All families are happy in the same fashion,
and each family is unhappy in its own way.

Count Leo Tolstoy (1828-1910)
in Anna Karenina (1875-1877)

Banks lend money; but they are averse to the risks of this lending, so they usually require security for the money they lend. One form of security is to get another, creditworthy, person to agree to pay the loan if the borrower fails to do so. This arrangement is called a suretyship, and the person who undertakes to pay if the borrower does not is called a surety.

Do sureties need protection from the borrowers or lenders? For example, if a husband and wife have interests in the family home, and the wife agrees to secure a loan to her husband against her interest in the family home, does a vulnerable wife need protection either from an overbearing husband or an unscrupulous bank here? (A good discussion of this issue is to be found in Belinda Fehlberg‘s provocative book Sexually Transmitted Debt. Surety Experience and English Law (OUP, 1997)). If sureties need such protection, is there a common level of such protection in all of the EU’s member states? If not, ought there to be?

These were the issues discussed this week at the Dublin Legal Workshop by Dr Mel Kenny (in the photo, top left), of the University of Durham and the Centre for European Law and Politics (Das Zentrum für Europäische Rechtspolitik, ZERP) in the University of Bremen. His presentation (the title of which I have used as the title of this post) was based on his paper “Standing Surety in Europe: Common Core or Tower of Babel” (2007) 70(2) Modern Law Review 175 (paper here (via Blackwell) and here (via Ingenta); subs req’d), which, in turn, is based on ZERP’s research project on Protection from Unfair Suretyships in the European Union.

By way of introduction, Mel set up two competing policies: freedom of contract (the right of individuals to enter into what contracts they will, even unwise ones, even bad ones), on the one hand, and, on the other, the need to protect the vulnerable from exploitation. And although there has been a series of recent EU developments in European Financial Services Policy and European Contract Law, EU legislation does not cover the issue of suretyship, except incidentally (Case C-45/96, Bayerische Hypothekenbank v Edgar Dietzinger [1998] ECR 1-1199 para [20]). As Mel pointed out, this gap exists for the very good reason that suretyship does different things in the various legal orders of the EU’s member states in legal fields as diverse as classic contract doctrines, procedural protection, unfair contract terms, consumer law, insolvency law, family law, constitutional law, property law, and (general) doctrine. He therefore turned to an overview of the various families (hence his use of the opening line of Anna Karenina, quoted above) of national approaches.

Mel began by characterising the position in England and Wales after Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 44; [2002] 2 AC 773 (here and here), as laying down a series of stringent procedural requirements on the bank. He argued that the position in Ireland after Ulster Bank v Fitzgerald [2001] IEHC 159 is not as strict, but he pointed to the position under IFSRA‘s Consumer Protection Code (pdf). And he characterised the position in Scotland as introducting Etridge by the back door, via a combination of Law Society of Scotland‘s guidelines on inter-spose guarantees (2003) and bank practices (overspilling from south of Hadrian’s Wall). In his view, England and Scotland demonstrated a divergence in principles, but a convergence of result; whereas England and Ireland, with a convergence in principles, nevertheless showed a divergence in result.

He then looked at various families of legal systems in other EU states. In the established Civil law systems, both Germany (for constitutional reasons) and Austria (for private law reasons) focus on whether there is an excessive and unfair disproportion between the surety’s income and assets on the one hand, and exposure on the loan on the other. The Dutch system, by balancing private autonomy and banks’ due diligence, seems to be half way between the English and German approaches; Belgium applies family and insolvency law doctrines; France takes a consumer protection approach; while Spain has a cocktail of various doctrines.

There is no consistency either in the Nordic states. For example, in Finland, a property boom in the 1990s led to massive rise in surety agreements, but the Guarantees and Third-party Pledges Act, 1999 legislated a high level of protection for sureties, leading to drying up of suretyships. By contrast, there are very few suretyships in Sweden, for local social reasons.

By and large, the Baltic states have recently transplanted their rules on suretyships from eleswhere: Estonia is a melange of the relevant doctrines in the Principles of European Contract Law (PECL) and the United Nations Convention on Contracts for the International Sales of Goods (CISG); Lithuania has adopted the relevant Unidroit principles; whilst Latvia has copied elements of the Swiss Civil Code. But such transplanted foreign rules have to work in the very different soil of the local social environment. So, for example, in Estonia, most often it is the husband who is securing his wife’s business debts or the younger generation securing their parents’ debts. And the countries in Eastern Europe are just beginning to develop legal rules to deal with the issue. In Poland, the validity of the suretyship turns on principles of “community life and lawfulness”; in Hungary suretyship is not yet very prevalent, though the banks are now beginning to introduce Baltic-style liberal lending policies, as they have been for a while in Solvenia, where suretyship is beginning to become more prevalent than in Hungary.

The ZERP study group on Protection from Unfair Suretyships took the view that the procedural standards to be found in England after Etridge in fact offer the highest protection, whereas the substantive standards such as the German constitutionalised protection in fact offer the lowest protection. The group therefore recommended overwhelmingly in favour of a procedural approach, predicated on a duty (modelled on the PECL and the proposals of the Study Group on a European Civil Code (SGECC)) to ensure that the surety is given full and independent information about the arrangement and its consequences.

However, Mel argued that it is difficult to come up with a convincing uniform solution in the face of the many different approaches which he had already set out. Moreover, in his view, too high a level of protection for sureties renders the instrument less attractive and makes credit hard to secure. This often serves simply to displace social problems to elsewhere, such as to subprime credit: overindebtedness has not disappeared in countries with higher standards of protection but has rather been transformed into problems relating to charges on mortgages and use of demand guarantees. In his view, no national approach entirely is convincing, he considered that competition of legal orders may very well be a good thing. In the end, therefore, he argued for a variety of different approaches, rather than a unitary system or even a common core: suretyship differs in the different legal orders; the standards of intervention also differ in the different member states; and competition between them may very well be a good thing.

It was a fascinating presentation, drawing connections between widely disparate areas, from traditional principles of equity to doctrines of EU law and the practices of comparative law. For all that, however, there were at least two points of detail on which I’m not sure I agreed with Mel, relating to the effects of Etridge at English law, and the conclusions to be drawn from the Irish cases.

First, Etridge. In an earlier case, Barclay’s Bank v O’Brien [1994] 1 AC 180 (HL), the House of Lords held that where a bank is put on notice that the surety might not be properly consenting (due perhaps to pressure on the surety (usually a wife, in these cases) by the borrower (usually the husband)), the bank must take reasonable steps to ensure the validity of that consent; and these reasonable steps consisted in the main of an interview by the surety with an indpendent solicitor. In Etridge, the need for notice to trigger the duty to take reasonable steps was removed, simply requiring the banks to take reasonable steps where-ever the surety is the spouse or partner of the borrower. This seems quite a stringent protection, and that is how Mel treated it; but in my view, since it is simply procedural, once the bank jumps through the relevant hoops and over the relevant hurdles, it can enforce against the surety even in cases of serious substantive disparity. In other words, though it adds a layer to lending, it is a mechanical process, relatively easily satisfied by banks.

Second, in Ireland, it is not entirely clear whether O’Brien or Etridge form part of Irish law. In Bank of Nova Scotia v Hogan [1996] IESC 2; [1996] 3 IR 239; [1997] 2 ILRM 407 (SC), the Supreme Court certainly adopted a notice standard, holding that the bank could enforce against the surety unless it had notice of pressure on the surety by the borrower. But the Court did not go further and expressly hold that if the bank did have such notice, it could nevertheless enforce against the surety if had taken O’Brien-style reasonable steps. However, my sense was that Hogan represented the adoption of the full O’Brien standard, not only the notice requirement but also the reasonable steps. But in Ulster Bank Ireland Ltd v Fitzgerald, O’Donovan J did not need to answer that question, finding instead that the bank had no notice of the husband’s pressure. And Etridge does not seem to have been considered in any Irish cases, but my sense is that, in an appropriate case, the courts would adopt that standard, constructed as it is upon O’Brien which was largely adopted in Hogan.