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Mandatory Law: Fundamental Principles

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 Mandatory Law: Fundamental Principles

Mandatory Law: Fundamental Principles

Hans Christoph Grigoleit
1. Characteristics and distinctions
a) Definition
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
contracual 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 (cf 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
Hans Christoph Grigoleit 1

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Mandatory Law: Fundamental Principles

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 (cf 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 (cf 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.
2 Hans Christoph Grigoleit

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 Mandatory Law: Fundamental Principles

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.

Hans Christoph Grigoleit 3

Mandatory Law: Fundamental Principles

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 (cf 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 burdened
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

4 Hans Christoph Grigoleit

 Mandatory Law: Fundamental Principles

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
Hans Christoph Grigoleit 5
Mandatory Law: Fundamental Principles

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 (cf 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
6 Hans Christoph Grigoleit
 Mandatory Law: Fundamental Principles

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 that 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 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
Hans Christoph Grigoleit 7
Mandatory Law: Fundamental Principles

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 (cf 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, cf → mandatory law
(specific 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 (cf 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
8 Hans Christoph Grigoleit
 Mandatory Law: Fundamental Principles

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 (cf §§ 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.
Literature. Patrick S Atiyah, The Rise and Fall of Freedom of Contract
(1979); Reinhard Zimmermann, The Law of Obligations (1996); Claus-
Wilhelm Canaris, Die Bedeutung der iustitia distributiva im deutschen
Hans Christoph Grigoleit 9
Mandatory Law: Fundamental Principles

Privatrecht (1997); Tony Weir (tr), Hein Kötz, European Contract Law,
vol 1 – Formation, Validity and Content of Contracts; Contract and Third
Parties (1998); Jörg Neuner, Privatrecht und Sozialstaat (1999); Oliver
Remien, Zwingendes Vertragsrecht (2003); Nicholas Bamforth,
‘Conceptions of Anti-Discrimination Law’ (2004) 24 Oxford Journal of
Legal Studies 693; Gary Slapper and David Kelly, English Law (2006); John
Cartwright, Contract Law (2007); Sibylle Hofer, ‘Vor § 241’ in Mathias
Schmoeckel, Joachim Rückert and Reinhard Zimmermann (eds), Historisch-
Kritischer Kommentar, vol II/1 (2007); Matthias E Storme, ‘Freedom of
Contract – Mandatory and Non-Mandatory Rules’ [2007] European Review
of Contract Law 233; Andreas Thier, ‘§ 311’ in Mathias Schmoeckel,
Joachim Rückert and Reinhard Zimmermann (eds), Historisch-Kritischer
Kommentar, vol II/2 (2007); Hugh G Beale, William D Bishop and Michael
P Furmston, Contract – Cases and Materials (2008); Horst Eidenmüller and
others, ‘The Common Frame of Reference for European Private Law –
Policy, Choices and Codification Problems’ (2008) 28 Oxford Journal of
Legal Studies 659; Hans Christoph Grigoleit, ‘Anforderungen des
Privatrechts an die Rechtstheorie’ in Matthias Jestaedt and Oliver Lepsius
(eds), Rechtswissenschaftstheorie (2008) 52; Horst Eidenmüller, Florian
Faust, Hans Christoph Grigoleit, Nils Jansen, Gerhard Wagner, Reinhard
Zimmermann, ‘Towards a revision of the Consumer-acquis’ [2011]
Common Market Law Review (forthcoming); Gerhard Wagner,
‘Zwingendes Recht’, in Horst Eidenmüller, Florian Faust, Hans Christoph
Grigoleit, Nils Jansen, Gerhard Wagner, Reinhard Zimmermann, Revision
des Verbraucher-acquis, 2011 (in print)
Hans Christoph Grigoleit

10 Hans Christoph Grigoleit

 Mandatory Law: Fundamental Principles

Sources of law

PECL:
1. Ole Lando (ed): Principles of European Contract Law, parts I and II, The
Hague 2000 (contains Chapters 1 to 9);
2. Ole Lando, Eric Clive, André Prüm, Reinhard Zimmermann (eds):
Principles of European Contract Law, Part III, The Hague 2003 (contains
Chapters 10 to 17);
3. PICC: International Institute for the Unification of Private Law
(UNIDROIT) (ed): UNIDROIT Principles of International Commercial
Contracts, 2004.
Acquis Principles:
1. Research Group on the Existing EC Private Law (Acquis-Group) (ed):
Principles of the Existing EC Contract Law (Acquis-Principles), Contract
I, Munich 2007 (contains Chapters 1 to 7 and commentary);
2. Reiner Schulze (ed), Common Frame of Reference and Existing EC
Contract Law, Munich 2008, 301 ff (contains Chapters 8 and an interim
version of the commentary).
DCFR:
Christian von Bar, Eric Clive, Hans Schulte-Nölke (eds): Principles,
Definitions and Model Rules of European Private Law, DCFR, Outline
Edition, Munich 2009, cf also
<http://webh01.ua.ac.be/storme/2009_02_DCFR_OutlineEdition.pdf>

Hans Christoph Grigoleit 11

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