Учебный год 22-23 / Mistake, Fraud and Duties to Inform in European Contract Law (The Common Core of European Private Law)

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Whether the seller should have realised that the information was misleading is irrelevant.

For Far Eastern Delights to be responsible for the contents listed in its catalogue, the assumption is either that it has provided the information itself, that the information has been provided on behalf of the firm, or that the information has been given by an earlier supplier.85 The misleading information represents a significant defect in the objet d’art, and gives the purchaser the right to terminate the contract. Together with the termination of contract, the purchaser can also demand compensation. This presupposes, however, that there is a basis of liability for compensatory damages. If the seller ought to have known that the information given was inaccurate, the purchaser can demand that his full economic loss be covered (the expectation loss). Further, according to Norwegian and Swedish law, directly related losses can be claimed on an objective basis, the so-called ‘control liability’.86

Portugal

(i) This case concerns the question of defects in the thing sold. According to Portuguese law (arts. 913◦ and 905◦ of the Civil Code), if the thing sold has some kind of defect which diminishes its value or prevents it from fulfilling its purpose, it does not have the qualities guaranteed by the seller and the contract is voidable on the grounds of mistake or fraud. So the same rules referred to in the previous case would apply, and Emile would be entitled to annul the contract. However, the defect must be communicated to the seller within thirty days after the buyer has discovered it and at the utmost within six months after delivery (art. 916◦ of the Civil Code). This provision, criticised by a number of scholars, includes an action which looks like a remedy for nonperformance under the head of defects of consent. The justification for such a conceptual oddity lies in the fact that the seller is obliged to sell specific goods, if the goods are defective this affects the buyer’s consent constituting a defect of consent. In case of fraud, Far Eastern Delights would also have to compensate Emile for the loss he has suffered as a

p. 296, and K. Krüger, Norsk kjøpsrett (3rd edn, Bergen, 1991), p. 120. However, this does not express the prevailing opinion.

85The Norwegian Sale of Goods Act, § 18, and the Swedish Sale of Goods Act, § 18. In Danish law, we find the same regulation in the Sale of Goods Act, § 76, regarding consumer sales.

86The Norwegian Sale of Goods Act, § 40(1) and the Swedish Sale of Goods Act, § 40, which is an implementation of CISG, art. 79.

result of the purchase (arts. 908◦ and 913◦ of the Civil Code). If there is no fraud, but only mistake, according to art. 915◦ of the Civil Code, Emile can still ask for damages (damnum emergens) but not for his losses (lucrum cessans), and damages would not be available if Far Eastern Delights was not at fault, in being unaware of the kind of defect in the statuette. In other words compensation is limited to the negative interest suffered by Emile.

(ii) If circumstances show that without mistake or fraud, Emile would have still acquired the statuette, but for a reduced price, he would not be entitled to annul the contract, but only to ask the court for the reduction of the price (arts. 913◦ and 911◦ of the Civil Code).

Scotland

In Cases 1 and 2, we have been concerned with uninduced mistake. When a mistake has been induced by an operative misrepresentation, the contract can be annulled even though it is an error in motive and does not go to the root of the contract, i.e. it is not essential.87 Before a party can have a contract annulled on the ground of misrepresentation, the misrepresentation must be operative. To be operative the following criteria have to be satisfied: (i) the statement must have been made by the other party to the contract or his agent; (ii) the statement must be an inaccurate statement of fact. Where a mistake has been induced by a material misrepresentation, the contract can be rescinded; restitutio in integrum must be possible.

In the problem, the description in the catalogue is a false statement of fact. If Emile was in fact induced to purchase the statuette because of the description in the catalogue, then the misrepresentation is operative, as a mistake as to the quality of the object is clearly material. Emile can therefore have the contract annulled and recover the price. If the statement has been incorporated as a term of the contract, Emile could elect to keep the statuette and sue for breach of contract and recover the value of an original work.

If the statement was made negligently or fraudulently, in addition to rescission (should he so elect), Emile has an action for damages in delict: rescission is not a condition for a claim in damages. There is no claim for damages in delict if the misrepresentor honestly believed that what he was saying was true: Boyd & Forrest v. Glasgow & S W Railway Co.88

87Stewart v. Kennedy (1890) 17 R (HL)1; Menzies v. Menzies (1893) 20 R (HL) 108.

88(1915) SC (HL) 20.

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Spain

(i)In cataloguing the item, the gallery (Far Eastern Delights) must have examined it and should have been aware that it had undergone major repairs. This is a case of deception or fraud by Far Eastern Delights, and Emile would be protected by the right to annul the sale contract due to defective consent based on that fraud (art. 1301 of the Civil Code). As already pointed out, fraud is not presumed and Emile must prove the deception, by adducing the catalogue and the evidence of the repairs to the statuette if the claim for annulment of the contract is to succeed.

(ii)In addition, and alternatively, Emile may also bring a claim for guarantee against hidden defects actio redhibitoria or quanti minoris as a result of latent defects in the acquired object (art. 1486 of the Civil Code) making the object unsuitable for its intended use, or diminishing such a use. These claims, which place a reduced burden of proof on the buyer, are subject to a 6-month limitation period (art. 1490 of the Civil Code): if they are successful, the object and price are returned or the price is reduced.

Comparative observations

In this classic example of sale of a work of art (false description of the subject matter in a professional’s catalogue, ambiguity as to whether the seller knew of its falsity or not) to a non-professional buyer, the overlapping remedies for defective consent and/or breach of contract are highlighted.

Defective consent

In Austria, Belgium, France, Greece, Italy, Portugal and the Netherlands an action may lie for a fundamental mistake as to the quality of the subject matter entitling the buyer to annul the contract. Again, the legal analyses may vary -- for example under French law the mistake is fundamental according to a subjective view of substance, whereas under Greek law an objective criterion -- the importance of the quality according to the agreement of the parties -- is also satisfied. The bar rendering a mistake inexcusable (in Belgium, France, Greece, and Italy for example) will probably not operate here since the mistaken party is a consumer, albeit with some amateur expertise in the field, dealing with a professional. Under Portuguese law the action appears to be a special category of mistake with more restrictive time limits for the buyer. In

contrast Germany will not admit mistake because of the application of lex specialis concerning the law of sales.

Under Austrian law the mistake could be analysed as common to both parties, although this interpretation infers that the seller honestly believed that the content of its catalogue description was true. (If this is not the case, a remedy will still lie for unilateral mistake without compensation to the non-mistaken party as the conditions of art. 871 ABGB are fulfilled.) Likewise, under English, Scots and Irish law, precisely because the mistake is shared and not unilateral, a fundamental mistake may be admitted if it renders the statuette ‘essentially and radically different’ from that contracted for. Two conceptions of mistake may apply, a common law fundamental mistake which renders the contract void ab initio, which could be appropriate here or possibly, according to the Irish reporter, an equitable mistake making the contract voidable. However, it should be noticed that in practice, under English, Scots and Irish law, Emile is unlikely to pursue his claim on this basis since other easier and more adequate remedies lie.

Moreover, this case illustrates a divergent conceptual analysis in relation to mistake which reveals somewhat unexpected results. Misrepresentation clearly does not correspond to a positive duty to inform since it does not remedy a neutral (non-fraudulent) failure to disclose. Nonetheless, it would appear to bridge the gap between civil law and common law mistake; whereas the former is widely admitted, the latter is not. Applying this analysis to the facts, were it proved that the seller honestly believed that the contents of the catalogue were true, fraud would no longer be a possible route (see below p. 190) and Emile would have to rely on mistake. Under English, Irish and Scots law however, Emile would not rely on mistake but would choose rather to rely on innocent misrepresentation that would entitle him to annulment of the contract (absent operative bars) and/or damages.89 If a misrepresentee claims damages in tort as well as annulling the contract, he will obtain restitution of the price paid (the immediate consequence of the annulment) as well as tort damages for additional consequential damages. In the event that the court awards damages in lieu under s. 2(2) of the Misrepresentation Act, instead of annulment, it is submitted that this remedy resembles the civil law monetary equivalent of restitution granted where restitution

89Under Irish law, damages cannot be awarded as an alternative to annulment since there is no Misrepresentation Act. Under English and Scots law, s. 2(2) of the Misrepresentation Act provides for such a technical remedy, termed ‘damages in lieu’, which allows the courts to award damages instead of annulment by exercising their discretion.

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in integrum is no longer possible. These functional similarities indicate that the conceptual civil law/common law gap in relation to mistake is not as wide in practice as is often assumed.

If the seller’s behaviour is interpreted as being fraudulent, then remedies will lie for fraud and fraudulent misrepresentation. Under this head the solutions are similar both in appearance and effect. Under English, Irish and Scots law, Emile could make a claim based on fraudulent misrepresentation. As stated, misrepresentation renders the contract voidable, time bars will not preclude annulment provided that action is taken within a reasonable time of discovery of the fraud. Damages are calculated on a tortious basis to cover losses, i.e. the price paid for the defective statuette and consequential losses, such as expenditure incurred to establish its defectiveness (experts’ fees etc.).

On the basis of a Civil Code provision as to fraud (Austria, Belgium, France, Germany, Greece, Italy, the Netherlands, Portugal, and Spain) or by a case law extension of fraudulent concealment (e.g. France, Belgium) the seller could be held liable for failure of a duty to inform. Another means of arriving at a similar result can be achieved by treating the seller’s behaviour as in breach of good faith on the basis of culpa in contrahendo (Austria, Portugal, Greece). As we have seen an action in fraud normally circumvents any allegations of the mistaken party’s inexcusable behaviour, except if, under Austrian law, for example, Emile were held contributorily negligent (for failing to detect the extent of the restoration) which would thus diminish the amount of his damages.

Breach of contract remedies involve a guarantee against hidden defects and non-conformity with the description or lack of agreed quality

In some countries, such as France, Belgium, Italy and Spain, a claim may be brought under the contract of sale for breach of the guarantee against hidden defects.90 Obstacles arising under this head are both procedural -- the short time limit and on the facts substantial -- it may be both difficult to prove that the goods are not fit for its normal usage and indeed that the defects are hidden.

An alternative remedy for breach of contract lies in France, Belgium, Greece, the Netherlands, Italy and Germany, under the heading of nonconformity on delivery or lack of an agreed quality respectively and in

90Notice that the Directive 1999/44/EC which, when transposed will change the answer here to some extent, has not been considered by the majority of the reporters, with the exception of Germany, since the Directive’s provisions had not been transposed into national law at the date of writing the reports.

England and Scotland under breach of description -- s. 13 Sale of Goods Act 1979 for the United Kingdom.91 The operative bars are quite similar, the buyer will lose the right once the goods have been accepted. Belgium has a fairly severe attitude towards acceptance or approval, which means in practice this ground is rarely used. In Italy the seller can likewise raise the defence of ‘limit of tolerance’ to bar the claim which has arisen as a result of the principle of good faith contained in art. 1337 of the Civil Code which provides that contracts must be performed in good faith. If the goods have not been accepted, a claim can be made for both termination and damages. It should be pointed out that termination is retrospective in Austria, Belgium, France, Germany, Greece, Italy, Norway,92 Portugal and Spain but not in England, Ireland, Scotland and the Netherlands. In the alternative, the buyer can ask for a reduction of the price (France, Greece, Portugal, the Netherlands, Germany) or the seller can offer to adapt the contract in certain circumstances (Germany, the Netherlands). Contractual damages will put the buyer in the position he would have been had the contract been performed, i.e. by an award of a sum of money enabling him to buy an equivalent statuette to the one promised but not delivered (the ‘expectation interest’).

The solution given in Norwegian law must be included in the above breach of contract remedies. Far Eastern Delights’ inaccurate catalogue description could be analysed as a breach of a duty to disclose accurate information about the sale which enables Emile, the buyer to terminate the contract and claim damages provided that the seller ought to have known that the information given was inaccurate. This contractual remedy is distinct from a duty to inform which is imposed upon formation of the contract. It overlaps, therefore, with the precontractual duty to inform developed in some civil law countries, such as France, and the other contractual remedies which may be available elsewhere. A similar remedy would lie in England and Scotland if it were proved that the statement of description was incorporated into the contract which thus constituted an express guarantee.

The countries converge as to the choice of available remedies. In fact, the solutions are highly similar, the differences lie not in substance but in practice. Some of the practical reasons as to whether one remedy is preferable to another are thus emphasised. Two obvious factors may influence the injured party’s choice: first, the procedural difficulties of

91In Ireland, the relevant statute is s. 10 of the Sale of Goods and Supply of Services Act 1980.

92Under Norwegian law, if restitution in kind is impossible, the creditor can normally only claim termination for the future.

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short time limits, evidential obstacles, such as proving fraud or a party’s subjective mistake; second, the crucial question of damages. If a claim is brought on one of the grounds of defective consent, damages will be tortious whereas on the grounds of breach of contract, contractual measures apply. The question of which measure is preferable will obviously depend on whether the buyer’s bargain is a good or bad one.93 It must be emphasised however that in Germany, which stands on its own here, the buyer cannot exercise a choice of remedy since the application of the lex specialis argument to the Code’s provisions to remedies for breach of contract (and particularly warranties concerning the goods’ characteristics) means that such remedies are exclusive. Nevertheless, in case of fraudulent misrepresentation by Far Eastern Delights the lex specialis argument would not apply and the contract would be void.

At the end of the day, the conceptual differences in legal nature of mistake -- unilateral, shared or common, subjective/objective -- have little bearing on the solution. Here the common core in terms of the solution is clearly identifiable.

93It is obvious that the buyer has made a bad bargain as he will have paid too much for the statuette.