Mortgage Debt and the Social Function of Contract

• Published date: 01 November 2016
• DOI: http://doi.org/10.1111/eulj.12213
• Date: 01 November 2016

Mortgage Debt and the Social Function of

Contract

Irina Domurath*

Abstract: The highnumbers of over-indebtednessand of evictions in Europe sincethe finan-

cial crisis have highlighted the need to re-think the role that mortgage credit plays for socie-

ties. This contribution examinesthe social function of contract law,based on the observation

that contract law is a meansof allocating welfare in a political economyin which the welfare

state is in retreat. The claim asserted in this article is that EU law in the field of mortgages

does not fulfil itssocial function because it isbased on a formalistic understanding of contract

law. In order to closethe protective gap brought about by a shift in the allocationof welfare

from public provision to private markets without altering the understanding of contracts, the

proposal is to follow the cooperative contract model of contracts as social cooperation. This

approach allows for an assessment of fairness that acknowledges the long-term character of

mortgage contracts and the ensuingneed to distribute market risksbetween both contracting

parties.

I Introduction

This article explores t he potential of EU contrac t law to contribute to wel fare by

preventing financial hardship of consume rs. Even though t his social funct ion of contract

law is well discussed, i ncluding in cases that h ave reached the Court of Justice of the

European Union (CJEU), the connections between contract law theory and reflections

of certain economic decisions in contract law rules have been largely missing in debates

following the financial crisis.

In this contribution, I show that EUcontract law is underpinned by a formalistic under-

standing of contractlaw, which has led to welfare losses in the field of housing since 200 8,

through evictions, homelessnessor social exclusion. I claim that theEuropean legal order

has contributedto these welfare losses because it fosters accessto some goods and services

essentialfor the well-being of all citizens,not through public provisionbut through private

markets, without providing for suf ficiently protective rules in contract law. As market

transactions are largely go verned by contracts, the way in which contract law pursues

the allocation of welfare becomes of pivotal importance. Thus, the socialfunction of con-

tract law is not only a majortheoretical issue but also a practicalone, given that the finan-

cial and economic crisis has increased financial hardship and social distress in Europe.

The article is structured i n four parts. In Section II, I sho w how public welfare is

displacedinto the private realm and howEuropean integration has impactedthe provision

* The author is a researcher of consumer law at the Federal Ministry of Justice and Consumer Protection in

Germany. Thiscontribution draws on my PhD researchat the University of Copenhagenand the University

of Iceland. A book based on the PhD thesis will be published by Hart Publishing in 2017. I thank Agustín

Menéndez, SabineFrerichs, Federico Ferretti,and Stefano Palestini for mosthelpful comments and critiques

of a previousdraft. All responsibilitylies with the author.

European La w Journal, Vol. 22, No. 6 , November 2016, pp. 7 58–771.

© 2017 John Wiley & SonsLtd. 9600 Garsington Road, Oxford,OX4 2DQ, UK

and 350 Main Street, Malden,MA 02148, USA