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24 February 1994, NJW 1994, 1341

Bundesgerichtshof (Ninth Civil Senate) 24 February 1994, NJW 1994, 1341

The plaintiff’s father worked as an estate agent. He was also involved in developing and selling flats. When in 1982 he requested the defendant savings bank to increase his borrowing limit for account no. 172429 from DM 50,000 to DM 100,000, the defendant requested him to provide a guarantee from his daughter, the plaintiff in this action. At this time, the plaintiff was 21 years old, earned some DM 1,150 net per month as a blue collar worker and did not dispose of any assets. On 29 November 1982, the plaintiff signed at the defendant’s premises an absolute guarantee for the amount of up to DM 100,000 plus collateral debts in order to secure all present and future claims which the defendant had against the principal debtor “arising from its business relationship (in particular from current account, credits and loans of any kind, and bills of exchange) as well as bills of exchange handed in by third parties, guarantees, assignments or subrogation”. The following day, the defendant granted the extension of the credit. At that time, the defendant had also granted to the plaintiff’s father a bridging loan amounting to DM 3 million for the construction of a multiple private dwelling. This loan was valued at some DM 2.5 million at the time when the plaintiff provided the guarantee. In 1984, the principal debtor gave up his estate agency and became a shipowner, for which he received further credits from the defendant. When his assets deteriorated two years later, the defendant called in all credits. From the day when the plaintiff signed the guarantee, the principal’s debts continued to exceed DM 100,000. The plaintiff initially filed a declaratory action, claiming that the contract of guarantee was void. When the defendant brought a counterclaim for the payment of DM 100,000 plus interest, both parties declared the main action to be settled.

The Landgericht allowed the counterclaim. The Appeal Court dismissed it. On appeal by the defendant, this Senate, by judgment of 16 March 1989 (NJW 1989, 1605 …), restored the judgment of the first instance. This judgment was quashed by the decision of the Bundesverfassungsgericht of 19 October 1993 (NJW 1994, 36 …), and the case was referred back to this Senate. The appeal did not succeed.

Reasons

I. The Appeal Court refused the action for payment on the ground that the plaintiff had a claim for compensation in pre-contractual liability, which obliged the defendant to relieve the plaintiff from the guarantee.

In the Appeal Court’s view, a bank is not required to inform about the risk involved in a guarantee. However, a bank must not trivialize the type, scope or risk of the guarantor’s liability and thereby influence his decision, in particular if the guarantor is obviously inexperienced in business matters. Precisely this had happened in this case. According to the credible account by the plaintiff’s father, the employee acting for the defendant before signature made a representation to the effect of: “Would you just sign this here, please, this won’t make you enter into any important obligation, I need this for my files.” This created the impression on the plaintiff that not much could happen to her at the end of the day. By this, the defendant’s agent had grotesquely trivialized the significance of the liability which the plaintiff had assumed. The plaintiff would not have provided the guarantee if the defendant’s employee had not trivialized the risk which was connected with this obligation.

II. These explanations withstand legal examination, as far as the outcome is concerned.
Due to the particular circumstances under which the guarantee contract was concluded with the principal debtor’s daughter, this contract offends good morals and is thereby void (§ 138 I BGB).

1. …

2. A legal transaction is void under § 138 I BGB only if its entire character, as it results from content, motivation and purpose taken together, offends good morals, for which only those circumstances are to be taken into account which prevailed at the conclusion of the contract (references omitted). The mere fact that the content of the contract placed a considerable burden on the plaintiff and only the plaintiff, cannot in itself question the validity of the guarantee. By operation of the law, the content of such a contract will as a rule be a unilateral obligation in favour of the creditor. Generally, the content and purpose of such a contract consist merely in providing the creditor with a security for certain claims against the principal debtor. By its structure, the guarantee is therefore not characterized by an appropriate and in principle equal consideration of mutual interest but, by its legal nucleus, is aimed at providing benefits to one party only.

3. Likewise, the obligation which has been assumed does not merit disapproval by the law merely because at the time of her declaration of intention, the guarantor did not dispose of the necessary income or assets for performing the obligations for which she was to be liable. The Constitution guarantees freedom of contract within the legal framework, which includes the freedom to design the rules of a contract. This forms an important foundation for the present private legal order. It follows from the freedom of contract that a person must generally be free to enter into risky transactions at his own responsibility and to undertake an obligation which can only be performed under particularly favourable circumstances, if necessary by permanent use of all the income which exceeds the protected earnings rate. This principle, which has dominated the jurisprudence of this Senate (references omitted) has been approved by the Eleventh Civil Senate of the BGH (reference omitted). As a rule, any person with the unlimited capacity to contract is in a position to realize that a guarantee implies the assumption of a considerable personal risk, to assess the consequences of such conduct accordingly, and to reach a decision on this basis. In principle, this also applies if the guarantor is a close relative of the principal debtor (references omitted).

4. However, if the guarantor assumes an obligation the amount of which exceeds by far his present and potential future income situation and assets, such a contract can be void under § 138 I BGB, if additional circumstances, which can be attributed to the creditor, levy a considerable additional burden on the guarantor and lead to an intolerable imbalance between the parties to the contract. In particular, such burdens can be caused if the creditor exploits the guarantor’s inexperience in business matters or a mental predicament, or exerts undue influence on his freedom of decision in another way.

5. The plaintiff’s father has influenced her decision to assume liability towards the savings bank in a manner which must be disapproved of by the law, i.e. which violated § 1618a BGB. These facts can be attributed to the defendant, who was at least grossly negligent not to consider such influence on the guarantor.

(a) Freedom of contract, which enjoys protection as a basic right, can justify the conclusion of risky and at the same time unilaterally burdensome contracts only if both parties are in a position to decide freely in favour of or against being bound by a contract. It is this freedom, combined with an unrestricted opportunity to understand the potential legal consequences of the obligation in question, which alone can justify why a guarantor should be bound by a decision which he reached in his own responsibility even if the legal consequences prove extraordinarily burdensome (BVerfG NJW 1994, 36 …). The danger of the guarantor’s freedom of decision being unreasonably restricted exists particularly in situations where young adults, who either have not completed their education or are at the beginning of their professional activity (in other words: who are inexperienced) are asked by their parents to assume liability in their favour for legal transactions in which the children take no legal or economic interest of their own. If parents impose such a request on them, young adults in particular, who have reached majority only a few years ago and who enjoy an undisturbed relationship with their parents, will mainly be led by the desire to accede to the parents’ request. It is in these situations in particular that emotional considerations can easily be uppermost in their minds, and that the guarantee is granted solely in full trust in the parents’ abilities and good intentions. In such situations guarantors are highly liable to repress from their minds the considerable risks which they enter into as regards their own designs on life. Young adults, who normally have little business experience, are particularly at risk in such a situation that they do not decide in a free and matter-of-fact way, but that they comply with the parents’ request out of mental predicament or without serious consideration. They will hardly be in a position to envisage the scope of the consequences, which their signature could possibly entail.

(b) If parents require their children, after they have reached majority, to provide, for the sole motive of helping their family, a guarantee which by far exceeds the childrens’ financial capacity, such a request will frequently be questionable from a moral viewpoint and be incompatible with the duties of parents which continue to exist towards adult children. The way in which maintenance obligations are designed, but even more so the provision of § 1618a BGB, which was inserted when the law of custody was reformed, make it clear that parents and children owe to each other assistance and consideration for the entire span of their lives. This norm creates true legal duties, even if their violation does not lead to immediate sanctions (reference omitted). It is the duty of consideration in particular which can necessitate that personal interests must be put aside if they are to be reasonably balanced with the interests of the other family members. If parents cause their children to provide a guarantee with the consequence that, if the risk materializes, the children will have to make substantive payments to the creditor over an unforeseeable period or perhaps for the rest of their lives, the parents thereby expose to lasting danger the children’s entire independent plans for life, which will frequently not yet have advanced beyond an early stage. Exerting such influence on children, who have reached majority, contradicts the conduct which § 1618a BGB requires for the mutual relationship between children and parents, and is fundamentally irreconcilable with generally acknowledged views on the responsibility of parents towards their adult children.

At the time of the conclusion of the contract, the plaintiff was not in a position ever to pay an obligation amounting to DM 100,000 plus interest. As an unskilled worker, she earned no more than some DM 1,150 per month. Nothing has been submitted to show that her income situation or assets could possibly fundamentally improve in the future. The plaintiff, who was 21 at the time, was also inexperienced in business matters. After having completed her Hauptschulabschluß (approximately GCSE), she was unemployed for a long time, had only temporarily performed some clerical work in her father’s office, and had just started in a position as a worker in a fish factory. It is not disputed that the granting of the credit did not serve the plaintiff’s own interests. On the contrary, the father acted solely in pursuit of his own economic interests. The risk, which he placed on his daughter, could also not be considered negligible, as he had additional obligations towards the defendant in connection with the construction of a multiple private dwelling, amounting to some DM 2.5 Million.

(c) It is true that all these circumstances primarily characterize a conduct which offends good morals in the relationship between the principal debtor and the guarantor. But these circumstances are not without influence on the legal relationship between the guarantor and the creditor bank. It is true that a bank cannot reasonably be expected to investigate in each individual case whether the guarantor was restricted in his freedom of decision, and in particular whether and in which way parents have exerted pressure on their children. However, the abovementioned danger, to which the guarantor is frequently exposed in such cases, influences the kind of conduct which the bank must show as regards the securities which the bank requires and accepts from the borrower. If a bank deems it necessary to require securities for a requested loan, and for this reason makes payment conditional on the borrower procuring a guarantee by his child for an amount which expectedly exceeds by far the child’s financial capacity, the question will necessarily arise whether the creditor was aware of the morally and legally unacceptable influence which the creditor exerted on the guarantor, or whether it deliberately closed its mind to such insight. If this is the case, the borrower’s conduct, which violates § 1618a BGB, will be attributed to the bank. This will regularly warrant the conclusion that the guarantee in itself is considered void. Therefore, the bank generally must not impose on the client the request to provide as a security a guarantee by a child which is still inexperienced, which has no own interest in the granting of the credit, and which expectedly will be unable for a longer period of time to pay the secured debt if the risk materializes. To the extent that this Senate in previous judgments did not attach the same meaning to the above-mentioned dangers for the guarantor’s freedom of decision and the resulting obligations of the bank (references omitted), the Senate no longer adheres to that view. The defendant requested the account holder to provide a guarantee by his daughter for the sum of DM 100,000. The plaintiff’s own interests were not involved. The defendant could not help noticing or even positively knew that the plaintiff would be economically overtaxed, as the defendant could not seriously assume that the plaintiff would be in a position to pay DM 100,000 plus all of the accumulated interest within a foreseeable period of time should the occasion arise. On the contrary, the general assumption must be that young adults, who have not completed their education or find themselves at the beginning of their professional development, do not dispose of considerable assets or an income which far exceeds the average, unless there is clear evidence to the contrary. This is particularly true if the parents themselves are not in a position to provide other securities to the bank and for this very reason depend on their child to provide a guarantee in order to obtain the desired credit. This is why the defendant could not help noticing that the plaintiff, through lack of experience, entered into an obligation which would utterly overtax her financially if the risk materialized.

It is also common practice in banking that the securities which need to be provided in order for the loan to be paid out are examined for their value, as without such examination the economic purpose of this security agreement can, as a rule, not be fulfilled. On the other hand, if a bank decides not to make such enquiries in cases where the children of the principal debtor provide securities for very large amounts, this will, as a rule, leave no other possible interpretation than that they were either aware of the guarantor’s financial circumstances, or that they deliberately closed their eyes towards the value which this security would provide.

6. The bank itself exerts undue influence on the guarantor if its employees trivialize the scope of the guarantee, in particular if they purport the signature to be a mere formality (reference omitted). In particular as regards inexperienced guarantors, who additionally are close relatives of the principal debtor, such conduct can create the impression on the guarantor that there is nothing serious to worry about, thereby preventing the guarantor from having a closer look at the content of the document. The representation which S, an employee of the bank, made as regards the meaning and the scope of the guarantee before the plaintiff signed the document, was apt to obscure the risk of such liability and thereby the dangers which this would impose on what the entire future would hold for the plaintiff. This conduct gravely impaired the plaintiff’s freedom to reach a matter-of-fact and balanced decision.

(a) The Appeal Court assumes that the defendant played down and even trivialized the guarantor’s liability towards the plaintiff, and therefore exerted undue influence on the determination of her will. This appreciation withholds the appeal’s attack.
(aa) … (bb) …

(cc) The Appeal Court believes that the defendant’s employee played down both the degree of the risk and the scope of the liability. Therefore, his statement was prone to create the impression on the plaintiff that not much could happen to her at the end of the day. These findings are based on an interpretation of this statement, which is a question of facts to be decided by the lower courts, and which on second appeal can only be examined as to whether they violate statutory rules of interpretation, rules of logic, empirical standards or rules of procedure (references omitted). Contrary to the view expressed by this Senate in its judgment of 16 March 1989 (= NJW 1989, 1605, …), no such violation has occurred. If the creditor declares during guarantee negotiations that the entire matter is a formality, it may frequently be obvious to the parties concerned that this is but an empty generalization which says nothing about scope and importance of the risk (reference omitted). The representations made by the defendant’s employee, however, went beyond such a declaration. It is particularly the combination of the hint that this was no important obligation and the additional statement that this declaration was needed for the files which could create the inaccurate impression on the addressee that the requested guarantee was in its essence a formality. Neither was the representation made by the employee S unambiguous enough for the plaintiff to necessarily understand it as a mere reference to the financial soundness of her father. In addition, the Appeal Court considers that at this time the plaintiff did not have the slightest experience with banking business. Thereby, the Appeal Court is right in referring to the perspective of the recipient of the declaration.

(b) But even if the father’s financial soundness was to be considered as favourable at the time, it was, in view of the entire circumstances of the disputed case, particularly reprehensible to trivialize the guarantor’s risk towards the plaintiff to such an extent.

(aa) It is not disputed that the plaintiff was to provide the guarantee in order for the credit line on the father’s current account to be extended from DM 50,000 to DM 100,000. This is why liability was limited to the amount of DM 100,000 plus interest and costs. However, since the guarantee, according to the standard form content of the document, related to all claims which the defendant had against the plaintiff’s father arising from their banking business relationship, this implied that the plaintiff also secured to this amount the credit obligation amounting to DM 2.5 million at that time which arose from the building project. By this fact, the risk which the plaintiff had incurred was instantly much higher than it might have appeared if one had looked only at the extended current account credit. It is not disputed that this extraordinarily high claim, which the defendant possessed, was not mentioned when the plaintiff was presented with the guarantee contract form.

(bb) In addition, the plaintiff was already in a position which made it particularly difficult for her to decide in a reasonable and balanced way due to the presence of her father, who had accompanied her to the savings bank with the intention of obtaining the desired credit by her signature.

(c) Under § 278 BGB, the bank must account for its employee’s undue influence on the determination of the plaintiff’s will. As regards the subjective requirements under § 138 I BGB, the findings made supra (5) (c) apply mutatis mutandis. The above-stated circumstances justify the assumption that the plaintiff signed the guarantee contract as a consequence of the mental predicament which she had been caused. It can be left open whether the father’s conduct sufficed for this, or whether the trivializing representations made by the saving bank’s employee were an additional cause, as the defendant must account for either conduct within the framework of § 138 I BGB (reference omitted).