When is a guarantee immoral?

The triangular relationship between debtor, creditor and guarantor is a concept of German law of obligations as regulated in the German Civil Code (BGB). The debtor (borrower) is the person who has a principal debt to the creditor. This is usually a financial claim, for example from a loan. The creditor is the person or institution that holds this claim and is entitled to its settlement. In the case of a surety, a guarantor is added. The latter undertakes to assume the principal debt if the debtor fails to meet his obligations. The guarantor's liability is regulated in the German Civil Code (BGB) and serves to protect the creditor by providing additional security that the claim will be fulfilled.

Some debtors exploit the trust of people close to them to obtain a guarantee for a loan. Once you have signed the guarantee agreement as guarantor, the debtors naturally believe they are in the right in the event of a dispute. However, such a guarantee is usually immoral, so you can terminate it prematurely as guarantor.

The German Civil Code (BGB) regulates the immorality of a guarantee very precisely. According to established case law, three questions are primarily relevant:

• Is the guarantor significantly overburdened financially by his obligation?
• Was the guarantee trivialized towards the guarantor or even reprehensibly interfered with his freedom of choice?
• Was there undue pressure on the guarantor or was the guarantor exploited in an emotional predicament?

If you as guarantor can answer at least one of these questions with a "yes", your guarantee may be immoral and can be terminated prematurely. Competent and committed representation is advisable in practice. This is because there is usually a great deal of interest in the validity of your surety, so both debtor and creditor will try to defend it.

The law firm CDR Legal offers you a non-binding and free initial assessment of the immorality of your guarantee. You can tell us about your situation directly on the phone or via the contact form. You will then receive a competent assessment from us as well as targeted advice on how to proceed.

How can a guarantee be terminated (prematurely)?

Before we discuss the immorality of a guarantee below, it makes sense to look at the possibilities of (premature) termination of the guarantee in general.

Essentially, the following options are available to you as a guarantor under certain conditions:

• Revocation of the guarantee
• Limitation of the guarantee claim
• Limitation of the principal claim

In practice, it is most common for the surety claim or the debtor's principal claim to become time-barred. This in turn leads to the expiry of the guarantee declaration. However, it takes several years for the statute of limitations to run.

In contrast, establishing that the surety is immoral offers the possibility of getting out of the surety agreement earlier. It is therefore particularly worthwhile for guarantors who are faced with imminent financial burdens to have an immorality check carried out.

Immorality of the guarantee in accordance with section 138 BGB

A guarantor's declaration of surety may be immoral and therefore void under certain circumstances. The unconscionability of a contract is generally Paragraph 138 BGB, Section 1 and 2 ("immoral legal transaction").

Over the course of time, various groups of cases have emerged in case law according to which a guarantee can be assumed to be immoral:

1. Creation of a blatant financial overload due to the assumption of the principal debt
2. Reprehensible interference with the guarantor's freedom of choice or trivialization of the risks of a guarantee
3. Exerting undue pressure on the guarantor or taking advantage of a psychological predicament

Gross financial overstretch of the guarantor

One possible scenario that leads to the assumption that a guarantee is immoral is if the guarantor is significantly overstretched financially. This is the most common case in practice.

There is no uniform definition of when such an extreme overload exists. However, there are a number of court rulings in which the rule of thumb has crystallized. The guarantor is always deemed to be grossly overstretched financially if he is not even in a position to pay the interest that may later accrue with his existing assets or attachable income when the guarantee agreement is concluded.

It can be assumed that there is an emotional bond when such an obligation is assumed. The following people in particular are affected by the influence of an existing emotional attachment:

• Spouses
• Life partner
• Parents
• Children
• Employees

The borrower and their fate are particularly important to these groups of people. Therefore, they cannot refuse his request to vouch for him, even though they could suffer a financial loss themselves. This is often the case with the spouse's guarantee.

However, this list is not exhaustive. There may also be close emotional ties to other relatives or acquaintances, such as siblings, good friends or family members. The difference to the very close family members listed above, however, is that this group of people is obliged to prove their strong emotional ties.

If the amount of the guarantor's obligation significantly exceeds his own ability to pay, it is assumed that the guarantor should have no incentive to enter into the guarantee. It is therefore rebuttably presumed that the guarantor did not consider his own interests and the realistic assessment of his financial risk when entering into the guarantee obligation.

Instead, he was guided by emotional factors which the bank involved exploited in order to obtain a guarantee. This in turn is an immoral guarantee. However, as this is a rebuttable presumption, the bank can refute the thesis.

A recognized exception, however, is when economic benefits are obtained through a guarantee. Here it is possible to assume that the guarantee was not only given for emotional reasons. The guarantee is therefore not immediately immoral. An example: The bank wants to avoid a transfer of assets between a less wealthy person and a person close to them and therefore requires a declaration of surety.

However, if it is foreseeable when the guarantee agreement is concluded that the guarantor will not be able to settle the debtor's claim, this is usually still a strong indication that the guarantee is immoral.

Significant influence on the guarantor’s freedom of choice or trivialization of the risks

Another reason why a guarantee could be immoral relates to the guarantor's freedom of choice. If the bank exerts considerable influence on these, this often leads to an immoral guarantee. However, there must regularly be a particularly high degree of influence by the bank. The term "particularly reprehensible influence of the lender on the guarantor's decision" is then often used. What does that mean in detail?

Taking advantage of inexperience is a typical example of influencing freedom of choice. Such guarantors are often teenagers or young adults who are still in training, studying or have just started their careers. The Federal Court of Justice (BGH) sees a risk that this group of people will not be able to adequately assess the financial implications of the decision. This makes it much more difficult to make an objective decision for or against the guarantee.

So if the father asks his 20-year-old son for a guarantee, it can be assumed that the guarantor is being influenced in a certain "reprehensible" way in his freedom of choice. From a legal point of view, it is not the father's behavior that is reprehensible. Rather, if the bank is aware of the relationship, it should not accept the corresponding guarantee. In practice, the bank knows the age of the guarantor , which is why it can often be assumed that inexperience is being exploited in relevant constellations.

Another case in which the bank has a reprehensible influence on the guarantor's decision is when the risks of a guarantee are played down. Just so that the guarantor signs the guarantee agreement, the credit institution may not play down or even conceal the financial risks or the scope of the guarantee from the guarantor.

In particular, the guarantor must not be given the impression that he is not entering into a major obligation with the guarantee or that the claim is very unlikely. The submission of his guarantee declaration is never "a mere formality".

Exploiting a psychological predicament or exerting undue pressure

If the bank exploits a psychological predicament or increases the pressure on the guarantor, the guarantee is immoral. In short, the guarantor must not be taken by surprise.

A classic example of this is when the customer visits the bank's branch for a different reason. However, he is then asked to sign a declaration of guarantee. The "gun is put to his head", so to speak. This is often done on the grounds that the debtor's loan would otherwise be terminated immediately.

This procedure is regarded as immoral because the guarantor is put under pressure in terms of time and is also put in a predicament, which then induces him to sign. However, a guarantee must always be signed of your own free will.

Who has to prove the immorality of the guarantee?

If the guarantor asserts the defense of unconscionability of the guarantee, the question arises as to who must provide the corresponding proof.

It is relatively easy to prove that the guarantor is financially overburdened. All the guarantor has to do is disclose their income and expenses and be able to prove that they have no other assets since the guarantee agreement was concluded.

An emotional bond can also be assumed relatively quickly, particularly in the case of the aforementioned group of people (parents, spouses, etc.), and is even rebuttably presumed. Accordingly, the so-called reversal of the burden of proof applies. In this case, the bank must prove that the guarantor did not act on the basis of an emotional connection, but that it was a rational economic consideration. In practice, however, this is difficult to prove.

When taking advantage of a psychological predicament or exerting undue pressure, it is a case of testimony against testimony, which is why this evidence is difficult to provide.

Consequences of an immoral guarantee

In the previous article, you learned about the different groups of cases in which a surety can be immoral.

Let us assume that the conditions for immorality are met. The question then arises as to what consequences this has for the guarantor.

In principle, a guarantee is a contract concluded between the guarantor and the creditor, usually a bank. If the guarantee is now considered to be immoral, the guarantor's corresponding guarantee declaration would be invalid and therefore the entire guarantee contract void.

While the termination of the guarantee has no direct consequences for the principal debtor, i.e. the borrower, the guarantor is released from his obligation with immediate effect. This means that the bank can no longer make a claim against him in the future if the debtor fails to meet his obligations.

For the borrower, the expiry of the guarantee often means that they have to provide the bank with other collateral. If he is unable to do so, the lender may cancel the loan that has already been paid out.

Judgment of the Federal Court of Justice (BGH)

In case law, particularly in the area of civil law (ZR), the BGH has established principles on the immorality of guarantees in various decisions. The BGH often refers to its decisions that are published in the official collections, also known as BGHZ (BGH-Zivil).

One judgment that received a lot of attention and was published in the NJW (Neue Juristische Wochenschrift) and the BGHZ, among others, is the judgment under file number XI ZR 380/16. In 2018, the Federal Court of Justice ruled against the plaintiff, who granted a loan in the amount of 2 million euros. The borrower was a company that got into an economic crisis and used employees as guarantors. After the Higher Regional Court of Karlsruhe had already dismissed the claim, the Federal Supreme Court ruled at federal level. The plaintiff had no claim for payment against the defendants, since the guarantees and their renewals were contrary to accepted principles of morality pursuant to § 138 Section 1 BGB are null and void.

This ruling shows that immoral guarantees occur time and again, although they must be considered on a case-by-case basis. If you find yourself in a similar situation, you should seek legal advice. You should contact an experienced lawyer at the latest when the creditor bank appears as the plaintiff and demands that you settle the debts, even though your guarantee is immoral.

How CDR Legal can help you

For a guarantee to be immoral, one of the following circumstances must apply:

• Gross financial overburdening of the guarantor with emotional attachment
• Significant influence on the guarantor's freedom of choice or trivialization of the risks
• Exploiting a psychological predicament or exerting undue pressure

If you as a guarantor are of the opinion that the guarantee you have entered into is immoral, you should have your individual case examined. The law firm CDR Legal specializes in banking and capital market law and is experienced in assisting you. In recent years, the lawyers at CDR Legal have been able to successfully support many affected persons.