By contract dated 28 April 1952, the defendant's son in law, K, took over the sole proprietorship of a business which he had previously run in commercial partnership with the plaintiff: 'I personally guarantee payment of the sum still owed by K under the sale contract of 28 April 1952'.

K had paid the plaintiff DM 15,000 in May 1952, but the balance remained unpaid. On 1 December 1954 final default judgment was given against K for DM 10,000. Execution against him is unavailing.

The plaintiff sues the defendant as guarantor for the balance due and his legal costs. The defence is that K had counterclaims against the plaintiff which K set off after judgment was rendered against him, and that the plaintiff's claim was thus extinguished.

The Landgericht held the defendant liable. The Oberlandesgericht rejected his appeal. His further appeal is now allowed.

Reasons

The Court of Appeal was of opinion that since any counterclaims which K might have had against the plaintiff arose before 4 May 1952, they could not be set off against the sum claimed. It therefore did not decide whether any such counterclaims were good in law.

The appellant is right to criticise this (...)

The fact that there is final judgment against K, the principal debtor, does not mean that the defendant guarantor's objections need not be investigated. Of course it is true that while para. 768 BGB permits a surety to use defences available to the principal debtor, this does not apply to cases falling under paras 387 ff BGB: a surety may not declare a set-off when the principal debtor might; all he can do is to defer payment under para. 770 para. 2 BGB for as long as the creditor can satisfy himself by making a set-off against a due claim by the principal debtor. However, the surety is not limited to this defence of his, for once the principal debtor or creditor had duly declared a set-off, this extinguishes the claim for which the surety was liable, and he is thenceforward free.

(a) In the present case the principal debtor did declare a set-off, but only after he had been held liable by final judgment. At that time he no longer had any power to declare a set-off.

para. 767 para. 2 Code of Civil Procedure (ZPO) allows K to raise against the claim which had been confirmed by judgment only such defences as arose after the end of the oral proceedings. It is irrelevant that the declaration of set-off was made after this time. What is critical is when the valid counterclaims arose (see, inter alia, RGZ 64, 228); on the defendant's own testimony they arose before the end of the preliminary oral proceedings.

The significance of para. 767 para. 2 ZPO is not purely procedural: once a debt has been confirmed by judgment, a purported set-off is substantially invalid unless the counter-claim could be raised in the execution proceedings (RG HRR 1935, 691). Such a purported set-off, being invalid, cannot benefit the defendant surety. There is nothing inconsistent with this in the decision in RGZ 122, 146, 148, for there the principal debtor declared a set-off in the suit brought against him, and did so, even though in vain, before the end of the oral proceedings.

(b) But while the judgment issued in the preliminary trial prevented any subsequent set-off by K, the principal debtor, the plaintiff as creditor remained as free as ever to use this legal remedy. The actual wording of para. 770 para. 2 BGB is literally satisfied here, since it only refers to the power of set-off vested in the creditor, but some commentators are of the opinion that the surety can only rely on the dilatory exception of para. 770 para. 2 BGB if the creditor is bound to accept a set-off declared by the principal debtor, and cannot do so if the debtor no longer has a power of set-off (references omitted). It is not necessary for us to decide whether or not this view is correct, for in the case before us K's counterclaims, if valid, would give him the principal debtor, a ius retentionis under para. 273 BGB (RGZ 137, 34, 38), and this defence is one which the defendant guarantor may use under para. 768 BGB, unaffected by the fact that K himself is now prevented from relying on it by the judgment issued against him: to this extent the defendant is not barred by the legal force of the judgment (see, inter alia, RG JW 1909, 419 no. 13). On the facts of the case there can be no doubt that the mutual claims here arose from the same legal relationship in the sense of para. 273 BGB.

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