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Case:
BGH NJW 1994, 1341 Bundesgerichtshof (ninth civil senate) IX ZR 227/93
Date:
24 February 1994
Judges:
Professor B.S. Markesinis
Copyright:
Mr Raymond Youngs

Facts:

The claimant's father worked as an estate agent; besides this he erected and sold flats for owner occupation. When he wanted to extend his credit limit on account no. 172429 from 50,000 to 100,000 DM in 1982, the defendant savings bank invited him to provide a guarantee by his daughter, the claimant. She was 21 years old, earned about 1150 DM net monthly as a manual worker and had no assets at her disposal. On the 29th November 1982 the claimant signed on the defendant's premises an absolute guarantee for a sum of up to 100,000 DM plus additional obligations for the securing of all existing and future demands by the defendant against the principal debtor "from its business connection (in particular from current account, credits and loans of every kind and bills of exchange) as well as from bills of exchange which are submitted by third parties, guarantees, transfers or transmission demands". On the following day the defendant granted the increase in credit. Besides this, the defendant had at that time granted to the claimant's father an interim credit of 3 million DM for the erection of an apartment block. This loan was valued at a sum of about 2.5 million DM when the claimant gave the guarantee. In 1984 the principal debtor gave up his estate agents business and operated as a shipowner, for which he received further loans by the defendant. When about two years later he suffered a loss of assets, the defendant terminated all credit. The principal debtor's liabilities since the day when the claimant signed the guarantee continually amounted to more than 100,000 DM. The claimant initially claimed a declaration of the invalidity of her guarantee. When the defendant had raised a counterclaim for payment of 100.000 DM together with interest, the parties both declared the claim in the main action as closed.

The Landgericht allowed the counterclaim. The appeal court rejected it. On the defendant's appeal in law, the Senate restored the decision at first instance by a judgment of the 16th March 1989 (reference omitted). This judgment was quashed by a decision of the Federal Constitutional Court of the 19th October 1993 (NJW 1994, 36 = ZIP 1993, 1775) and the matter was referred back to the Senate. The appeal in law was unsuccessful.

Grounds:

I.

The appeal court rejected the claim for payment because the claimant had a claim to compensation for fault in contractual negotiations which obliged the defendant to release the claimant from the guarantee.

The bank admittedly does not need to explain about the risk of the guarantee. It ought not however to trivialise the nature, scope and risk of the guarantee liability - in particular to a guarantor who is recognisably inexpert in business - and thereby influence the exercise of his will. Something like this had happened here. According to the credible testimony of the claimant's father the gist of the defendant's employee's explanation before the signature was: "Here, please, just sign this. It doesn't mean you're entering into any big obligation; I just need it for my records". The claimant was given the impression by this statement that not much could happen to her in the end result. The defendant's agent had thereby grotesquely played down the importance of the liability undertaken. The claimant would not have given the guarantee if the defendant's employee had not trivialised the risk associated with the obligation.

II.

These observations stand up to legal examination in the end result. As a result of the special circumstances in which it came into existence, the guarantee contract with the principal debtor's daughter violates good morals and is therefore void (§ 138 (1) of the BGB).

1...

2. A legal transaction is only void under § 138 (1) of the BGB if it contradicts good morals in its total character, as deduced from a combination of its content, motive and purpose, in which connection only the circumstances surrounding the conclusion of the contract are to be taken into account (references omitted). The fact that the content of the contract is merely disadvantageous to the claimant to a substantial extent does not of itself place the validity of the guarantee in question. Guarantees as a rule simply by virtue of statute law have as their object a unilateral obligation in favour of the creditor. The content and sense of such a contract consist in principle exclusively in granting to the creditor a security for certain claims against the principal debtor. The guarantee is therefore not characterised structurally by a reasonable and in principle equivalent consideration of mutual interests: in its legal core it is intended to provide advantages for one side only.

3. The obligation entered into is also not subject to legal disapproval just because the guarantor at the point in time of her declaration of intention did not have the income or the assets for the fulfilment of the obligations for which she is to be liable. The private autonomy guaranteed by the Constitution within the framework of statute and law includes, amongst other things, the freedom to conclude contracts. This forms a fundamental basis for the current private legal order. It follows from freedom of contract that everyone must in principle be at liberty to conclude even risky transactions on their own responsibility and commit themselves to obligations which can only be performed under especially favourable conditions, if necessary by utilisation on a continuing basis of income not subject to attachment. This principle which shapes the case law of this senate (references omitted) is agreed by the eleventh senate of the Bundesgerichtshof (references omitted). As a rule, every person with unlimited legal capacity may recognise that by a guarantee he enters into a substantial personal risk, assess the consequences of his action appropriately and make his decision accordingly. It is necessary to proceed initially on this basis, even if the guarantor is a close relative of the principal debtor (references omitted).

4. If the guarantor commits himself to an extent which far exceeds his income and assets as they exist at present and are to be expected in the future, such a contract can however be void under § 138 (1) of the BGB if the guarantor is also substantially burdened by further circumstances in a manner attributable to the creditor which lead to an intolerable inequality of the contracting partners. Such burdens can in particular arise from the fact that the creditor exploits the guarantor's lack of business experience or emotional predicament or impermissibly interferes with his freedom of decision in some other way.

5. The claimant's father has influenced her decision to make a commitment to the savings bank in a manner which meets with legal disapproval - in violation of § 1618a of the BGB. These circumstances are to be attributed to the defendant, because it has been at least grossly negligence in leaving out of consideration the effect on the guarantor.

a) The private autonomy which is protected by the basic rights can only justify the conclusion of transactions which are risky and at the same time unilaterally burdensome in so far as both partners are in a position to decide freely for or against a contractual commitment. It is only this freedom as well as the unrestricted possibility of knowing the legal consequences associated with the obligation in question, which can provide justification for holding the guarantor to the decision which he has made on his own responsibility in spite of legal consequences which are exceptionally disadvantageous to him (reference omitted). The danger of a free decision by the guarantor being unreasonably restricted exists especially when young adults who are still being educated or are at the start of their working careers (or, to put it differently, are inexperienced in business matters) are asked by their parents to undertake for their benefit liability for obligations arising from legal transactions in which the children themselves have no legal or economic interest of their own. If parents approach them with such a request it is precisely these young adults who have only reached full age a year or two ago and whose personal relationship to their parents is undisturbed who in making their decision will allow themselves to be led chiefly by the wish to comply their parents' wishes. It is in just this situation that it can easily happen that emotional considerations take first place and the guarantee is given, trusting solely on the abilities and good intentions of the parents. In such cases it is therefore especially natural for the guarantor to suppress the need to make himself aware of the substantial risk which he enters into for his future lifestyle. Young adults, who as a rule still have little business experience, are especially in danger of not deciding freely and soberly in such a situation and of complying without greater reflection with the wishes of their parents out of an emotional predicament. They can at that time scarcely see the extent of the consequences which their signature possibly carries with it.

b) Attempts by parents to obtain from their children who have attained full age a guarantee which far exceeds their financial capability purely out of readiness to help the family is frequently questionable morally and not reconcilable with the duties existing even to children of full age. The nature of the right to maintenance, and especially the provision in § 1618a of the BGB introduced by the new regime on the law of parental care, make it clear that parents and children owe each other assistance and consideration throughout their lives (references omitted). This norm forms the basis of genuine legal duties, although admittedly no direct sanctions are linked to their violation (references omitted). In particular the duty of consideration can require the putting aside of one's own wishes, if this is objectively required on sensible balancing with the interests of the other party. If parents induce their children to provide a guarantee which has as its consequence that they must make substantial payments to the creditors on occurrence of the risk for the foreseeable future, or even for the length of the children's lives, they cause lasting danger to the entire independent nature of their lives which are frequently just in the process of construction. An effect of this kind on children who have attained full age is in contradiction to the behaviour prescribed by § 1618a of the BGB for the mutual relationship of parents and children, and is also in principle irreconcilable with generally recognised views about the responsibility of parents towards their grown up children.

The claimant was not in a position on the conclusion of the contract ever to pay off a commitment of 100,000 DM plus interest. She earned a mere sum of approximately 1150 DM a month as an unskilled worker. No grounds have been put forward for saying that her income and assets could possibly fundamentally improve in the future. The claimant, who was at that time 21 years old, was also unexperienced in business matters. After her secondary school leaving certificate she had been unemployed for a lengthy period, had only carried out temporary clerical work in her father's office, and had only just accepted a job as a worker in a fish factory. Indisputably the granting of credit did not serve the claimant's own interests. Instead the father had acted exclusively in the pursuit of his own business interests. The risk which he asked his daughter to take was not negligible even if he was at that time in good financial circumstances, because he had further commitments to a sum of about 2.5 million DM with the defendant in connection with the erection of an apartment block.

c) The circumstances mentioned are admittedly primarily those which characterise conduct contrary to good morals in the relationship between principal debtors and guarantors. They are however not without influence on the legal relationship of the guarantor to the creditor bank. It is true that the bank must not be expected to ascertain in the individual case whether the guarantor is actually restricted in his freedom of decision, and in particular whether and in what way the parents have exercised pressure on their children. However the danger which has been described, into which the guarantor frequently falls in such cases, has effects on the requirements for the conduct of the bank, when it is a question of which securities it asks for and accepts from the borrower. Suppose that the bank in its view needs a security for a loan which has been applied for, and it therefore makes the payment of it dependent on the customer providing a guarantee by his child of an amount which probably far exceeds the child's financial capacity. The question inevitably arises as to whether exertion of influence by the principal debtor on the guarantor which should be disapproved both morally and legally was known to the creditor or whether it had deliberately closed its mind to such knowledge. It this is so, the borrower's conduct which violates § 1618a of the BGB is to be attributed to the credit institution. This as a rule justifies regarding the guarantee itself as contrary to good morals. The bank may not therefore in principle approach its customer with a request to provide it with a child's guarantee as security, if the child is still inexperienced in business matters, has no interest of his own in the granting of credit, and on the occurrence of the risk will probably not be in a position to pay off the secured obligation for a lengthy period. In so far as the Senate in earlier judgments has not attached appropriate importance to the dangers set out for the guarantor's freedom of decision and the duties of the bank which follow from this (references omitted), this view is no longer adhered to. The defendant invited the account holder to supply his daughter's guarantee in the sum of 100,000 DM. The claimant's own interest did not come into it.

The excessive requirements imposed upon her would have forced themselves upon the defendant's attention, even if they were not positively known to it, because the defendant could not seriously suppose that the claimant would be in a position to pay off, if necessary, 100,000 DM plus all accumulated interest in the foreseeable future. It is necessary in principle to assume that young adults who are still in training or only just at the start of their vocational development do not have substantial assets or much above average income, in so far as concrete facts do not indicate the contrary. This applies especially when the parents cannot offer the bank any other securities and for this very reason have to rely on the child's guarantee in order to obtain the credit sought. Accordingly the defendant could not help knowing that the claimant entered out of inexperience into a commitment which, on the occurrence of the risk, would completely overtax her financially.

It also corresponds to usual bank custom to examine the securities on the performance of which the payment of the loan is to depend for their value, because without appropriate findings the security agreement cannot as a rule fulfil its economic purpose. If, on the other hand, the bank has refrained from appropriate investigations in relation to children of the principal debtor who give a very high guarantee, this as a rule only allows the interpretation that the financial circumstances of the guarantor were either unknown to it or it had deliberately closed its mind to knowledge of what value the security offered.

6. The credit institution is exerting an influence on the guarantor's decision in an impermissible manner if, through its employees, it plays down the consequences of the guarantee and in particular represents the signature as a pure formality (reference omitted). Such conduct, especially in relation to a guarantor who is inexperienced in business and closely related to the principal debtor, can create the impression that he has nothing serious to fear and so keep him from concerning himself in more detail with the content of the document produced. What the bank employee S explained about the meaning and scope of the guarantee before the claimant signed the form was appropriate to conceal from her the risk of liability and the dangers for her future lifestyle as a whole associated with this. This conduct seriously restricted the claimant in her freedom to make decisions objectively and with careful consideration.

a) The appeal court accepts that the defendant had trivialised the guarantee liability to the claimant and had in fact minimised it; and had therefore influenced her in the determination of her will in an impermissible way. This assessment withstands the challenges of the appeal in law.

...

cc) The appeal court considers that the defendant's employee played down the scope of the risk as well as the extent of the liability. Its statement was therefore appropriate to convey to the claimant the impression that nothing much could happen to her in the end result. This view is based on an interpretation of the declaration - in principle left to the judge of fact - and is only to be examined by the court dealing with the appeal in law to see whether it violates statutory rules of interpretation, rules of logic or experience, or procedural provisions (constant case law: reference omitted). Such a mistake must, contrary to the view held by the Senate in the judgment of the 16th March 1989 (reference omitted), be denied. If the creditor states in negotiations for a guarantee that the whole affair is a matter of form, then the participants may frequently be able to recognise it as merely a general form of speech without any statement in its content about the scope and importance of the risk (reference omitted). However, the explanations of the defendant's employees went substantially beyond such a statement.

The combination of an indication that it was not a question of any great obligation with an additional remark that the statement was required for the records could create the false impression with the person addressed that the desired guarantee was substantially a formality. The statement of the employee S was also not so unambiguous in its content that the claimant had to understand it merely as a reference to the creditworthiness of her father. The appeal court also considered that the claimant at that time possessed no experience of any kind in bank transactions and thus correctly took into account the viewpoint of the recipient.

b) Considering all the circumstances of the case in dispute, it was also especially reprehensible at a time when the father's creditworthiness could be assessed favourably, to play down to the claimant the risk of the guarantee in such a manner.

aa) Indisputably the claimant was to provide the guarantee in order that the credit limit on the father's open account could be increased from 50,000 DM to 100,000 DM. Therefore the liability was limited, by amount, to 100,000 DM - plus interest and costs. As however the guarantee referred, according to the form which constituted the document, to all the defendant's demands arising from the banking business relationship with the claimant's father, she also, to the extent mentioned, provided security for the loan obligation of (at that time) 2.5 million DM from the building project. The risk incurred by the claimant was therefore immediately far higher than it might appear from looking only at the increased open account credit. That exceptionally high demand by the defendant was indisputably not raised when the guarantee form was put before the claimant.

bb) Besides this, the claimant was, by the presence of her father who had accompanied her to the bank with the intention of obtaining the credit sought as a result of her signature, in any case in a position which made it especially difficult for her to decide wisely and with careful consideration.

cc)...

c) The bank must be responsible under § 278 of the BGB for the impermissible exercise of influence by its employee on the determination of the claimant's will. Beside this what is said above (5c) applies correspondingly for the subjective characteristics necessary under § 138 (1) of the BGB. The established circumstances justify the presumption that the claimant has signed the guarantee as a result of her psychological predicament. Whether the father's conduct alone suffices for this or the trivialising statements of the bank's employee were part of the cause, can remain undecided because both pieces of conduct are to be attributed to the defendant within the framework of § 138 (1) of the BGB (references omitted).

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