20 November 2007

Chantal Mak on Fundamental Rights in European Contract Law

My good friend Chantal Mak (University of Amsterdam) has a forthcoming book with Kluwer Law International on the hot-hot-hot topic of fundamental rights in private law (C. Mak, Fundamental Rights in European Contract Law: A comparison of the impact of fundamental rights on contractual relationships in Germany, the Netherlands, Italy and England, The Hague: Kluwer Law International 2007, forthcoming. The study, to my mind, is not only a wonderful source of information on fundamental rights in private law litigation in a numer of European countries, but also a highly interesting case-study of Duncan Kennedy's work on autonomy and solidarity in private law. With Chantal's very gracious permission (and that of her publisher), here's an exclusive preview written by Chantal herself.

Summary and conclusion

The application of fundamental rights in contractual disputes brings together questions of constitutional law and private law. What is the relation between these rights, originally protecting citizens against the State, and the contractual ties that bind private parties to each other, in a realm in which State intervention traditionally has been limited to setting the framework within which parties are free to arrange their interrelations? Under which circumstances can contractual disputes be resolved on the basis of fundamental rights argumentation? And what would be the added value of this method in comparison to the traditional contract law balancing of interests?
In this study, the subject has been approached from the perspective of contract law, in order to find out how the introduction of issues of public interest in this field can be justified from there and what are the dynamics of fundamental rights integration into the contract law balance of interests. Attention has been paid to both constitutionally protected rights and rights safeguarded by international human rights treaties, such as the European Convention on Human Rights (ECHR). A comparison has been made between four European legal systems, viz. Germany, the Netherlands, Italy and England, so as to contribute to the current debate on the development of contract law in Europe.

Chapters 1 and 2: freedom of contract and fundamental rights in European contract law cases

Case law examples illustrate the main problems related to the theme. A central issue is the limitation of freedom of contract through fundamental rights argumentation. From the opposite perspective the question arises to what extent parties are allowed to use their freedom of contract to agree on waivers or restrictions of their fundamental rights.
German law has recognised a reciprocal effect, or Wechselwirkung, of fundamental, constitutional rights and norms of private law since the 1950s. The Bundesverfassungsgericht, the German Federal Constitutional Court, established that all private law should comply with the objective order of values protected by the Constitution (BVerfGE 7, 198, Lüth). In case law, this could be realised especially through the interpretation of the general clauses of private law. In the 1990s the Court extended this doctrine to include the judicial review of the contents of contracts, based on the interpretation of ‘good morals’ and ‘good faith’ in the light of fundamental rights. Thus, a non-competition clause in a commercial agency contract could be contested for its serious restriction of the agent’s free choice of profession (BVerfGE 81, 242, Handelsvertreter). And a surety agreement signed by a non-pecunious daughter on behalf of her father could be annulled with an eye on the protection of private autonomy and the principle of the social state (BVerfGE 89, 214, Bürgschaft).
In Dutch law, similar rules have been developed in case law determining the impact of fundamental rights on the colouring of general clauses of private law. Examples have been found of the Hoge Raad indicating the role of the fundamental right to teach in the adjudication of the legality of a contract stipulating the waiver of the right to teach mensendieck exercises in the case of a failed examination (NJ 1970, 57, Mensendieck I; and NJ 1971, 407, Mensendieck II). Moreover, co-operation in an hiv test for the benefit of another, and accordingly an infringement of the right to physical integrity, could be justified not only on the basis of tortious liability against that person (NJ 1994, 347, Aids-test or hiv-test I), but also on the basis of a duty of care resulting from contractual good faith (NJ 2004, 117, hiv-test II or dentist). Although the Dutch courts tend to lean towards a somewhat less dogmatic approach than their German counterparts, the rules established in these cases resemble the German theory of reciprocal effect or Wechselwirkung between fundamental rights and private law.
Using Italian and English law as touchstones, representing a Romanistic and a Common Law perspective respectively, it has been confirmed that fundamental rights have affected the development of private law doctrines. An impact can be felt through the judicial review of the contents of contracts with requirements of good faith (Italy), while at the very least fundamental rights may stimulate the extension of doctrines of private law to new cases (England). At the same time, Italian case law has demonstrated a greater emphasis on fundamental rights protection than German and Dutch examples, since Italian judges have applied fundamental rights to interpret rules of contract law, while paying relatively less attention to the reverse effect of contract law norms on the interpretation of the fundamental rights of contract parties. English common law, on the other hand, has not yet elaborated the role of fundamental rights, protected by the ECHR and given effect through the Human Rights Act 1998. It has, accordingly, sought to remain within recognised doctrines of private law, for instance breach of confidence, rather than introduce fundamental rights, such as a right to privacy.

Chapter 3: from direct/indirect effect theories to a legal-political perspective

The questions raised in the case law have often been analysed in terms of direct and indirect effects of fundamental rights. A direct effect implies that a fundamental right is applied to a case between private parties in the same way as it would be applied to a case involving the State. Indeed, it is held that fundamental rights may be infringed by private parties in a similar way as by the State and should therefore be given effect in contract law as in public law. The theory of indirect effect rejects this view, arguing that private parties in principle are not addressees of fundamental rights and cannot be requested to take into account matters of public interest in their interprivate relations. Fundamental rights, from that perspective, can at most serve as an inspiration for the solution of contractual disputes in which values protected by these rights are at stake. Case solutions should, however, always be embedded in norms of contract law.
Building on Chapters 1 and 2, it has been argued that a systematisation of case law according to the distinction between direct and indirect effects cannot fully explain the role of fundamental rights in European contract law. Even though a differentiation may be made between forms of direct and indirect effects, these do not prescribe the manner in which judges should handle fundamental rights arguments in specific cases. In particular, the theoretical framework does not provide clear guidelines for establishing the intensity of the impact of these rights. The reason for the fact that the direct/indirect effects distinction cannot clarify the relationship between constitutional law and contract law, it has been submitted, is that it is defined by this relationship itself: someone who considers constitutional law to be superior to contract law will favour a direct effect of fundamental rights, whereas someone who seeks to preserve the autonomous nature of contract law will prefer an indirect manner of giving effect to these rights. Trying to distill more general rules on the application of fundamental rights in contract cases from the specific case examples showing these varying effects thus unintentionally brings to mind Baron von Münchhausen pulling himself out of the swamp.
In order to overcome this impasse, a new perspective of analysis has been proposed, suggesting a comparative exploration of the legal-political aspects of the topic. The choice for this point of view is based on the characteristics of fundamental rights application in contract cases. Often, it seems that judges in civil cases balance interests rather than rights of the parties and, consequently, the values and interests protected by fundamental rights are included in this process. An essential difference between interests secured by fundamental rights and interests safeguarded through private law rules and principles, however, is that the former bear a relation which is much closer to issues of public policy than the latter. After all, they represent the views of society on values that are so fundamental that they should be guaranteed on all levels of public law as well as private law. From this presumption, it follows that the intensity of the impact of fundamental rights in contract law depends on considerations of a legal-political nature. Consequently, the analysis of case law developments from a comparative legal-political perspective raised the expectation that it could clarify the mediating role of fundamental rights between contract law and its politics and could thus define more specific criteria for the application of these rights in contractual disputes.

Chapters 4 and 5: judicial denial of the stakes of autonomy and solidarity hypothesised

In Chapter 4 the framework for the legal-political analysis has been further elaborated. Taking Duncan Kennedy’s work on political stakes in contract law issues as a starting point, it has been argued that rule-solutions for contractual problems represent the sums of balances struck between principles of autonomy and solidarity in contract law. Autonomy here refers to self-determination, within the boundaries defined by the autonomy of others. Solidarity is understood as implying sacrifices made on behalf of others and, other than in Kennedy’s definition, in particular the sacrifices required from a stronger party towards a weaker party aimed at restoring the equilibrium in their relationship.
Rule-solutions represent the sum of subcomponents of an autonomous and solidarity-based nature and can be depicted as relative points on a continuum between (non-existent) extremes of egotism and selflessness (see figure 1 in section 4.3.1). In order to illustrate the views of judges and legal scholars on specific cases, moreover, a double dimension may be given to the continuum model, indicating how they have classified the possible rule-solutions in a case. This has been demonstrated on the basis of the example of duties of care in bank/client relations, in which the prohibition of transactions is usually considered as tending to lean more towards solidarity than the imposition of information duties on the bank, while at the same time some people find that information duties emphasise autonomy, while others consider these to be solidarity-based (figure 2 in section 4.3.2). A third dimension may even be added, taking into account the background of the legal system within which cases are adjudicated (figure 3 in section 4.3.4).
An explanation for the fact that these political stakes are far from obvious in most case decisions can be found in the idea that judges often remain in denial of these stakes. The idea of denial is closely related to the theoretical view that is taken on adjudication. Chapter 5 has illustrated this on the basis of the work of Ronald Dworkin and Duncan Kennedy. While the former has promoted the solution of legal disputes on the basis of principle argument, which would be less susceptible to ideological influences than policy argument, the latter has criticised this assumption, submitting that principle is equally open to political views as policy. Policy here refers to collective goals of the community, whereas principle refers to individual and group rights. Dworkin claims that judges are acting in bad faith if they allow their ideological convictions to affect their decision-making and argues that the threat of this occurring is less imminent in principle-based adjudication than in policy-based judgment. Kennedy, on the other hand, submits that judges may be influenced by their own ideologies in both cases and considers them to be acting in bad faith because they – unintentionally – deny that they are affected by these convictions.
Coming back to the role of fundamental rights in contract law adjudication, the hypothesis has been developed that these rights can clarify what is actually happening in the adjudicative process. Fundamental rights may be seen as representing political choices for the protection of certain values in society, but at the same time they are enacted rules of the legal system, which may be invoked to enforce the protection of the interests they represent. As such they mediate in the dichotomy of politics and law. In public law cases this is apparent from the arguments of both principle (protecting the rights of the citizen against the State, for example freedom of expression) and policy (protecting the interest of society as a whole, for instance regarding the assurance of free speech) that these rights introduce. In contract law, given the emphasis on interests rather than rights, the distinction between arguments of principle and policy seems to dissolve when fundamental rights are invoked. Given that both lines of argument may be open to political influences, the hypothesis has been formulated that the application of fundamental rights can reveal the policies and political stakes involved in contract cases. Thus, it might be possible to pierce through the judicial denial of the stakes of autonomy and solidarity.

Chapter 6: testing the hypothesis

The hypothesis that fundamental rights application might raise awareness of the political stakes in contractual disputes has been tested on five case examples, each engaging different policies: 1) non-competition clauses in employment and commercial agency contracts (weaker party protection v. market positions); 2) sureties provided by relatives (weaker party protection v. protection of economic interests and suretyships); 3) reduction of contractual penalties (weaker party protection v. protection of sureties and general interest); 4) post-contractual duties in doctor/patient relations (weaker party protection and health interests v. data protection and patient protection); and 5) surrogate motherhood (best interest of the child, interests of the intended parents and the surrogate mother, protection of the biological family). An investigation was made of the policies worded in legislation governing these problems, as well as of the solutions given in case law and the policy choices these represented. The various rule-solutions for each case study have been analysed against the model of the autonomy/solidarity continuum. In particular, the relative deviations of the solutions chosen by national courts have been determined with respect to a European view of the dilemma.
From this analysis, it follows that fundamental rights argumentation does indeed bring out into the open the policies involved in contract cases. Furthermore, it appears that courts in decisions containing this type of reasoning especially tend to underline the importance of party autonomy, in the sense that the weaker contracting party’s possibilities for self-determination should find effective protection. What is more, the application of fundamental rights regularly seems to induce a shift on the autonomy/solidarity continuum – for instance a shift from holding non-competition clauses and suretyships to be valid, irrespective of the position of the actual agent or surety, (a relatively autonomy-based solution) towards a possible annulment of such clauses or agreements in light of the structural inequality of the contract partners (a relatively solidarity-based solution). Though the motivation for such movements on the continuum may focus on the shifting limits to party autonomy, it follows that the pursuit of solidarity-based policies may determine the new boundaries of this autonomy. The case studies, moreover, show that the solidarity-based argument may refer to a variety of forms of social justice in European contract law, which complement the model of the continuum.

Chapter 7: explanations and conclusions

Finally, the results of the legal-political case law analysis have been translated to the general questions on the impact of fundamental rights in European contract law. In the first place, an explanation for the preferences for either a theory of direct effect or one of indirect effect can be related to the political views of the supporters of the theories: ‘technical’, dogmatic reasoning promoting a general theory may be revealed to cover up a political preference for either having public interests taken into account in private relations to a considerable extent (direct effect) or not (indirect effect).
Furthermore, the role of fundamental rights in contract law adjudication can be given a twofold explanation. Not only does the application of these rights make explicit the policy issues involved in contract cases. It may also help to clarify the manner in which courts have dealt with these policy issues and, consequently, reveal the policies pursued through their judgments. This double function of fundamental rights supports Kennedy’s critique of the claim that principle argument would be less susceptible to ideological influences than policy argument. Indeed, it undermines Dworkin’s rights thesis by showing that, actually, (fundamental) rights themselves incorporate policy choices and may thus translate these to the level of contract law adjudication.
The second question, concerning the formulation of criteria for fundamental rights application, cannot at first sight be given a clear-cut answer. In fact, more clearly than the general theories of direct and indirect effect, the legal-political analysis accepts that the intensity of the impact of these rights in contract cases may vary according to the fundamental rights involved, the nature of the contractual relationship and the activity of the various legal actors (the legislature, the judiciary, and the parties). Nevertheless, on the basis of the cases found, several factors may be enumerated, the presence of which seems to heighten the possibility of fundamental rights application being of use: first, an imbalance of bargaining power requires the demarcation of limits of party autonomy in the light of solidarity-based policies; second, such issues often seem to arise in relation to the validity of the contract or contract clause, in which context fundamental rights may be of relevance for colouring the general clauses of ‘good morals’ and ‘good faith’.
A third and final question is what the explicit consideration of fundamental rights adds to traditional contract law adjudication. Given that fundamental rights argumentation can bring to the fore the policy issues involved in contractual disputes, they are likely to inspire judges to reconsider the rationale behind the case solutions from which they may choose. An added value of this type of argumentation is thus that it will bring into view solutions that otherwise would not have been taken into account. This does not fully guarantee that judges will recognise the extent to which they are in denial of their own influence on policy choices, but at least it makes visible the various policies that may be pursued. Related to that, the explicit contemplation of policies implied in legislative rules or preceding case law sketches the framework within which judges have to make their decision. Since decisions deviating from legislation or established case law will not be lightly made, the application of fundamental rights could thus require the judges to more extensively justify their rulings, especially insofar as they diverge from established rules. This would also serve legal certainty.

These conclusions could form the basis for a further discussion of the topic also on the level of the European Union. The examples from case law have clarified how fundamental rights relate to policies of autonomy and solidarity, mediating the translation of these policies into rules of contract law. Moreover, they have illustrated how a variety of forms of social justice can be given shape in contract law regulation. Once thought has been given to the aims of social justice that a unified or harmonised European contract law should pursue, fundamental rights argumentation might therefore be applied to ensure that the rules comply with the constitutional traditions of the EU member states and other relevant fundamental rights charters and treaties.

Many thanks - and congratulations - to Chantal!

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