учебный год 2023 / Drobnig, Principles of European Law of Personal Security

Chapter 4:

Special Rules for Personal Security of Consumers

Introduction

1.The Issue

The adequate protection of consumers who assume personal securities is one of the most pressing demands in our days. In virtually all member states, although to different degrees, “strong” creditors have pressed economically “weak”, especially non-professional debtors to provide security for their credits by furnishing personal security. Typically, this class of debtors is not in a position to appeal to professional security providers. Instead, they may persuade their spouse or parents or children to assume a personal security, even if these persons are in a comparably weak economic position and are likely to lack business experience.

Depending upon the strength and awareness of consumer organizations, the afore-men- tioned practices have evoked more or less vivid, numerous and forceful reactions first by the courts and later also legislators. The national laws of the member states have very differently reacted to this issue – from complete non-action on the part both of the courts and the legislators to rather broad enactment of comprehensive and detailed rules, especially in FRANCE. These differences are reflected by the national notes.

Therefore, there is clearly a need to formulate, on the basis of experiences in the member states, appropriate European rules on the protection of “weak” providers of personal security.

Whether these or similar rules should be extended to third party providers of proprietary security is a different matter and may be addressed in future rules on proprietary security.

2.General Protective Rules in the Principles of European Contract Law

Two rules of PECL are relevant in the present context. One is the general rule requiring each party to act in accordance with good faith and fair dealing – a general obligation which cannot be excluded or limited by the parties (PECL Article 1:201). While such a very general obligation does not assist very much in the solution of specific cases, it indicates at least a general attitude which is to inform the application of all rules of PECL (cf. also infra).

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A specific protective rule is contained in the chapter on the validity of contracts. PECL Article 4:109 deals generally with the protection of a “weak” party. Such weakness, which must have existed at the time of conclusion of the contract, may be due to a dependency on or a relationship of trust with the other party; economic distress or urgent needs; or personal weaknesses such as improvidence, ignorance, inexperience or lack in bargaining skills (Article 4:109 (1) (a)).

In addition to these objective or subjective factors on the part of the weak person, there must have existed additional subjective factors on the part of the other contracting party: the latter must have known or ought to have known of the aforementioned factors on the part of the weak party and in view of the circumstances and the purpose of the contract must have taken advantage of the weak party’s situation “in a way which was grossly unfair” or must have taken an excessive benefit (Article 4:109 (1) (b)).

The weak party’s primary remedy in the above-mentioned situation is the avoidance of the contract (Article 4:109 (1)). However, alternatively the weak party is entitled to ask a court to adapt the contract so as to bring it in accordance “with what might have been agreed had the requirements of good faith and fair dealing been followed” (Article 4:109 (2)).

After the weak party has sent a notice of avoidance, the other party may apply to the court for adaptation of the contract (Article 4:109 (3)).

3.Specific Protective Rules for Personal Security by Consumers

Following the DUTCH model, it appears to be most useful to collect all special rules on consumer security providers in a separate part in order to facilitate access to those rules. Moreover, in this way a few relevant general rules can best be placed in their proper context. A further advantage is that all rules for “normal” personal securities, especially those for commercial transactions can be presented consecutively and consistently.

These rules specifically designed for the protection of consumer providers of personal security fall into four categories. The first is the definition of the consumer which has been placed into the general introductory rule on definitions (Article 1:101 (g)) and the scope of application of the special protective rules (Article 4:101). In the second category the applicable rules are designated (Article 4:102 and 4:104). The third and most important category is devoted to the protection of the consumer in the course of its assuming the security (Articles 4:103 and 4:105). And the fourth category deals with the restricted effects of a consumer’s personal security (Articles 4:106-4:108).

4.Terminology

The definition of the term “consumer” and the reasons for using this term have been set out in Article 1:101 (g) and the Comments to that rule (Comment nos. 49-62 on Article 1:101).

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Article 4:101: Scope of Application

Article 4:101: Scope of Application

(1)Subject to paragraph (2), this Chapter is applicable when a security is assumed by a consumer (Article 1:101 lit. (g)).

(2)This Chapter is not applicable if

(a)the creditor is also a consumer; or

(b)the consumer security provider is able to exercise substantial influence upon the debtor where the debtor is not a natural person.

Comments

A.General Remarks

1.Article 4:101 delimits the personal scope of application of the special rules established in Chapter 4 for the protection of consumer providers of personal security.

2.The key term of the “consumer” is defined in Article 1:101 (g) and need not therefore be explained here.

B.Assumption of Personal Security

3. The assumption of a personal security by the security provider as against the creditor is mentioned in Article 1:101 (c). This rule makes clear that the assumption of a personal security is part and consequence of a contract. Since this contract usually – except in certain commercial relations – merely contains obligations of the security provider in favour of the creditor, the latter’s acceptance of the terms offered by the security provider often is not explicit and therefore requires special regulation, cf. Article 1:104. As far as the contents of the contract is concerned, this is governed by the general principle of freedom of contract (Article 1:103). Such freedom, however, is strongly limited by Article 4:102 (2); cf. infra.

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C.Restrictions of the Personal Scope of Application

4. Paragraph (2) of Article 4:101 restricts the application of Chapter 4 in two ways: the Chapter does not apply if either the creditor is also a consumer; or if the security provider can exercise substantial influence upon the debtor provided the latter is not a natural person.

a.The Creditor is Also a Consumer – Para (2) Lit. (a)

5.If not only the security provider, but also the creditor is a consumer, typically there is no necessity of protecting the security provider. The creditor as consumer typically is on the same level of sophistication as the security provider; usually both are weak parties. Therefore, the ordinary contract rules should apply.

6.It would be inadequate to require a typical consumer in the position of the creditor to comply with the special rules of care, duties of information and formality established by Articles 4:103 and 4:105. Due to ignorance of these requirements, many otherwise impeccable contracts of personal security would be void or at least avoidable by the security provider. That risk is inacceptable.

7.Of course, sometimes the creditor, although a consumer, may be more shrewd than the security provider and may therefore “drive a hard bargain” by imposing inequitable terms on the security provider. In such cases, the security provider may invoke the general protective rules of PECL Article 4:109 that were briefly presented in the Introduction to Chapter 4 at no. 2.

b.The Consumer Security Provider with Substantial Influence upon the Debtor (Not a Natural Person) – Para (2) Lit. (b)

8.The exclusion clause of para (2) lit. (b) is inspired by legislation and court practice in some member states. Natural persons who are closely affiliated – whether by legal bonds or by factual influence – with a company, whether or not a legal entity, do not deserve protection like a consumer. Of course, in many cases such persons, in providing a personal security for company obligations, are acting in a commercial capacity, e.g. as managers or directors of a company which has taken credit. However, in practice sometimes major non-commercial shareholders of such a company assume a personal security for financial obligations of the company.

9.Paragaph (2) lit. (b) uses the terms “able to exercise”. It is not required that the person has in fact exercised substantial influence since it would be difficult for an outsider to determine and prove the exercise of such influence in the case at hand. Rather, decisive is the ability of the security provider to exercise such influence. This ability may rest upon legal grounds, e.g. as a holder of the majority of the shares. But it may also be based upon factual circumstances, e.g. as the younger and energetic wife of a majority shareholder. Obviously, this is a factual issue which has to be decided in the light of all the relevant facts.

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Article 4:101: Scope of Application

10. On the application of the provision to a case of co-debtorship for security purposes, see Comment no. 13 on Article 1:106.

D.Mandatory Provision

11. According to Article 4:102 (2), Article 4:101 is a mandatory provision in favour of the consumer security provider.

National Notes

I. Scope of Consumer Protection Provisions in the Member States

1.The scope of the consumer protection provisions in the area of personal security differs between the individual member states in at least two ways. Firstly, there are different concepts of “consumer” (cf. national notes on Art. 1:101 nos. 49 ss.). Not only do the member states apply different criteria as to when a person qualifies as a consumer nor is there unanimity in general as to whether the security provider or the debtor has to be a consumer in order for specific consumer protection provisions to apply (cf. especially national notes on Art. 1:101 nos. 63-66). While within the context of these Rules it is the person of the security provider who is decisive, there is also national consumer protection legislation focussing on the person of the debtor. Such legislation is covered insofar as it indirectly provides protection also for the security provider specifically in relation to consumer matters. Secondly, not all member states embrace the general idea of these Rules, i.e. to apply the consumer protection provisions to all types of personal securities (on the different levels of protection of consumer security providers in the member states, as well as on future perspectives of European regulation in that subject matter, see the research project by the Centre of European Law and Politics at the University of Bremen – ZERP – in co-operation with the University of Oxford, cf. Colombi Ciacchi, Unfair suretyships 281 ss.; Colombi Ciacchi (ed.), Protection of NonProfessional Sureties in Europe: Formal and Substantive Disparity, Baden-Baden, forthcoming 2007).

2.The AUSTRIAN consumer protection provisions apply to several types of personal

security, especially dependent and independent personal securities (ConsProtA §§ 25b para 2, 25c and 25d) as well as assumptions of debt or co-debtorship (§§ 25a

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para 1, 25c, 25d). These provisions do not apply to contracts between an employee and an employer (§ 1 para 4); any form of security assumed by an employee securing a monetary obligation of the employer towards its creditors is forbidden and void (KautSchG §§ 1 and 4). However, the courts also apply the exception corresponding to Article 4:102 (1) (b) of these Rules (cf. infra no. 32) in the present context: OGH 20 Feb. 2003, BA 2003, 957. For GERMAN parallels, cf. infra no. 22.

3.Also in BELGIUM, the main rules applicable to consumer personal securities (ConsCredA arts. 34-37) apply to all personal securities granted in order to secure debts arising from a consumer-credit agreement (not only dependent but also independent

personal securities, Forges 331 no. 195; Lettany 221 no. 253 at 221).

4.Besides the general rules designed to protect the consumer, the most relevant ENGLISH and SCOTS legislation, the ConsCredA and the Consumer Credit (Guarantees and Indemnities) Regulations 1983 (cf. reg. 2), apply to both dependent and independent (i.e. indemnities) personal securities. Further, it seems that the assumption of debt for security purposes is equally covered, since “security” is given a very wide meaning in ConsCredA sec. 189. The UnfContTA 1977 contains a specific consumer protection provision in sec. 3, according to which a contractual term which would exclude or reduce one party’s liability cannot be relied upon against a consumer (or any other person where the other party deals on its written standard terms of business). However, since the ENGLISH law of personal security typically does not protect the security provider by imposing liabilities on the creditor, but by discharging the security provider, this provision is of limited assistance against typical standard terms used by professional creditors to the disadvantage of the consumer security provider: these terms purport to preserve the liability of the security provider despite the occurrence of certain events which would in the absence of any agreement to the contrary lead to a release of the security provider, but these terms do normally not aim at the restriction or reduction of the liability of the creditor (cf. O’Donovan and Phillips nos. 4-160 s.). Whether also the Unfair Terms in Consumer Contracts Regulations 1999 are applicable to security transactions is open to some doubt (cf. O’Donovan and Phillips nos. 4-163 ss.; Andrews and Millett, nos. 3-036 ss.). Even if these provisions were applicable it is argued that “all monies”-clauses, i.e. clauses extending the security provider’s obligation to all sums due by the debtor to the creditor – if written in a plain intelligible language – should not be subject to assessment under the Unfair Terms in Consumer Contracts Regulations 1999, since they are said to fall within the ambit of reg. 6 para 2 lit. a) by defining part of the main subject matter of the contract (Hapgood 719; for the contrary view see O’Donovan and Phillips no. 4-173). The banks, however, have bound themselves in no. 13.4 of the Banking Code (version March 2005) not to take unlimited personal securities by personal customers.

5.In FINLAND the Law on Consumer Protection Chap. 4 §§ 1-4 regulates the protection of consumers. According to Chap. 1 § 2a the provisions in Chap. 4 apply to the Finnish Law on Dependent Personal Securities. The type of a personal security is irrelevant in this context as the Law on Dependent Personal Securities also applies to independent personal securities – but not to those on first demand – (RP 189/1998 rd 17).

6.In FRANCE the consumer legislation, first on Consumer Credit (Loi Neiertz 1989) and later on all types of credit (Loi Dutreuil 2003) applies to dependent personal securities only (cf. respectively ConsC arts. L 313-7 ss. – in particular art. L 313-10-1 – and L 341-1 ss.).

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7.The GERMAN ConsCredA that has been integrated with some modifications into CC

§§491 ss. as of 1 Jan. 2002 is not applicable to dependent personal securities (BGH 21 April 1998, BGHZ 138, 321; Erman/Saenger § 491 no. 21; approvingly: Reinicke and Tiedtke, B4rgschaftsrecht no. 476), but by analogy to assumptions of debt for security purposes (BGH 8 Nov. 2005, WM 2006, 81; BGH 5 June 1996, BGHZ 133, 71, 77 ss.). The applicability to independent personal securities is uncertain. The GERMAN Law on the Revocation of Doorstep Transactions, that has now been integrated into CC

§§312 ss., is according to common opinion of courts and writers generally applicable to dependent personal securities (cf. only Erman/Saenger § 312 nos. 28 s. with further references). The applicability to other instruments of personal security is still uncertain (cf. Erman/Saenger § 312 no. 30). The Law on General Terms and Conditions that was especially intended to protect from surprising or unfair clauses and has been integrated with some modifications into CC §§ 305 ss. applies to all types of contracts including contracts granting security.

8.It is assumed that the GREEK ConsProtA is to apply to every form of onerous contract (Georgiades § 3 no. 85). The personal security is regarded as an onerous contract since the security provider undertakes a burdensome obligation vis- -vis the creditor (Georgiades § 3 no. 102). Hence, the security provider is always considered to be a consumer as defined in ConsProtA art. 1 para 4 lit. a) (except if it assumes the security as part of its profession) and for this reason is deemed to be an amateur and inexperienced, despite the fact that technically the debtor and not the security provider is the “final receiver” of goods or services (Georgiades § 3 no. 86). In addition, this wide meaning of the purpose of the ConsProtA speaks for the application of the consumer protective provisions to every form of security.

9.The IRISH ConsCredA covers only “contracts of guarantee” (cf. sec. 2); it seems that this term is to be understood as being restricted to dependent personal securities. Concerning the applicability of the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995, it seems that this must be subject to the same doubts as in

ENGLISH law (cf. supra no. 4), since the relevant provisions on the scope of application in the IRISH regulations (reg. 3 para 1) resemble the ENGLISH provisions (reg. 4 para 1).

10.ITALIAN ConsC arts. 33-38 on abusive clauses are applicable to every contract concluded between a consumer and a professional (Calvo 69 ss. with reference to the previous CC arts. 1469bis-1469sexies, which have been replaced by DLgs no. 206 of 6 Sept. 2005, ConsC); therefore they apply to both dependent as well as independent personal securities (Falcone 86 ss.). According to the interpretation developed by the Supreme Court, even if the security provider is not a consumer, consumer protection rules should nevertheless apply if the debtor of the secured obligation is a consumer (Cass. 11 Jan. 2001 no. 314, Foro it. 2001 I 1589; Cass. 13 May 2005 no. 10107, Foro it. Mass. 2005, 1203).

11.In the NETHERLANDS, the new Civil Code of 1992 contains in Book 7 both general rules on personal security (arts. 7:850-7:870) and, embedded into these, some specific rules on dependent personal security assumed by consumers (arts. 7:857-7:864).

12.The PORTUGUESE Law on General Contractual Terms (DL no. 446/85 of 25 Oct. 1985) also applies to contracts granting security (STJ 28 May 2002, 1506/02 www.dgsi.pt for contracts of dependent personal security). As to the application of other consumer legislation to security providers there is neither case law nor specific

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literature. The Law on the Banks’ Duty of Information (DL 220/94 from 23 Aug.), however, expressly excludes in art. 2 lit. a) contracts granting security from its scope.

13.In the SCANDINAVIAN member states other than FINLAND the protection of consumer security providers is hardly regulated (very critical on this Andersen and Møgel- vang-Hansen 39 ss., 78 ss.). However, the DANISH ContrA §§ 36 and 38a ss. and the SWEDISH ContrA § 36 juncto Law on Terms of Contracts in Consumer Relationships § 11 apply to both types of personal securities.

14.Although personal securities are very frequently provided by private persons in SPAIN there are no cases on the application of consumer legislation to personal securities, so that the legal situation is uncertain on this point. Literally, although a consumer security provider is not covered by the concept of consumer of Law no. 26/1984 (ConsProtA), Law no. 26/1991 on Doorstep Transactions and Law no. 7/1998 on General Contract Terms, it does fall under the one provided by the underlying EU-Directives. Again, the literal wording of Law no. 26/1984 art. 1 para 2 and art. 3 would exclude a private security provider – who by giving a personal security aims to benefit the debtor but does not receive a service as a final receiver. Since the extension of the SPANISH consumer legislations to all persons covered by the EU-Directives has been intended by the SPANISH legislator (cf. national notes to Art. 1:101 no. 61) it should be concluded that the EUROPEAN concept of consumer is adopted by SPANISH law and therefore Laws 26/1984, 26/1991 and 7/1998 shall be applicable to the contract of personal security where the security provider does not act for professional or business purposes. On the other hand, a contract of personal security does not fall under the scope of Law no. 7/1995 (ConsCredA) art. 1, the content of which corresponds to the one of Directive 87/102 on Consumer Credit (Carrasco Perera a.o. 92).

15.For references on exceptional situations, in which at least some member states do not apply their relevant consumer protection provisions on contracts of personal security although the security provider is a consumer, see infra nos. 29 ss.

II. Application of General Rules and Principles of Law

16.In most member states, protection for typically weak parties is apart from specific consumer protection provisions also derived from the application of general rules and principles of law. For protection of typically weak parties through information requirements and similar institutions based upon rules of general application see the national notes to Art. 4:103 nos. 27 ss.

17.The AUSTRIAN Supreme Court has developed three main criteria for determining whether the assumption of a dependent personal security is void as infringing good morals (CC § 879 para 2 no. 4): (1) an obvious discrepancy between the amount of the security and the economic capacity of the security provider; (2) the circumstances of the assumption of the security, including the “thinning” of the free will of the security provider due to family solidarity; and (3) the knowledge or negligent ignorance of these

factors on the part of the creditor (leading case: OGH 30 June 1998, SZ 71 no. 117 at p. 125 s.; further OGH 28 June 2000, JBl. 2000, 794, 795). In 1997 the legislator enacted a specific rule for personal securities of consumers which has similar, although less stringent prerequisites, but provides for a judicial right to mitigate the obligation of the security provider (ConsProtA § 25d). On the co-existence of this provision and the former case law, cf. OGH 28 June 2000, supra.

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18.In BELGIUM the creditor should see to it that the contract of personal security is drafted precisely, since any inaccuracy is interpreted in favour of the security provider, whereas the creditor may also be liable for it (Van Quickenborne no. 423). Specifically BELGIAN ConsCredA art. 38 § 3 protects the security provider for a consumer credit whose financial situation has aggravated at the time of the creditor’s demand: it can apply to a judge for respites of payment in the same way as a consumer debtor could.

19.Under DANISH law, weak security providers enjoy statutory protection under the general provisions of ContrA §§ 36 and 38a ss.

20.In ENGLISH law, there have been attempts to introduce a broad concept of inequality of bargaining power which was intended to give protection amongst others to security providers in situations where the parties had not met on equal terms (cf. Lloyds Bank v. Bundy [1975] QB 326 (CA)). The House of Lords, however, later rejected this general principle (National Westminster Bank v. Morgan [1985] AC 686 (HL)). It has been argued, however, that in ENGLISH law situations in which such a principle could be relevant are to a great extent solved on the basis of the principle of undue influence (cf. national notes on Art. 4:103 no. 30). Sometimes also the application of the principle of unconscionability has been suggested, but no decision has been based in relation to securities on this concept yet (cf. O’Donovan and Phillips nos. 4-155 ss.).

21.In FRANCE the creditor must ascertain whether the engagement of the provider of dependent security is proportionate to its financial capacity, otherwise damages for contractual liability may fall due (principle of proportionality: Cass.civ. 6 April 2004, Bull.civ. 2004 I no. 110 p. 90). According to FRENCH consumer legislation, the consumer security provider’s obligations are not enforceable if the latter’s engagement was at the time of contracting obviously disproportional in respect of its financial possibilities unless its assets are sufficient at the time of performance. This protective rule on proportionality applies not only to consumers (ConsC art. L 313-10 for consumer credit), but since the «Loi Dutreuil» of August 2003 even if the debtor is a professional (ConsC art. L 341-4 for all credit types). Prior to this Law which extends consumer protection to all debts irrespective of their nature, the creditor could be also liable in the case of excessive engagement, but the provider of dependent security was only partially discharged under CC art. 1382 («Macron decision» Cass.com. 17 June 1997, JCP E 1997, II no. 1007, note Legeais; Cass.civ. 9 July 2003, JCP 2003, II no. 1590, note Casey). The damage suffered was the difference between the amount of the security and the financing capacity of the debtor. The Grimaldi Commission proposed to restrict this protective rule to consumers (CC proposed new art. 2305, excluding securities assumed by entrepreneurs cf. «Nahoum decision» Cass.com. 8 Oct. 2002, RTD civ 2003, 125 ss.; Cass.com. 25 March 2003, RD banc 2003, 207, note Legeais). According to this proposal the liability of the security provider was to be reduced instead of the unenforceability of the security contract or the liability of the creditor. However, this proposal was not enacted by the legislator of 2006.

22.After two interventions of the GERMAN Federal Constitutional Court (BVerfG 19 Oct. 1993, BVerfGE 89, 214 = NJW 1994, 36; BVerfG 5 Aug. 1994, NJW 1994, 2749; for former court practice cf. only Reinicke and Tiedtke, B4rgschaftsrecht nos. 174-180) the GERMAN Supreme Court has developed on the basis of the rule on immoral transactions (CC § 138) a specific practice to protect security providers who assume dependent personal securities that by far exceed their financial possibilities because of their personal relationship to the debtor. Unfortunately, the two divisions of the Supreme Court

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