Mortgage Debt and the Social Function of Contract

Publication Date01 November 2016
AuthorIrina Domurath
Date01 November 2016
Mortgage Debt and the Social Function of
Irina Domurath*
Abstract: The highnumbers of over-indebtednessand of evictions in Europe sincethe nan-
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 eld of mortgages
does not full 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
I Introduction
This article explores t he potential of EU contrac t law to contribute to wel fare by
preventing nancial 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 reections
of certain economic decisions in contract law rules have been largely missing in debates
following the nancial 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 eld 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 ciently 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 nan-
cial and economic crisis has increased nancial 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 58771.
© 2017 John Wiley & SonsLtd. 9600 Garsington Road, Oxford,OX4 2DQ, UK
and 350 Main Street, Malden,MA 02148, USA

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