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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Based on legal experience, I find it most fitting to explain the duty of disclosure as follows: the seller must inform the purchaser about all the conditions and defects regarding the property which he knows of or should not have been unaware of (or had suspected), and which he must assume is of substantial interest for the purchaser’s evaluation of the property, and of which he cannot assume that the purchaser is aware.91
By law no. 391 of 14.6.1995, ‘the law on consumer protection in acquiring property’, conditions for the sale of housing were changed dramatically. The law introduced an insurance regulation in respect of the sale of property: a claim should initially be presented to the insurance company. It would not be appropriate at this point to enter into details regarding this consumer law. Which claims (for defect) may be presented to the insurance company are, however, not specified in the statute.
(iii) The purchase and sale of property is, in Swedish law, regulated in the ‘Jordabalken’ (JB), chapter 4 on Purchase, Exchange and Gift.92 Responsibility for the defect is described in chapter 4, § 19, of the JB. The regulation does not mention specifically the duty to inform, but it is clear that the seller must comply with it.93 Because the property in all circumstances should correspond to ‘what the purchaser with reason could expect from the purchase’ (i.e. without regard to the seller’s good or bad faith), the duty to inform has less significance.94 The interaction between objectively and subjectively based defect regulations is also a condition of considerable importance in Danish and Norwegian law.
(v) The resolution of the disagreement would presumably depend on the degree of noise and on the disadvantages to which the new use subjects the purchaser. If the disadvantages are moderate and the motorised traffic more or less a natural development in the area, the condition would presumably not be considered a defect in the property. A similar case appeared in the Swedish Supreme Court.95 This also concerned traffic noise. An apartment was sold without information being given about a deregulation of traffic which would lead to the purchaser being subjected to increased noise levels. Distance to a roundabout was reduced from 20 m to 3 m. The seller knew of the deregulation of traffic but did not pass the information on to the purchaser. In line with the
91A. Vinding Kruse, Ejendomskøb (6th edn, Copenhagen, 1992), p. 112.
92The new JB of 17 December 1970, see SFS 1971: 1209.
93See J. Hellner, Speciell avtalsrätt (2nd edn, Stockholm, 1993) vol. II: Kontraktsrätt, part I, pp. 58 ff.
94See C. Hultmark, Upplysningsplikt (Stockholm, 1993), pp. 40 ff.
95NJA 1981.894.
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purchaser’s claim, a price reduction of SKR 60,000 was granted. The apartment was purchased for SKR 535,000. The Supreme Court maintained that ‘the risk of this kind of deregulation was of considerable significance to the owner wishing to speedily divest himself of the property’. If the changed use is considered a defect, the usual remedies for breach of contract are applied, such as the right to terminate the contract (if the defect is fundamental), claim a price reduction, or claim compensation.
Portugal
This case concerns the question of encumbrances on the thing sold. According to art. 905◦ of the Civil Code if the thing sold has some kind of encumbrances or limitations which exceed the normal limits of rights of that kind, the contract can be annulled on the grounds of mistake or fraud.
(i)There is a mistake relating to the object of the contract, because Mr and Mrs Timeless did not know of the existence of the right of way for motor vehicles on the land, so the rules of arts. 251◦ and 247◦ of the Civil Code would apply, and Mr and Mrs Timeless can ask for the contract to be annulled, as Mr and Mrs Careless knew or should not have been unaware that the mistake was fundamental for them.
(ii)There is a question of fraud, because Mr and Mrs Careless omitted to inform Mr and Mrs Timeless of the variation of the right of way, which constitutes fraud in the sense of art. 253◦ of the Civil Code, as art. 227◦ of the Civil Code recognises the existence of duties to behave in good faith during negotiations and the formation of the contract and among these duties is a duty to inform, the breach of which constitutes fraud and can also give rise to liability for damages.
So Mr and Mrs Timeless would be entitled to annul the contract within a year after the conclusion of the contract (art. 287◦ of the Civil Code). But if circumstances showed that without mistake or fraud, they would still have acquired the land, but for a reduced price, they would not be entitled to annul the contract, but only to ask the court for a reduction of the purchase price (art. 911◦ of the Civil Code).
Besides the annulment of the contract or the reduction of the price, in case of fraud, Mr and Mrs Careless would also have to compensate Mr and Mrs Timeless for all the expenses (damnum emergens) and losses (lucrum cessans) incurred as a result of the acquisition (art. 908◦ of the Civil Code). If there is no fraud, but only mistake, according to art. 909◦
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of the Civil Code, Mr and Mrs Timeless can still ask for damages even if there was no fault by the vendors in addition to annulling the contract.
Scotland
It is a rule of the law of misrepresentation in Scotland that there is in general no duty of voluntary disclosure. There are exceptions to this rule, the main example of which is a contract of insurance. The general principle, however, is that of caveat emptor or buyer beware, as was noted by Lord Trayner in Murray v. Marr96 where he stated that,
there may be many things which, if disclosed on one side or the other, would prevent a party from entering into a contract, but the non-disclosure of which will not affect the validity of the contract.
In the present example, there is no duty of voluntary disclosure. Therefore there will only be a remedy if the question is asked of Mr and Mrs Careless, and they either assert that it is not the case, or attempt to conceal the existence of the right of way. This does not appear to be the case given the facts as presented, and therefore there is no remedy available as there is no misrepresentation by non-disclosure in the sale of heritable property, and the principle of caveat emptor means the buyers must inform themselves of such rights of way. It is likely that in most cases a clause in the missives would require the sellers to reveal the fact to the purchasers. If such a clause was in place and they failed to inform them, the contract would be voidable due to their misrepresentation.
Spain
The ground of fraud as a defect of consent is in the idea of deception, implying an intentional manoeuvre designed to give the mistaken party information about a particular reality. Accordingly, the result of the fraud is always a mistake and there is a very close relation between the two types of defective consent. The basic difference in the legal treatment of both is that the second considers, above all, the formation of the mistaken party’s knowledge and its own liability for the mistake, while fraud is appraised, legally speaking, in terms of the conduct of the party causing the deception.
What is essential here is that the sellers knew some of the basic reasons why the buyers wished to acquire the house, i.e. the quietness of the
96 (1892) 20 R 119 at 125.
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adjacent wood and, fearful that the contract might not be concluded, failed to advise them of the new easement which was to affect the woods. This conduct is absolutely contrary to the principles of good faith which must govern the conclusion of contracts.
It is not necessary therefore to ascertain whether the fraudulent conduct of the sellers produced the buyers’ mistake, thereby rendering their consent defective but rather, given the gravity of the sellers’ fraud (negative fraud, see Case 2) and considering that had Mr and Mrs Timeless been duly informed of the actual situation, the contract would probably never have been concluded, this fraudulent concealment is sufficient to invalidate the buyers’ consent, entitling them to bring a claim for annulment under art. 1265 of the Civil Code.
Comparative observations
The important features of this case are that it contains a mistake about rights in land, the consequences of which are as follows: the mistake can be qualified as a mistake of fact and/or law -- more significantly, is the qualification legally relevant? In addition, the sellers knew something about the land which they failed to disclose to the buyers, such a failure highlights the different legal views as to the obligation to disclose and the balance between conflicting duties to inform (on behalf of sellers and buyers). Lastly, since the mistake concerns land, lex specialis arguments, in relation to codification containing guarantees owed by an owner of land in relation to the title or hidden defects of the land sold, may be raised. The available remedies are summarised in the laws of mistake, fraud and duties to inform and breach of contract.
1. There are two mistakes conceivable here: a mistake as to the right of way and a mistake as to quality of the land. Even though the former may be qualified as a mistake of law, in most civil law systems, such a mistake can be assimilated to a mistake of fact and give rise to annulment.
As to a mistake to quality under English, Scots and Irish law there is no remedy for a unilateral mistake as to quality, whereas it may be possible for such a mistake to give rise to annulment in some civil law countries partly due to the fact that the conception of mistake is more subjective. This would be the case in Austria, Belgium, France, Portugal and the Netherlands. In France and Belgium the interpretation of mistake diverges, whereas the Belgian reporter considers that the mistake is inexcusable, the French reporter does not. A similar position could be reached in Italy on the ground of a basic contractual assumption (i.e.
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the quietness of the property constituted the buyers’ main reason for entering into the contract). In Greece, in contrast, the quality of the property fails to qualify for mistake since the purely subjective aspect of the mistake does not render it sufficiently fundamental here. In Germany, a mistake could not be admitted, not for reasons arising out of the qualification (fundamental or not) of the mistake but simply according to the application of lex specialis rules. In the countries admitting mistake the remedy would consist in annulment and perhaps damages (Portugal) or adapting the contract consisting in a reduction in the purchase price (Portugal, the Netherlands).
2. Another ground, possibly more popular, would lie in fraud and breach of duties to inform.
This case is a good illustration of the three different conceptual foundations of the duty to inform. First, in some legal systems this duty is subsumed into defective consent provisions. Secondly, in others, it is treated as a ground of independent precontractual liability (culpa in contrahendo, art. 1382 of the French Civil Code etc.). Thirdly, the fraudulent aspect of silence can also be envisaged independently as a tort. One importance difference may be procedural, as suggested by the German reporter: it is no doubt easier to prove that a party has withheld information (under the head of precontractual liability) than to prove fraudulent intent.
(i) In Austria, France, Belgium, Germany, Greece, the Netherlands, Portugal and Spain, a remedy would lie more easily on the basis of a fraud consisting in a failure to disclose incumbent on the sellers. Similarly, under German, Greek, Portuguese and Austrian law, fraudulent concealment could also be inferred either by combining articles on fraud and good faith/common usage to give rise to an obligation to disclose (previously § 242 BGB, now codified in §§ 311 II, 241 II, 280 I BGB, arts. 147 and 288 of the Greek AK and arts. 227 and 253 of the Portuguese Civil Code) or by simply concentrating on the fraudulent behaviour of the sellers which induces a mistake in the buyers (§ 870 ABGB). Likewise it should be added that the Dutch version of mistake is based on a failure, deemed incumbent on the sellers, to inform the purchasers, constituting an induced mistake. In all its varieties such a claim gives rise to annulment and/or damages as discussed. In addition, under Austrian law, Dutch, Greek and Portuguese laws, it is possible to ask the courts to adapt the contract as if it were concluded in the light of the actual circumstances. This remedy would presumably consist in reducing the sale price and thus resembles the contractual remedies (below pp. 221--2).
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(ii) If the sellers’ silence constitutes a tort this entitles the buyers to bring an action under this head regardless of a claim under defective consent. This analysis is suggested by the German and Greek reporters. The remedy will be the same; for example, Greek law provides as a remedy in tort that the contract can be reversed by virtue of compensation in natura.97
However, a clear-cut divergence in the civil law/common law approach arises here since in common law countries no remedy will lie for misrepresentation in the absence of a duty of voluntary disclosure. Once again, attitudes towards silence diverge. Thus the principle of caveat emptor applies firmly here unless a positive statement of fact has been made by the vendors which subsequently turns out to be false. Only in these circumstances would a claim lie for innocent misrepresentation -- if the vendors knew of the change of circumstances but failed to inform the buyers -- or fraudulent misrepresentation, if the tort of deceit could be proved. The buyers’ remedies would then be annulment of the contract and/or damages in tort respectively, such remedies being the result of legislative provisions in England and Scotland (Misrepresentation Act 1967).
3. Breach of contract claims can be characterised as a (i) contractual duty of disclosure, (ii) guarantee of good title and (iii) warranty as to characteristics or quality.
(i) Under Scandinavian legal systems, a breach of contract consisting in the failure to disclose would, under specific and fairly recent legislation relating to the sale of property give rise to the right of termination (providing the defect is fundamental), reduction in the purchase price or damages. In Norway the seller’s actual or constructive knowledge is weighed up against the buyer’s expectation that he should have been informed, such a requirement being subject to the buyer’s own worthiness of protection. This rationale is comparable to that contained in French law, where a precontractual obligation to inform, often derived from an extensive view of fraudulent concealment, is cumulatively conditioned by the buyers’ legitimate unawareness of the material information and of their reliance on the sellers to inform them.
In a similar vein, in Germany, a contractual claim for damages (this time compensation for positive interest) for fraudulent non-disclosure could be made, under § 463 BGB, now §§ 437 Ziff 3, 434 I, 280, 281, 283, 276 I 2 BGB or §§ 437 Ziff 3, 311 a. BGB. Likewise under Austrian law § 1295 ABGB damages can be claimed for the loss incurred for breach of
97 See also German report.
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non-disclosure since the buyers have relied on the contract where the thing transferred contains irremediable defects (whether material or in title).
(ii)A different contractual remedy also lies, namely that of transferring the property with good title. In Italy (art. 1489 of the Italian Civil Code) and Austria (§ 932 ABGB), the right of way could be qualified as an encumbrance on the land and thus the sellers are in breach of their duty to sell the property free from encumbrances, thus entitling the buyers to a choice of contractual remedies, termination, a reduction in the sale price and/or damages for a defect in title.
(iii)Under German law a similar result can be achieved for breach of contract in a warranty claim. The quietness of the property is a subjective defect (§ 434 I BGB) for the buyers and they can terminate the contract or ask for a reduction in price. In contrast, under English law a contractual remedy would only lie if it could be proven that the contract contained an express term as to the quality of the land, which is unlikely on the facts. This is also probably the case in the Netherlands.
Once again the qualification of an initial mistake as to the quality of the property, the subject matter of the contract of sale, gives rise to a number of overlapping remedies; some of which are specific to the type of contract (sale of land -- guarantee of good title), others, being more general, relate to the process by which the contract is formed and concentrate more on the fairness of the parties’ conduct towards one another. In circumstances which apparently indicate an equality of the contracting parties (two sets of individuals) the common law/civil law systems clearly perceive this equality differently. Whereas the classical principle of caveat emptor continues to prevail in the common law systems, the civil law takes into account the presence of information as a source of inequality, thus leading to a redistribution of the parties’ obligations. First, it appears that possession of material information should be disclosed, thus leading to a higher standard of fair dealing between the parties. Secondly, this higher standard of fair dealing is further reflected by giving a remedy for a failure to disclose, on the basis that silence constitutes a fraudulent concealment.98 It should be underlined that such a perception of the parties’ unequal access to material information for the contract’s formation has arisen as a result of case law but has also been incorporated into specific legislation under Scandinavian law.
98 Compare art. 4:106 PECL.
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A number of observations can be made from this case. First, in the absence of fraud (by the sellers), the same underlying values (as to the relative strength of the parties) are not shared by all legal systems. Secondly, a further difference arises within the legal systems offering protection for the buyer: for some legal systems the duty to inform is precontractual; for others it is contractual.99 Moreover, it is interesting to note that when an obligation to inform is imposed, this has the effect of putting the risk on the shoulders of the ‘stronger’ party who is in possession of the information, rather than leaving the risk systematically to the buyer. An economic analysis has inferred that the criterion of risk can be linked to the access and cost to each party of acquiring the information,100 rather than focusing on their status (seller or buyer; professional or consumer). It has also been suggested that a criterion lies in the extrinsic or intrinsic nature of the information.101 The results of this case show that the choice as to whether the risk should lie on the buyer or seller is economical and political. The classical theory preconises that the risk lies on the buyer whereas a more modern approach allocates the risk to the seller via the obligation to inform. Whether the re-allocation of risks has an uneconomic effect on the market, a criterion considered essential according to the classical vision of contract, remains to be seen.
99See Comparative Conclusions at pp. 399--400 for a further discussion on this point.
100A. T. Kronman, ‘Mistake, Disclosure, Information and the Law of Contracts’ (1978) 7 J. Leg Stud. 1.
101R. E. Barnett (ed.), Perspectives on Contract Law (Boston, 1995), pp. 342 ff.
Case 5
Bruno v. The Local Garage
Case
Several months ago, Bruno bought a second-hand car from his local garage, who assured him that it was a 1995 model ‘as good as new’. He has now discovered that the car is unroadworthy and the motor needs replacing. What remedy, if any, is available?
Discussions
Austria
Bruno’s claims lie in mistake and breach of contract.
(i) Bruno can allege that he made a mistake when concluding the contract, as provided for in § 871 ABGB. As Bruno assumes that the car is capable of being used on the roads and is in good working order for a 1995 model, both of which turn out not to be the case, he has made a mistake; that is a mistake as to the important qualities of the subject matter of the contract.1 One out of the three conditions stated in § 871 ABGB applies since Bruno’s mistake has been caused by the seller’s promises.
The right to annul (§ 871 ABGB) or the right to adapt (§ 872 ABGB) is available by considering respectively the importance of the mistake. If Bruno would not have bought the car if he had recognised its defects, namely the poor condition of the car, the mistake is fundamental. The
1An objective promisee who knows when the car was manufactured considers this statement as an advertisement more than a promise; compare Reischauer in Rummel §§ 922--3 RZ 5; OGH IN HS 135/51. As Bruno assumes the car has already been used, the statement has to be seen as indicating that the car has no severe defects and is in working order like any used car.
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contract can then be judicially annulled in accordance with § 871 ABGB2 and he is entitled to the reimbursement of the purchase price at the same time as returning the car to the seller in an action under § 877 ABGB (condictio sine causa).
(ii)As long as a period of six months has not yet passed since the actual delivery of the car (the so-called ‘Fallfrist’ or expired term in accordance with § 933 ABGB) Bruno can also make a claim on the basis of a guarantee against defects (§§ 923 ff. ABGB). Since the defects are sufficiently serious to render the car unroadworthy they must be considered important (compare § 932 ABGB). However, the facts do not indicate if these defects can be remedied (can the condition of the car be improved?). If they can be remedied by (economically) reasonable means (compare
§1167 ABGB), Bruno can ask for a price reduction or adjustment (§ 932 ABGB). Only in the case of important and irremediable defects3 is Bruno entitled to ask the court for termination of the sale with retrospective effect which would also lead to the restitution of the car and the purchase price (§ 1435 ABGB).
(iii)Contrary to termination, the right to annul a contract for fraud or mistake has an impact on the law of property.4 Annulling the contract implies that the acquisition of title (the title for actual delivery) required for the transfer of the purchase price is set aside (especially § 380 ABGB; the so-called ‘Prinzip der kausalen Tradition’). As the purchase price has already been transferred to the seller, Bruno cannot ask for repayment of the purchase price by using an action in rem (rei vindicatio) (§ 370 ABGB).
Belgium
Bruno’s claims lie in defective consent (mistake or fraud) and breach of contract (lack of conformity or guarantees against hidden defects).
(i) There are numerous cases involving controversies as to the sale of used cars but very few use a fundamental mistake as the basis for the buyer’s action. The point is that the issue of excusability (see Case 1) can constitute an extremely difficult obstacle to overcome when the sale of a used good is at stake: the buyer is not supposed to have expected the delivery of goods in perfect condition and the judge will often impose a
2 Compare Gschnitzer in Klang IV/1 113f; Koziol/Welser, Bürgerliches Recht, I 131; OGH in SZ 50/35; JBl 1976, 240; JBl 1980, 424; JBl 1982, 36.
3 For more details of this concept see Case 4.
4Compare Gschnitzer in Klang, IV/1538; Koziol/Welser, Bürgerliches Recht, 1 256; H. Mayerhofer, ‘Schuldrecht Allgemeiner Teil’ in vol. II/I of A. Ehrenzweig (ed), Systeme des österreichischen allgemeinen Privatrechts (Vienna, 1986), 1 444.