Mandatory Law (Fundamental Regulatory Principles)
1. Characteristics and distinctions
The terms mandatory law (ius cogens) and non-mandatory law (ius dispositivum) refer to the relationship between a rule of private law and the agreement by the parties. While non-mandatory rules can be set aside by contractual agreement (and sometimes also by a unilateral act of one party), mandatory rules do not allow for derogation by the parties. Since party autonomy (freedom of contract), ie the freedom of individuals to determine their legal relationships according to their own discretion, is the most fundamental principle in any liberal system of private law, non-mandatory provisions of law are the general rule whereas mandatory provisions are the exception (see 2. b), 3. b) below).
According to the general primacy of party autonomy, mandatory rules are generally explicitly phrased as such, whereas non-mandatory provisions mostly lack such clarification. However, in all cases where an express determination is missing, the character of the legal rule has to be established according to the general principles of interpretation, with particular regard to be given to the purpose of the rule in question.
b) Party autonomy and validity requirements
The rules governing the validity of declarations such as the rules on capacity,mistake or formal requirements are to a large extent excluded from the parties’ discretion. Thus, from a terminological point of view, these rules may be qualified as mandatory law. However, the prerequisites of a valid declaration differ significantly from other mandatory provisions. In order that individual declarations of intention can be recognized, the law must provide a definition of the conditions under which a declaration of intention is binding. Hence, these provisions are procedural or functional because they determine the requirements of self-determination while the other mandatory rules put substantive restrictions on acts of self-determination free from procedural defects. The latter can be described as mandatory rules in a narrower sense. Admittedly, as with any systematic classification, the distinction between validity requirements and (other) mandatory rules is a general characterization rather than a stringent logical distinction. But the narrow definition allows one to focus on the essential problem of mandatory law as it addresses the conflict with party autonomy and involves the particular burden of argumentation that is associated with mandatory rules (see 2. b) below).
c) Mandatory rules and the principle of good faith
The principle of good faith as a general caveat of justice characterizes the process of rule-making as well as the process of adjudication in private law in various ways. Insofar as it is used as a means to interpret contractual agreements or to set limits on them on the basis that particular circumstances have been neglected by the parties, the principle of good faith does not have the effect of mandatory law. However, if the principle of good faith is applied to justify the general invalidity of contractual terms, it becomes a source of mandatory law. It is the characteristic feature of this type of mandatory law that the conditions for the application of the compulsory rule are determined by the judiciary rather than by statutory regulation (see 4. a) below).
2. Functional background
a) Definition and types of legal purposes
Both in the assessment of a legislative decision about the non-mandatory or mandatory nature of a particular rule, and in the determination of the character of a provision in private law by way of interpretation, the different purposes and effects of the two categories of legal rules have to be taken into account.
The essential purpose of non-mandatory rules in private law is to save transaction costs, as these rules relieve the parties from the burden of regulating their relationship in all conceivable detail. Accordingly, they should be designed to reflect the typical intention of the parties. The persuasive power of non-mandatory rules thus depends on whether they realistically reflect the typical intention of parties in a certain situation. If the typical intention is not reflected by them, the rule will be abrogated on a large scale or turn out to be a pitfall for inattentive parties. Due to their reference to the typical parties’ intentions, non-mandatory rules have a strong empirical component.
By contrast, mandatory rules enforce the purpose of the law even against the parties’ explicit intention. With regard to the regulatory purposes pursued, three categories of mandatory rules can be distinguished. The first category consists of rules that are excluded from being placed at the disposal of the parties in order to enforce fundamental goals and values of society. These rules include prohibitions in the interests of public security (eg limitations on sales of weapons or drug trafficking), provisions protecting certain aspects of the human personality (eg invalidity of contract terms in contravention of human dignity), laws enforcing family-related values (eg the principle of monogamy; safeguards for the family in the law of testamentary succession (compulsory portion)), or the regulations of anti-trust law that safeguard efficient competition.
The second category relates to rules that are designed to facilitate commerce by protecting reliance. In many cases third parties are potentially affected by the decisions of the contracting parties and hence the discretion of the latter has to be restricted in order to protect their reliance in legal transactions. In this context one may mention the numerus clausus of legal forms under property and corporate law—a principle that is recognized in all European legal systems to a varying extent.
The third—and in the recent development of private law most prominent—category consists of mandatory rules safeguarding the ‘weaker’ party in a contractual exchange, ie rules of social protection. The most important fields of social protection in European private law systems can be found in tenancy law, labour law, and consumer protection law (consumers and consumer protection law). Non-discrimination rules form another area of social protection in private law. They link social protection to gender, or the affiliation to a particular (minority) group (prohibition of discrimination (general)). Social protection in private law is based on the assumption that the weaker party is unable effectively to enforce its interests against the stronger party. Thus, it follows that rules of social protection must be qualified as mandatory rules. As far as non-discrimination laws are concerned, one may add that a derogation from the ban on discrimination by agreement would itself be discriminatory. It would be almost paradoxical to impose the prohibition and to recognize its revocation by party agreement at the same time. Therefore, provisions aiming at social protection are enforced not only against the will of the ‘stronger’ party; the ‘weaker’ party cannot dispose of its own protection either. Otherwise the ‘stronger’ party could easily undermine the protection envisaged by making use of its bargaining power. Another aspect of social protection in private law is that it does not only affect the freedom to determine the contents of the contract but also—at least partly—the freedom to contract at all, ie in cases where an obligation to contract is imposed in order to safeguard the social participation of the ‘weaker’ party.
b) Legitimacy requirements
A political or judicial decision to interfere with the individual decisions of private parties is subject to a strict burden of argumentation, which is—as a general rule and depending on further specifications—justified for the following three reasons. First, the parties generally have better information resources to evaluate their own legal affairs than a legislature. Secondly, any deviation from the parties’ agreement or intention triggers specific costs, eg litigation costs caused by legal uncertainty or exceeding effects, additional costs of finding alternative means to pursue the purpose of the prohibited agreement etc. Thirdly, the fundamental ethical superiority of incentive-based justice over distributive justice supports the burden of argumentation associated with mandatory law.
In particular, the legitimacy of regulatory interference with the parties’ agreements depends on the nature of the purpose pursued (see 2. a) above). An intervention for fundamental supra-individual purposes must be justified by their social value. The legitimacy of mandatory rules envisaging the protection of reliance in legal relations is contingent on their effects with respect to facilitating commerce. The justification of the third category of mandatory private law, ie rules providing social protection for the ‘weaker’ party, has to deal with two particular concerns. The first concern is to explain why one individual party in a private law relationship should carry the burden of social protection rather than the general public, eg by way of general taxation. Unless there is a particular interdependence between the distributive purpose and the respective private law relationship, it seems arbitrary to attribute the costs of social protection to one individual party in a transaction (problem of arbitrariness). The second concern relates to the effects of mandatory rules beyond the particular relationship of private law. Provisions envisaging social protection trigger costs which the party burdened by them is likely to account for in its price calculation. Therefore, the costs of social protection can lead to an increase of the price level and are therefore likely also to have to be borne by the group of individuals that is supposed to be protected (paradoxical effects).
3. Tendencies in legal development of mandatory law
a) The tradition of the exceptional character of mandatory law
The scope of non-mandatory private law depends on the scope of private autonomy and freedom of contract. These principles are fundamental to all liberal societies and have been recognized in European private law systems for a long time.
In Roman law, the exceptional character of mandatory law was particularly noticeable. Subject to the requirements of legal capacity the praetors recognized private agreements and helped to enforce them. Limits to the content of the agreement were set by certain legal prohibitions (leges perfectae) and by the standard of morality (contra bonos mores). Yet these restrictions were not particularly far-reaching, especially the consideration of social protection did not play an important role. Further limits resulted from the numerus clausus of the enforceable actiones, which were, however, a by-product of a not yet fully developed and therefore over-formalized procedural order rather than restrictions based on principles of justice. As a result, the numerus clausus of legal forms was widely undermined in practice, especially by the broad use of the stipulatio (promise) and by the recognition of actions for individual cases (actiones in factum). The tradition of the ius commune maintained the extensive guarantee of the freedom of contract with variations in detail. The procedural restrictions of the system of actiones were largely abolished in medieval times.
The early codificatons in Germany, particularly the Allgemeines Landrecht für die Preußischen Staaten, also adopted this liberal approach. The same applied to the Bürgerliches Gesetzbuch (BGB) in its original version, for it stressed the contractual discretion of the parties. The BGB limited the judicial review of contracts to their compliance with a legal and ethical minimum standard (illegality and immorality; §§ 134, 138 BGB) which had already been recognized by Roman law and is inherent in any private law system. The rules of contract law were thus largely non-mandatory. Mandatory regulation could be found with regard to the protection of reliance in certain legal structures (in particular the numerus clausus of rights under property law or the rules on legal persons) and in the fields of family law and the law of succession which are influenced by ethical considerations.
Similar traditions can be found in the other European private law systems. The French Code civil, for example, is famous for its high esteem of party autonomy. In England, the development of the free market in the 19th century went along with an extraordinary appreciation of contractual freedom. Patrick Atiyah describes the period between 1770 and 1870 as the ‘age of freedom of contract’. The so-called classical conception of contract considered an agreement as an economic instrument of the parties whereby each party was entitled to seek the best bargain. The courts were extremely reluctant to interfere in the substance of the contract. Only agreements that had as their object illegal ends were not enforced (eg cases of bribery of public officials, or contracts to kill third persons). Beyond such cases, it was generally not the courts’ business to ensure the fairness of a private contract. Agreements could not be set aside by reason of being harsh, unconscionable or unjust (Atiyah, The Rise and Fall of Freedom of Contract, 398 ff).
b) Extension of the scope of mandatory law in the 20th century
In the course of the 20th century, the scope of mandatory law in European private law systems has been widened. As a result, contrary to the fundamental prevalence of non-mandatory regulation mentioned above, mandatory rules appear in an increasing number. In England, a decline of the freedom of contract can be observed between 1870 and 1970 (see Atiyah, The Rise and Fall of Freedom of Contract, 571 ff). The main reason for this development is that the notion of equality of bargaining power lost much of its thrust and modern governments started to intervene in favour of the ‘weaker’ party in various situations of (potential) imbalance.
This development can be observed, for example, in tenancy law. During the housing shortage in Germany after World War II, the content of tenancy agreements was widely excluded from party discretion in order to protect the tenant. Since the 1960s, the regulation of tenancy contracts has been relaxed. However, various fundamental mandatory rules have remained in place, eg concerning the limits on termination by the lessor (§§ 573–574c BGB) and increasing the rent (§§ 557–561 BGB; lease). In England, tenants of various types of property enjoy the protection of the Landlord and Tenant Act 1985, a statute from the provisions of which the parties may not derogate (s 12).
Another important area of social protection in private law has been labour law. In Germany, an increasingly consolidated network of mandatory rules for the protection of employees was developed, consisting of restrictions on dismissal (especially the Kündigungsschutzgesetz, KSchG), rules on wages, and the entitlement to holidays. Similarly in England, many mandatory rules have been adopted in this field. In particular, the Employment Rights Act 1996 restricted the possibility of contracting out of provisions for the protection of the employee (s 203). The quite extensive mandatory character of tenancy and employment relations—not only in Germany and England but all over Europe—is based on the consideration that tenants and employees, due to their social position, are particularly dependent upon their accommodation and their salaries and cannot effectively enforce their interests against their lessors or employers who are usually in a stronger bargaining position.
A third significant field for the development of mandatory law has been the judicial scrutiny of certain contract terms, in particular standard terms, even before the enactment of the EC Directive on Unfair Terms in Consumer Contracts. The control of standard contract terms presented by one party to the other is based on the consideration that, due to the number and complexity of the terms, the other party is normally incapable of adequately taking them into account and even less capable of negotiating them. Accordingly, standard contract terms are not subject to sufficient market control. As the imbalance justifying the development of mandatory rules is caused by the relative superiority (as regards control and information) of the party presenting the standard contract terms, there is sufficient ground to apply the judicial review even in favour of businesses. However, the judicial scrutiny of individually negotiated terms cannot be justified on that basis.
In Germany, the judicial review of standard terms was first developed by the Federal Supreme Court (Bundesgerichtshof, BGH) on the basis of the general good faith provision of § 242 BGB, (BGH 13 March 1956, NJW 1956, 1065, 1066). The scope of this judicial control widened the original minimum standards of §§ 134, 138 BGB to a remarkable extent. In 1977, the legislature enacted a specific statute on the judicial review of standard terms, the Gesetz über allgemeine Geschäftsbedingungen (AGBG). In 2002, in the course of the reform of the German law of obligations, the AGBG was incorporated into the BGB (§§ 305–310 BGB). According to these rules, terms in both business-to-consumer and business-to-business contracts are subject to judicial review.
In England, the Misrepresentation Act 1967 was the first statute to introduce a standard of reasonableness, but its scope was limited to (both individually negotiated and non-individually negotiated) disclaimer clauses and to remedies resulting from pre-contractual misrepresentation (Misrepresentation Act 1967, s 3) The act did not distinguish between consumers and businesses. A decade later, the Unfair Contract Terms Act 1977 gave the courts further powers to control particular contract terms, again without a distinction between individually negotiated and non-individually negotiated terms. This act was more general than the Misrepresentation Act 1967, covering all clauses having the effect of excluding or restricting liability and indemnity clauses. However, for the most part, it is only applicable to business-to-consumer contracts. In 1999, the United Kingdom implemented the EC Directive on Unfair Terms in Consumer Contracts by passing the Unfair Terms in Consumer Contracts Regulations 1999. The regulations are applicable only to business-to-consumer contracts and cover only non-individually negotiated terms, but they also extend to clauses other than those providing for the exclusion or restriction of liability.
A fourth trend that—as we have seen—partly overlaps with the judicial scrutiny of standard contract terms is the increase of consumer protection legislation in general. This field of private law can be characterized by a ‘role-specific’ protection of private individuals in their dealings with businesses (consumers and consumer protection law). If a set of rules envisages consumer protection, the protective devices have to be mandatory in favour of the consumer (see 2. a) above). In Germany, the Abzahlungsgesetz of 1894 was an early example of a mandatory role-specific instrument dealing with hire-purchase contracts. Subsequently, it was replaced by the Consumer Credit Act (Verbraucherkreditgesetz), which was eventually incorporated into §§ 491–504 BGB. Apart from this, (purely) national initiatives in the field of consumer protection were quite few in number and rather insignificant even though the idea of consumer protection had become prominent in legal discourse since the 1960s. Similarly, in the UK the tendency of the modern state to intervene in order to protect consumers was quite limited at first. The only major piece of (purely) national legislation passed in the United Kingdom was the Consumer Credit Act (CCA 1974), giving power to the courts to intervene if a relationship between creditor and debtor was unfair. The later provisions on consumer protection under private law basically served to implement EU law, eg Part I of the Consumer Protection Act 1987, the Unfair Terms in Consumer Contracts Regulations 1999, already mentioned above, and the Sale and Supply of Goods to Consumers Regulations 2002. In general, the comprehensive penetration of private law by mechanisms of consumer protection in Germany, the United Kingdom and other European countries can be traced back to the numerous EU directives, see mandatory law (basic features of regulation in European private law).
The fifth important tendency has been influenced by various EC directives, but also by a growing awareness of the impact of fundamental rights on private law: the restriction of the freedom of contract by the prohibition of discrimination. Protection against discrimination under private law is ‘naturally’ of a mandatory nature (see 2. a) above). However, one should bear in mind that the legitimacy of non-discrimination rules in private law is questionable as long as no public authorities or companies holding a monopoly are concerned: they inevitably offer various possibilities of circumvention for dishonest parties, while they can provoke significant costs by constituting a gateway for querulous claims against honest parties.
In Germany, non-discrimination was initially only recognized in various manifestations of fundamental rights and in numerous particular statutes that served the implementation of EC directives. Recently, however, the Allgemeines Gleichbehandlungsgesetz, a general statutory regulation concerning the prohibition of discrimination, has come into force, implementing EU Directives 2000/43, 2000/38, 2002/73 and 2004/ 113 and even extending the scope of these directives. The general non-discrimination rule refers to the criteria of race, ethnic origin, gender, religion, disability, age and sexual identity (§ 1). The prohibition of discrimination under § 1 can—with some caveats—significantly influence the formation and the content of contracts under private law (see §§ 2, 19). In the UK, the first non-discrimination rules were statutes prohibiting specific types of discrimination, especially in the context of employment (Equal Pay Act 1970; Sex Discrimination Act 1975; Race Relations Act 1976; Disability Discrimination Act 1995; Fair Employment and Treatment (Northern Ireland) Order 1998). The Human Rights Act 1998 implemented the anti-discrimination provisions of the International Covenant on Civil and Political Rights and the European Convention on Human Rights. Unlike Germany, the United Kingdom did not implement the four directives mentioned above in a single statute but only amended several existing statutes and their specific non-discrimination rules.
Similar approaches to extend mandatory restrictions on private law have been adopted in other European countries. However, apart from the uniform influences of EU law, the focus differs. In tenancy and labour law, for example, the scope of mandatory law is a reflection of a national legal system’s attitude towards social redistribution. As far as the judicial review of contract terms is concerned, a general reasonableness test is applied in the Nordic legal systems to all contract terms, whereas other European states (eg France) do not allow any (or only very little) interference by courts in the case of business-to-business contracts. However, one may identify as a common tendency in all EU Member States that mandatory rules of consumer protection law and non-discrimination law are largely influenced by EU law.
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