Case 12 - Immoral Suretyships

Summary

Mr Hazard, a businessman, needed a loan of €50,000. Bossy Bank agreed to this on the condition that Mr Hazard's daughter, Miss Penny, secured it for its full amount through a suretyship. The 19-year-old Miss Penny owned no assets and had no experience in business. As a worker in a fish factory, she only earned €600/month (after tax). The suretyship contract was concluded when Bossy Bank's employee handed out a standard form contract to Miss Penny and said, without further explanation: “Could you please sign this, Miss? We need it for our files”. Four years and €2,000,000 in debts later, Mr Hazard has gone bankrupt. Bossy Bank now claims the €50,000 from Miss Penny. Can Miss Penny challenge this?

Variation: Would it make a difference if the suretyship was concluded by Mr Hazard's wife, Mrs Hazard, who worked as a customer service employee in Mr Hazard's business and earned €2,000/month after tax?

Case Reference: BVerfG, 19.10.1993, 1 BvR 567 u. 1044/89.

AUSTRIA

OPERATIVE RULES

Miss Penny can challenge the claim.

Variation: Mrs Hazard could most likely challenge the bank's claim to some extent.

DESCRIPTIVE FORMANTS

Austrian law provides two rather similar regimes for combating unfair suretyships. Under the more general approach, developed by the Supreme Court by applying the “immoral contracts” rule in Art. 879(1) CC, a suretyship is void based on three groups of criteria. The first requirement is a “disapproval of the suretyship as to its content” (inhaltliche Missbilligung) which, in the first place, means that there must be a “gross disparity” between the surety's financial assets and the amount guaranteed under the suretyship. In addition, further aspects may be relevant within this first criterion. For instance, where the surety has a personal economic interest in the credit, this will speak against an “immoral” character of the guarantee (but it has been accepted that, where such personal interest results from maintenance rights vis-à-vis the debtor, for example where the debtor's wife stood surety, this personal interest will usually be outweighed by a considerable degree of dependence on the principal debtor). As a second requirement for nullity, the suretyship must be disapproved as to the circumstances of the conclusion of the security agreement, due to a factual limitation of the surety's free will.