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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faith and common usage to reveal that it lost the actual contracts to a competitor. On the contrary, the principles of good faith and common usage impose that the purchaser bears the risk of a transaction concluded in the stock market field of intense competition and conflicting interests.

If a company which provides investment services (EPEY) has mediated for the conclusion of the sale, it could be liable, under specific conditions which are not met here,31 to compensate Cinderella according to art. 8 L. 2251/1994 on consumer protection. If however the financial intermediary was aware of the truth, i.e. that the company had lost many contracts to a competitor, and this was confidential information to which the financial intermediary had access, it would not be liable to Cinderella’s compensation, since PrD 53/1992, aiming mainly to protect the market’s function and not the protection of private interests, prohibits ‘insiders’ from disclosing confidential information. It is submitted32 however that if the confidential information may lead to an abrupt fall in the shares’ value, as is the case here, the advisor should warn future investors of the risks which threaten the investment.

Ireland

Cinderella purchased the shares she intended to buy. There is no possible recourse to a remedy due either to mistake or misrepresentation under Irish law, purely because the shares were not of the value she believed them to be. She purchased her commodity/product without assurances and the undervalue of that commodity is not something which changes the nature of that commodity in itself. Furthermore, there has not been any mistake as to the substance or subject matter of the contract. Accordingly, Irish law recognises no remedy in such circumstances.

Italy

Cinderella’s case can be seen as affected by a basic contractual assumption (presupposizione) that ‘important contracts would not be lost’ and we could have the solution similar to the one offered by the Supreme Court33 where the purchase of the stocks of a company was annulled

31For example, if the financial intermediary has violated the duties imposed by the code of deontology of EPEY (see arts. 10, 11 of the corresponding Directive of 10/5/1993 93/22/EC) for instance by omitting to make enquiries and collect information from the press concerning the object of the investment.

32Triantafyllakis ChID A p. 28.

333 December 1991, n. 12921, see GI 1992, I, 1, 2210 noted by ODDI.

because the buyer was not aware that the only immovable good in the company assets was subject to a pending action brought by the administrator in liquidation (art. 2901 of the Civil Code).

A different solution could be reached if the ‘prospectus’ about the company concealed the ‘loss of important contracts’. Then, Cinderella would have a claim against the company in respect of its untruthful prospectus (Responsabilità da prospetto). There are usually two kinds of prospectus: one is offered by the merchant bank proposing the investment, the other is issued by the company itself.34

The misstatement in the prospectus drafted by the underwriter of the investment was considered in the Banca Manusardi case, decided by the Court of Appeals of Milan,35 to create a precontractual liability (art. 1337 of the Civil Code) where ‘a bank did not disclose some information concerning the economic situation of a company, whose convertible loan stocks were proposed to the investors’. In the Manusardi case damages were awarded for the ‘negative interest’, consisting in the losses occurred for not investing the money in a different object. Thus, the court decided to award the plaintiffs what they would have earned if they had bought Italian State Bonds for the same amount of money they had invested in the bad bargain.

The misstatement in the prospectus drafted by the company itself and certified by the accountant could entail both the precontractual liability of the company (art. 1337) and the civil liability of the accountant according to securities sales regulations,36 the requirement to certify and publish accounts37 and the duty to provide a truthful prospectus.38 There are only two cases of accountants’ liability in Italy, both consider the accountant liable for a misstatement in the books, but not for general information about the company’s business prospects. However, the Manusardi case result leads to speculation that the solution may be different in the future.39

The Netherlands

Cinderella has no remedy. I presume that shares were not sold by the company which -- e.g. as a result of regulations of the stock market -- was

34See Ferranini, ‘La responsabilità da prospetto delle banche’ in Banca Borsa e titoli di credito (hereafter BBTC) 1987, I, p. 437.

35A. Milan, 2 February 1990, in Giur. It., 1992, I, 2, 49, note by M. Arietti.

36L. 2 January 1991, n. 1, in GU 4 January 1991, n. 3.

37D.p.r. 31 March 1975, n. 136.

38EC Directive 80/310, L.4 June 1985, n. 281 and L.29 December 1990, n. 428.

39Trib. Torino, 13.6.1993; Trib. Milano, 16.11.1994, noted by Santaroni.

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under a duty to disclose these facts to the public (in its prospectus), nor that they were sold by a seller (e.g. by a member of the board) who in another capacity had knowledge of the fact that the company had already lost various important contracts to a Japanese competitor, which would trigger other specific regulations. Therefore this is a case of common mistake. In such a case, in principle art. 6:228, s. 1(c) BW, applies.

However, this common mistake could never lead to annulment of the contract since it is one for which Cinderella should remain accountable (see art. 6:228, s. 2 BW).40 First, because of the nature of the contract (sale of shares).41 Secondly, because Cinderella was mistaken with regard to an exclusively future fact. Although the company had already lost the important contracts to a Japanese competitor before the conclusion of the contract, the value of the shares dropped after it. If Cinderella had resold immediately, before the revelation in the press, she would have obtained a good price.

In this type of transaction the courts are very reluctant to accept remedies for disappointed buyers. Accepting a remedy here would be a serious threat to the proper functioning of the stock market.

Norway

Two potential issues arise here, that of the relationship between purchaser and seller and between the purchaser and the company.

(i) The selling of shares on the stock market is normally characterised by the purchaser and the seller having no knowledge of each other, and the seller is often without specific information about the companies in which he has shares. For these reasons, it would be difficult to establish breach of contract against the seller based on the insufficiency of the information provided.42

Whether a breach of contract can be based on objective defect criteria is rather doubtful.43 The purchase of larger holdings would, on the other hand, be negotiated on an individual basis. If it is presumed that this is the case in the present situation, and that the seller possessed the necessary information about the loss of the contracts, the question of the duty of disclosure is extremely pertinent.

40 Cf. Asser/Hartkamp II (2001), no. 189. 41 Cf. Asser/Hartkamp II (2001), no. 194.

42For the same reasons, invalidity would not apply, cf. J. Hellner, TfR 1987.313 ff.

43For a monograph on the sale and purchase of stocks and shares in Swedish law, see C. Hultmark, Kontraktsbrott vid köp av aktie. Særskilt om fel (Stockholm, 1992).

The Stock Exchange Act contains a specific regulation about a business’ duty of disclosure to the stock exchange, see § 47.44 Businesses have, according to the regulation, ‘a duty to provide the stock exchange with information necessary for a true evaluation of the stock’. Extensive guidelines are provided in the Stock Exchange Regulations, § 5--2.

There is reason to believe that the seller’s duty of disclosure to the purchaser to a large extent corresponds to a business’ duty of disclosure to the stock exchange. Individual conditions relating to the purchase situation can, however, be considered as extending or limiting this duty. According to this, the point of departure for judgment is whether the loss of the contracts would have any bearing on the value of the shares (‘correct evaluation of the shares’). Since this concerns the loss of important contracts, the duty of disclosure is to be expected.

(ii) Furthermore, a tortious claim against the company or even the company’s representatives could be entertained if this duty of disclosure according to the Stock Exchange Act has not been complied with. For the representatives of the company etc. this responsibility has been codified.45

Portugal

Cinderella’s chances of obtaining judicial annulment of the contract are very slight. The only possibility is a mistake about the contractual basis (art. 252◦, no. 2 of the Civil Code), as stated above, but it is difficult not to see this case as a situation covered by the normal risks of the contract, which exclude the application of art. 437◦.

The only remedy I see in this case is the liability for the prospectus about the sale of shares in the stock market, if the prospectus concealed the loss of important contracts. Articles 160◦ and following of the Securities Code set out a liability for truthful information in the prospectus which involves simultaneously the company itself, its corporate members or the financial intermediaries of the purchase. More specifically, art. 161◦ of the Securities Code states that if anybody has suffered harm as a result of insufficient, false or non up-to-date information in the prospectus relating to a sale on the stock exchange market, then he can bring an action asking for damages.46

44The Stock Exchange Act of 17 June 1988, no. 57.

45Section 17--1 of the new General Companies Act adopted 13 June 1997 corresponding to §§ 15--1 and 15--2 of the old Companies Act of 4 June 1976, no. 4.

46See A. J. Ferreira, Direito dos Valores Mobiliários (Lisbon, 1997), pp. 368 ff.

meaning that her mistake could have been due to negligence or a lack of diligence, which does not annul a contract.

(iii) Another possibility might be that the National Stock Market Commission had ‘privileged’ information on these securities which it failed to make known to the shareholders: this would make the Commission liable for the loss caused to Cinderella and any other affected party.

Comparative observations

Here the sales contract concerns shares of a company listed on the stock market and the object of the sale has a direct effect on the solutions.

No country admits mistake here. In Austria and Greece the buyer’s potential mistake is qualified as a mistake as to value and thus a mistake as to motive which is not fundamental to lead to annulment. Other analyses (Germany, The Netherlands) deny mistake on the basis that the buyer has tacitly accepted the risk or that her failure to be aware of the risk amounts to inexcusable behaviour (Spain).

England, Ireland and Scotland go one step further in refusing any remedy: there is no question of mistake nor misrepresentation. This bloc is not, however, restricted to the above-mentioned countries since Dutch law takes a similar view that the buyer assumes the risk and that the proper functioning of the stock market assumes a minimal interference.

As far as the imposition of a duty to inform is concerned, the majority of countries are also in agreement that no such general duty exists on the seller of shares of a listed company. The question then arises as a matter of factual interpretation: who exactly is the seller of the shares? The way in which reporters interpreted the facts reveals information about the various ways the stock market operates and is controlled in each country.

(i) If the sale is made by the company

Liability may be admitted by a number of countries, mostly on the grounds of specialised ‘prospectus liability’ contained in specific legislation, although it was considered that non-compliance had not been proven on the facts (Belgium, England, Italy, France). In contrast, Germany, Portugal and Norway consider that liability under this head could arise.

(ii) If the sale is made by a director of the company

In contrast, a claim made by a shareholder against a director of the company as seller (conceivable under French and Belgian law) would fail

consequence is manifested either by not imposing a duty to inform or by imposing a specific duty and interpreting it restrictively so that it does not apply. The prevailing values illustrated by this case are the contractual allocation of risks without outside interference and maintaining the security of transaction with the net result that party autonomy continues to apply.

In case Estella has actually received such a document it is necessary to ascertain whether or not the one-week period has already expired.

(ii)If the legislative time period has already expired then the question whether Estella is entitled to annul the contract on the ground of mistake arises. In accordance with § 6 subsection 1 figure 14 Konsumentenschutzgesetz the right to annul on the ground of mistake can neither be limited nor excluded by a contractual agreement. Annulling the contract is available only in case of an important mistake. The following conditions have to be fulfilled: (i) a mistake as to content of the contract in the wider sense exists; (ii) the mistake is fundamental;

(iii)one of the three possibilities under § 871 ABGB exists, namely that

(a)the mistake was caused by the other party; or (b) the other party should have recognised the mistake due to the circumstances; or (c) the mistake was notified on time.

In accordance with § 871 ABGB Code a contract can be annulled in the case of a mistake as to the important and fundamental nature of the subject matter of the contract. The term ‘important and fundamental nature’ does also include the usage of a physical good.1 The importance of a certain quality of the goods is primarily to be considered in accordance with generally accepted business usage.2 Since it is important that a cooking pan can be used on a common stove, the mistake is, therefore, a mistake as to the content of the contract. The mistake is important, as Estella would not have bought a cooking pan that she could not use if she had known the true circumstances. Furthermore, the mistake has been caused by Uriah Heep as he was obliged to provide full information (precontractual duty to inform) about the usefulness of the goods’ characteristics. Estella can thus successfully annul the contract. In addition she can sue Uriah Heep for damages incurred as a result of her reliance on the contract in accordance with the rules under culpa in contrahendo.3

(iii)The usefulness of the cooking pan for an entirely electric kitchen has to be seen as a generally recognised qualification of a cooking pan as to the large range of usage of that generally recognised form and method of energy. Therefore, this has to be seen as a material defect for which the seller is liable. The material defect is relevant and important as the defect does not permit the proper use of the goods, but the defect is removable. Estella, therefore, is entitled to claim termination on account of a material defect within a period of six months.

1 Pisko in Klang II, 118. 2 Gschnitzer in Klang IV/1, 124.

3OGH 8.10.1975 JBl, 205 note by Bydlinski; Koziol and Welser, Grundriß des Bürgerlichen Rechts I 138.