute what is referred to as ‘dispositives Recht,’which means that these rules must be treated as ‘default rules’ to be applied unless the parties have stipulated otherwise. Similarly, the parties are free to define the scope and nature of their contractual obligations. § 311 I, in conjunction with § 241 I, merely emphasise the binding nature of the obligation but does not (unlike the law of property as explained above) force the parties down the path of pre-defined models of contracts. Finally, there are no prerequisites as to the acceptance of an offer; everyone is free to reject the conclusion of a contract (this aspect is referred to as Abschlußfreiheit).

The original position of the BGB can be thus summarised as follows. The content of a contract as such was (except for the violation of statutory provisions or bonos mores) not to be regarded as sufficient ground to justify the intervention of a court. In terms of substantive and procedural justice, the BGB proceeded on the footing that if the requirements of the latter were fulfilled the former would not be questioned. Thus, in accordance with traditional liberal theory, the parties were the best guarantors of their respective rights and the contractual process was the epitomy of fairness. In the words of the French philosopher Fouillé (a disciple of Kant) ‘Qui dit contractual dit juste’: He who says contractual is saying fair! (See, as to procedural and substantive fairness, inter alia, von Mehren, IntEncCompLaw vol VII, chapter 1 (1982), p 72; Atiyah, Introduction to the Law of Contract (5th edn, 1995), p 289.)

(c) Modern Constraints

The halcyon days envisaged by the Code were not destined to last long. The socioeconomic developments that followed the First World War (and more so the Second) would gain momentum and encourage a marked tendency towards the establishment of a regime of substantive justice. In recent years, under the influence of EC law, the scope for avoiding contracts on procedural grounds has increased further providing yet another instance of the ‘internationalisation’ of what (since the emergence of the modern states) used to be a very ‘national’ based branch of the law. In some instances the freedom to enter into a contract has also been restricted (this so-called Kontrahierungszwang is discussed in chapter 2, p 70). Four of these developments, typical of the post-Wars period, and related to the general themes mentioned at the very beginning of this chapter, may be singled out in the remainder of this chapter. (They will be picked up in greater detail later in this book. See, also, for further discussion, eg, Canaris AcP 200 (2000) 273.)

First, we must mention the comprehensive judicial control exercised in relation to ‘standard terms’ or general conditions of business (Allgemeine Geschäftsbedingungen). Nearly a century after the adoption of the BGB, the Constitutional Court in the Bürge case was able to state that there was widespread consensus that the principle of good faith justified policing the content of a contract (richterliche Inhaltskontrolle) (in NJW 1994, 36, 39). The development referred to here is that of the emergence of a strict regime of rules concerning the conclusion and, crucially, the content of preformulated, standard term contracts. This was done first on the basis of § 242, later

FREEDOM OF CONTRACT 47

aided by a special statute and today is laid down in §§ 305–10 and Directive 93/13/EEC on Unfair Terms in Consumer Contracts (although it should be noted that the BGB rules are not, on the whole, limited to consumer transactions). The nature and scope of this intervention of the courts into contract law is discussed in detail in chapter 3, p 163 and represents one of the best examples of one of the most important developments of modern contract law: the appearance of the consumer as a litigating party. To borrow a metaphor used by Lord Denning MR in the case of George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284 (affirmed: [1983] 2 AC 803) (cited in full in chapter 3, section 5(a), p 166), German courts did not feel the need to conceal their ‘weapon’ and did not need to ‘stab the idol in the back’, but professed openly to control the fairness of exclusion clauses and indeed many other terms written ‘in small print.’ One of the consequences of policing standard terms has been that contracting out of the ‘dispositive Recht’ of the Code has become more difficult. The default rules are the guiding principle in policing ‘standard’ terms and thereby indirectly acquire a quasi-‘strict’ character (see now § 307 II Nr. 1). It would seem that, to paraphrase the famous slogan of the French Revolution, égalité was destined to trump liberté.

The impact of the human rights of the Basic Law upon the BGB has already been pointed out in section 6, p 37. It provided the second (and, doctrinally, the most intriguing) development relevant to freedom of contract. Freedom of contract is protected as part of the general right to act freely (Article 2 I GG, allgemeine Handlungsfreiheit). The wider aspect of human dignity is also relevant since the ability of a person to determine his fate autonomously is a central element of dignity as envisaged and protected by Article 1 I. This conforms to traditional contract doctrine. But then we begin to find concessions to the alternative position. So the German courts (since the aforementioned Lüth decision) have come to regard general clauses as ‘entrance points’ for constitutional values. Thus, in some cases freedom of contract was balanced against some other basic right of the Constitution, for instance the right of free marriage or the right to one’s personality or the right to freedom of expression. This leads to the most difficult aspect that has arisen following a number of highly controversial cases. The question is whether the Constitution is also relevant to defining the limits of freedom of contract, ie does it contain principles which determine the fairness of contract terms and the requirements as to the manner in which contracts are concluded? Here, both parties are said to be able to rely upon freedom of contract. One party invokes freedom of contract in the classic sense: the courts should not interfere with the contract. The other party’s invocation of freedom of contract is less easy to sustain on orthodox analysis, for this party demands that the courts should police the contract because of its unfair terms and because there was no ‘parity’ of bargaining power. In the view of the Constitutional Court, freedom of contract, or personal autonomy more generally, does not entail unlimited power to enter into contracts on terms which are unfair; further, the conditions of the exercise of this freedom, the ‘parity’ of bargaining power, must also be secured. We will return to this topic in chapter three below. Here, suffice it briefly to make three points.

First, despite the far-reaching language of these judgments, the cases could also be rationalised in the terms of more traditional concepts of private law. After all, lawyers are, in most cases, able to find a ‘justification’ for most propositions they wish to advance. The time, however, may have come when one should treat these developments

48 INTRODUCTION

as prompted by a socio-economic environment which is different from that which gave rise to the classical law of contract.

Secondly, this debate can also be found in other systems which have borrowed the German thinking and even the language of some leading German judgments. (Israel offers an excellent illustration where Justice Barak has drawn largely on the German reasoning and, in a contractual context, has been challenged by Professor Shalev among others. See: ‘Constitutionalisation of Contract Law’ in A Gambaro and AM Rabello (eds), Towards a New European Ius Commune (1999), pp 205–35).

Thirdly, it could be argued that these results are not so different from those achieved by apparently more conservatively minded English courts in comparable situations, such as cases relating to the incorporation of contract terms in certain situations (discussed below in chapter 3, particularly p 163 ff), misrepresentations inducing contracts (see chapter 6, sections 4, p 302 ff) and the doctrine of undue influence (treated in chapter 5, particularly section 4(c), p 253 ff).

Another major topic which must be discussed in the present context and which reveals a considerable constraint upon freedom of contract is the emergence of tightly regulated contracts in certain fields of law which were once seen as dealing with ‘specific’ aspects of contract law but which, nowadays, represent the part of the law of contract which is closer to the average citizen than any other (except sale of goods). Here, we will allude briefly to the law of leases and labour law, areas of contract law which have witnessed radical departures from traditional doctrine.

In the case of leases, this trend is described by adding the adjective ‘social’: ‘soziales Mietrecht’. (Initially, these strict regimes of (new) rules were contained in statutes outside the BGB but a reform of 2001 incorporated them into the BGB. (§§ 549–577a comprise the special rules applicable to leases of accommodation for private living (Mietverhältnisse über Wohnraum). While the original norms contained only some ‘drops’ of social oil (like the strict liability of the landlord if the flat were defective from the outset: now § 536a I), the present regime can be more accurately described as a thicket of ‘social’ regulation designed to protect the tenant.

To achieve this new protective aim, a whole range of protective measures has been invented. Thus, we find special formal requirements (eg, §§ 550, 558a), measures prohibiting deviations to the detriment of the tenant (eg, § 551 IV, 553 III, 554 V), narrowing down the reasons for which the landlord may terminate the contract (normally a long-term contract concluded for an indefinite period can after notification in advance freely be terminated; § 573, however, requires a ‘legitimate’ interest of the landlord if he is to be allowed to terminate the contract), and even provisions introducing mechanisms which allow the courts to control the rent at least in certain respects (the ‘just price’ idea applies to any demand of a rent increase after the conclusion of the contract (for which the contract has not expressly provided: §§ 559, 557–61, setting the level at the local spot rate plus a certain margin forming a ceiling; and other costs in connection with the lease, § 556). As a result of all of this, it is no surprise that most German ‘county’ courts have set up special departments to deal with leases, alone. Again, as a general rule it could be said that this ‘socially impregnated law’ finds its counterparts in most continental European systems, with the US standing at the other end of this spectrum (though here, too, state legislation and regulations provide some evidence of traditional contract doctrine being challenged by the social realities of the twenty-first century).

FREEDOM OF CONTRACT 49

English law also reveals characteristics similar to those found in German law, though the protection given to tenants had ebbed and flowed, followed political developments in the country during the last quarter of the twentieth century. Thus, the early legislation (the Increase of Rent and Mortgage Interest (War Restrictions) Act 1915 covered no more than six pages (in response to the wartime shortages) but this grew into a complex network of systems filling hundreds of pages and leading to thousands of cases interpreting the rules. Despite the fact that more recent English developments (see Part I of the Housing Act 1988 and also the Housing Act 1996) have seen a move back towards a lower level of regulation of the private lettings market, there still exist seven different systems of control (although Assured, Shorthold and Regulated Tenancies are the general regimes, while the other categories are either narrowly restricted or more concerned with granting a right to the tenant to acquire the freehold in the property: see, generally, Harpum, Megarry & Wade—The Law of Real Property, pp 1383 ff). Overall, however, the English system (within the various categories mentioned above) does provide a goodly measure of protection to tenants. For example, in assured tenancies under the Housing Act 1988, protection of tenure is provided to tenants by the imposition of a statutory periodic tenancy when the term of the tenancy expires. The landlord is then reduced to proving one of the statutory grounds for possession laid down in the Act (see Schedule 2 of the 1988 Act), if he is to recover possession of the property. Furthermore, on the death of the tenant of an assured tenancy, the relevant person untitled under the tenant’s will can succeed to a fixed-term assured tenancy. Finally, rent increases in periodic assured tenancies are subject to rent assessment committees, if the tenant objects to the proposed new rent (although it should be pointed out that this can often operate as much to protect the landlord who has forgotten to include a rent review clause—if such a clause has been included then the statutory procedure will not apply (section 13(1) (b) of the 1988 Act)). Assured shorthold tenancies, however, are now the default tenancy (see sections 19A, 20 and 34 of the 1988 Act) and these provide much less security of tenure beyond the fixed term period as the landlord is then entitled to recover possession as of right by serving a notice in writing on the tenant (section 21(1) of the 1988 Act). Nevertheless, a measure of rent protection is also available here, even if the landlord and tenant have already reached agreement (section 22 of the 1988 Act), although the powers of the rent assessment committee are somewhat more limited (section 22(3) of the 1998 Act). The advent of the assured shorthold tenancy has significantly reduced the importance of regulated tenancies under the Rent Act 1977, but where this is still relevant (typically due to grandfathering provisions relating to existing regulated tenancies—see section 34(1) of the Housing Act 1988) the major benefit for the tenant is a system that imposes and enforces a maximum rent and also prohibits premiums (for grant, renewal, etc of the tenancy—see Part XI, Schedule 1, Part II of the Rent Act 1977), although this will only operate once the rent for the dwelling is registered (sections 44, 57, 66 and 67 of the Rent Act 1977). And this is all without detailed discussion of the position of long leaseholders and their security of tenure (Part I of the Landlord and Tenant Act 1954) and possibilities to ‘enfranchise’ themselves by acquiring the freehold interest in the relevant property (the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993); and without coverage of secure tenancies where the landlord is a public body

50 INTRODUCTION

(particularly including the tenants’ right to buy under Part V of the Housing Act 1985). (See generally, Harpum, Megarry & Wade—The Law of Real Property, chapter 22; Megarry on The Rent Acts (11th edn, 1988); Driscoll, Residential Leasehold Property Law (2004) and Smith, The Law of Landlord and Tenant (6th edn, 2002).)

This brief tour d’horizon should serve to convince the reader that there is a fair parallel in the ‘social’ law of leases in English law to those developments in Germany, even if the overlap is not complete, and the increased burden that these provisions place upon landlords and conveyancers in appreciating the lie of the land in this area is clear to see. This is not an insignificant conclusion since it shows that despite the fact that English variant of market economy is ‘more liberal and less interventionist’ than the German, the country and its system have not escaped the current political preoccupation to give rights and entitlements to those who for social, ethnic or religious reasons are deemed to belong to the weaker sections of society.

The contract of services (§ 611) also encompasses relationships of labour law. Except again for a ‘drop’ of social oil (§ 618, which establishes certain protective duties regarding the health of employees), few constraints were originally envisaged in the BGB. (In the UK, the relevant avenues are compensation funded by social security contributions (laid down by the (much amended) National Insurance (Industrial Injuries) Act 1946) and claims for damages against an employer for breach of the employer’s statutory (eg, the Health and Safety at Work Act 1974) or tortious (such as negligence—see, eg, Walker v Northumberland County Council [1995] 1 All ER 737) duties.) The position of contemporary German law is thus characterised by a considerable number of (one-sided) significant restrictions of freedom of contract. Unlike in the case of the ‘social law of leases,’ however, these matters have been dealt with outside the Code. These specialised statutes include protective rules dealing with the right to a holiday (Bundesurlaubsgesetz—in the UK, see The Working Time Regulations 1998, SI 1998/1833, regulation 13), regulating the payment of loans in the case of illness (Entgeltfortzahlungsgesetz) and restricting the reasons for and setting out the procedure regarding dismissals (Kündigungsschutzgesetz).

Here, too, the law in the UK has, generally speaking, followed suit and contains an extensive set of legal rules regulating unfair dismissal. These were first developed at common law in the nineteenth century, where the increasing effectiveness of collective bargaining to set the terms of employment contracts led to adjudication by the courts upon those terms, their interpretation and application (see, eg, Collins, Ewing & McColgan, Labour Law Text and Materials (2001), pp 481–520; and see Deakin and Morris, Labour Law (4th edn, 2005)). It should be emphasised that, initially, these results were achieved using the ordinary rules of contract law in the relevant context (implication of terms, etc), although, eventually, the perceived limitations of this approach led to the introduction of statutory regulation of unfair dismissal (which are now consolidated in the Employment Rights Act 1996). This legislation provides mandatory standards (based upon ‘fairness’ as applied in the relevant context—see section 98 of the 1996 Act) for the control of the employer’s discretionary power of dismissal (see Collins, Ewing & McColgan (above) 520ff.; and see Deakin and Morris, Labour Law), although a desire to support flexibility in the labour market has led to certain possibilities for the employee to contract out of the statutory rights (such as compromise agreements where termination of the contract of employment is the result—in such a case, there will be no ‘dismissal’ under the legislation). Needless to

FREEDOM OF CONTRACT 51

say, we are dealing here with mandatory and not dispositive law (on this point, in relation to English labour law and issues of status and contract, see Kahn-Freund, ‘A Note on Status and Contract in British Labour Law’ (1967) 30 MLR 635 and Deakin and Morris, Labour Law, section 4.2). The Bundesarbeitsgericht has also interpreted the applicable BGB provisions rather narrowly. For instance, the court has tightened the conditions for dismissal under § 626 for a breach of duty by the employee. It requires (though there is no indication of this in the wording of § 626) that, even for a gross violation of the employee’s duties, dismissal is an ultima ratio measure which requires a negative prognosis as to the mutual trust of the parties (see, for criticism from a liberal perspective prompted by the current economic crises: Rüthers, ‘Vom Sinn und Unsinn des geltenden Kündigungsschutzrechts’ NJW 2002, 1601).

The alteration of the contractual background has come with an increase in litigation. As a result, special civil courts were set up in Germany to deal with matters of ‘labour’ law (Arbeitsgerichtsbarkeit). In the year 2000 alone 574,644 claims were brought before these courts (Rüthers, NJW 2002, 1601, 1602). It seems that the number of claims in the UK is smaller than in Germany (even allowing for the smaller UK economy). Nevertheless, litigation has grown rapidly throughout the 1980s and 1990s as the increase in individual (as opposed to collective) employment rights led to growing demands for their enforcement. This was a major motivation for the introduction of the Employment Act 2002, Part 2 of which creates restrictions upon the enforcement of the statutory rights by a reform of the tribunal system, while Part 3 introduces statutory dispute resolution procedures. It seems clear that the 2002 Act effects significant restrictions upon the exercise of employees’ individual rights and the legislation has attracted much comment and concern. For discussion, as well as wide-ranging and trenchant criticism of the 2002 Act, see Hepple and Morris, ‘The Employment Act 2002 and the Crisis of Individual Employment Rights’ (2002) 31 ILJ 245. This ‘un-noticed’ rapprochement of English and German law must again be contrasted with the American notion of contract terminable at will which offers American employers unimaginable freedom to terminate employment contracts. Having said this however one must again remind the reader of the (wider) economic conditions and philosophies that may be associated with these rules of law.

These developments foreshadowed the broadly drafted and construed consumer legislation across the European Community commencing in the 1980s. This is the fourth and final type of constraint on freedom of contract which we discuss here (see also, chapter 3). We have already mentioned the growing influence of European Community law in this field and we refer to it again since it is a main theme of this book (and one which we feel is applicable even to English law) that the ‘national’ flavour of contract law has, in some areas, succumbed to this ‘international’ climate of regulation. Thus, on this topic see, the Consumer Credit Directive 87/102/EEC (implemented in §§ 488–507 of the BGB—in the UK, see the Consumer Credit Act 1974, which pre-dated the Directive: many of the regulations adopted thereunder served to implement those aspects of the Directive that had not already been covered by the 1974 legislation. Note that this Directive is currently under review with a view to its revision by further EC legislation); Directive 90/314/EEC on Package Travel (§§ 651a–651m and §§ 305–10 and The Package Travel, Package Holidays and Package Tours Regulations 1992, SI 1992/3288); the Timeshare Directive 94/47/EC (§§ 481–7 and the Timeshare Act 1992 (as amended by The Timeshare Regulations 1997, SI

52 INTRODUCTION

1997/1081)); and Directive 1999/44/EC on Consumer Sales (inter alia §§ 474–9 and The Sale and Supply of Goods to Consumers Regulations 2002, SI 2002/3045 (amending the Supply of Goods (Implied Terms Act) 1973, the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982)).

The common element of these ‘harmonisation’ measures is that they introduce a regime of rules regarding ‘business-to-consumer’ transactions which is said to afford a minimum protection to the consumer: in other words they cannot be departed from to the detriment of the consumer. To give some examples, it is no longer possible to sell newly produced goods to a consumer at a price which was reduced in view of a shorter limitation period: reducing the limitation period will be held invalid (§ 475 II); and where the buyer is a consumer, the goods remain at the seller’s risk until delivered to the consumer (section 20(4) of the Sale of Goods Act 1979, as inserted by SI 2002/3045 (above)).

The combined effect of this legislation upon the BGB has been considerable. Most Directives have been implemented in the text of the Code itself and, as we have already suggested, from a point of legislative style, the lengthy and verbose formulations of these provisions contrasts rather unfavourably with the abstract and succinct traditional BGB provisions.

English law has adopted a similarly wholesale incorporation of the terms of many of these Directives, typically by means of statutory instruments: this has left difficult questions of interpretation to be resolved, relating to the relative scope of pre-existing national law (such as the Consumer Credit Act 1974 and the Unfair Contract Terms Act 1977) and the new, EC Directive-inspired/required statutory instruments (such as the current Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083); and this is a further ‘background’ factor which accounts for what we have described as the ‘un-noticed rapprochement’ with German law. (For brief discussion of this methodological approach, see Weatherill (1998) Amicus Curiae 11; for discussion of proposals to combine the 1977 Act and the 1999 Regulations, see the Law Commission Consultation Paper No 166 and Scottish Law Commission Discussion Paper No 119, Unfair Terms in Contracts—A Joint Consultation Paper (2002). Equally, it should be noted that in English law many of the provisions of those EC consumer-related Directives that concern the sale and supply of goods have been accommodated by amendment of the overall regime under the 1979 and 1982 Acts (above), rather than added as extra layers whose relationship with pre-existing provisions must then be disentangled.) Overall, however, the clear impression in English law is that there has been a significant shift towards the provision of information to the consumer and the existence of compulsory statutory rules that seek to protect the position of the consumer in the contracting process.

The clearest sign of this emergence of a special private law for consumers in Germany is the insertion, into the General Part in the section on the basic concept of ‘Person’, of two definitions of a Dealer (Unternehmer, § 14) and Consumer (Verbraucher, § 13). Irrespective of whether one welcomes these relatively recent departures of European law, the restrictions on freedom of contract cannot be ignored. Consumers—ie persons acting outside their business or trade—are not regarded as fully capable of taking charge of their affairs: apparently, they need protection and EC law is prepared to afford it to them.

This tendency towards increasing the control over the content of a contract on grounds of substantive fairness is supplemented by protective measures which

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increase the range of reasons for avoiding the contract, which could be said to undermine the principle of pacta sunt servanda. The right of termination granted by Directive 85/577/EEC (implemented in § 312 of the BGB and in the UK by The Consumer Protection (Cancellation of Contracts Concluded away from Business Premises) Regulations 1987 (SI 1987/2117, as amended by SI 1988/958 and SI 1998/ 3050)), concerning the protection of consumers in respect of contracts negotiated away from business premises, is the paradigm case. The justification for the right is procedural: in certain situations, the conclusion of the contract might have been premature, the consumer perhaps feeling an awkward pressure when goods are merchandised at his private home. Yet, in effect, it amounts to saying that a contract concluded under those particular circumstances can be freely revoked and is not binding, for the consumer must not show that he was in fact exposed to undue pressure. He may avoid the contract simply because he has had second thoughts.

A corollary of this consumer legislation is the proliferation of duties to provide information to the consumer. These duties can be fairly complex and extensive, yet failure to fulfil them means that the consumer’s rights are further increased. A good illustration of this point is provided by EC law in Case C-481/99 Heininger v Bayerische Hypo- und Vereinsbank AG [2001] ECR I-9945, NJW 2002, 281, concerning the application of Directive 85/577/EC: national law provided for a limitation period of one year within which the consumer had to bring his claim. However, the Court of Justice held that this period could not start to run unless and until the consumer had been properly informed of his right to avoid the contract, as required by the Directive. See now § 355 III sentence 2, the effect of which is that the right to terminate the contract never expires or lapses. This has prompted the German legislator to draft a special regulation, which contains ‘model’ information to be provided to consumers (BGB-Informationspflichten-Verordnung).

We may conclude this brief examination of some modern restrictions of freedom of contract with a few general remarks.

The constraints on freedom of contract appear considerable. Policing the content of a contract and a tight control of procedural fairness are closely related to transactions between dealers and consumers. The presumption here is that one party is weaker than the other and, faced with a dispute between the ‘little man’ and the ‘big concern’, it seems a foregone conclusion that the ‘weaker’ consumer or employee needs and deserves protection. However, this development that has seen the courts give up their neutrality towards the content of a contract is not limited to such relationships. It will be remembered that, for instance, the control of standard terms extends also to purely commercial transactions in German law. Conversely, in the law of leases it will often be persons acting outside their business or trade who let accommodation, yet they are still subject to the same strict requirements as any other ‘commercial’ landlord. These are the realities of contemporary private law systems and it would be misleading if in this book we were not to mention and discuss the considerable quantities of ‘social oil’ which have been poured over the BGB since its adoption in 1896 (although whether this has acted as a useful lubricant, as oil on otherwise ‘troubled’ waters or has added fuel to the fire is another matter). We will discuss specific aspects of these rules, as far as they can be regarded to affect general principles of German contract law, in the following chapters.