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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of the misrepresentation would disappear if David was employed as a representative (§ 166 I) or if he had performed an obligation for which Scrooge Bank was vicariously liable (§ 278). David certainly acted at the request of Scrooge Bank but not, however, as its representative; rather, he acted in his own interest. Moreover when he persuaded his wife, Nell, to make the contract of guarantee, he was not performing an obligation on behalf of Scrooge Bank for which it was vicariously liable; that is to say, Scrooge Bank was not connected to Nell so that David could have acted in ‘discharge of her liability’ (§ 278). Thus, Nell may not annul the

(Erklärungsirrtum).21 A mistake in substance is made if the declaration -- according to the objective meaning of the declaration -- is understood differently from the way that it was intended; a mistake in expression on the other hand, is made if the declarer makes a mistake in his choice of symbols with which he makes the declaration: if he makes a slip of the tongue or the pen, or if -- as in our case -- he signs a document without knowing that he is making a statement of guarantee. This distinction between mistakes in substance and expression is academic and does not offer any reference points for different evaluations.22 In both cases the declarer did not intend -- as expressed by the wording of the definition contained in § 119 I -- to ‘[make] . . . a declaration of this substance’. Therefore, it is also unnecessary to attribute the mistake that Nell has made to one of these two instances of mistake. As to the operativeness of the mistake, it is only important to ascertain whether it subjectively and objectively caused Nell’s mistake and whether Nell had assumed a particular risk in making the declaration.

(a) Nell believed when she signed the document given to her by David that she was signing a loan document; not in a capacity as a future borrower but for all intents and purposes as the acting representative of David’s company. Her mistake therefore related to the meaning of her signature. Accordingly, Nell may annul the contract if she would not have signed the document which David presented to her had she

21Cf. for example Flume, AT II, 449 ff.; Bork, AT 303 ff.; MüKo/Kramer, § 119 para. 46 ff. and para. 55 ff.

22Their roots lie in the psychological ‘Doctrine of Intent’ by A. Brinz, Pandekten (2nd edn, Brussels, 1892), vol. IV, pp. 1393 ff. and E. Zitelmann, Irrtum und Rechtsgeschäft (Leipzig, 1879), the effects of which still influence German legal theory (especially with regard to the ‘mistake in motive’).

been aware that it was in fact a contract of guarantee. From the facts it appears certain that this would have been the case (subjective causation criterion). Likewise, it is also certain that another person making the same mistake would not have made the contract in full knowledge of the facts (objective causation criterion).

(b)In apparently signing a document without having read it, Nell could have assumed the risk of making a mistake in the substance of this document. In this case she would not be able to annul the guarantee.23 However, when she signed the document presented to her by David she believed she was entering into a loan agreement in her capacity as representative. Therefore, she did not intend to make any old declaration and thereby assume the risk of the declaration’s meaning diverging from what she believed it meant, but rather she thought she was making a declaration that was precisely defined in content. In such cases, the person making the declaration will be allowed to annul where, contrary to his belief, he actually makes a different declaration.24

(c)Nell can of course free herself from the obligations under the contract of personal guarantee but she will then be liable to compensate the bank’s negative interest (§ 122). That is to say, that if Scrooge Bank neither knew of her mistake nor could have known of it (§ 122 II), she has to compensate the bank for the damage it suffered arising from its reliance on her statement of guarantee being valid. Due to the fact that Scrooge Bank would not have authorised credit to David if Nell had not entered into the guarantee then its negative interest amounts to the sum of the loan which was paid to David. Thus Nell is now liable under § 122 and no longer under the statement of guarantee which was effectively annulled -- for the satisfaction of the amount to which she would have been liable under the guarantee. Annulment is therefore also worthless for Nell due to the obligation it carries with it, to compensate the non-mistaken contracting party for his negative interest.25

Greece

Nell signed the document unaware that she was undertaking a legally binding obligation, she merely believed that the requirement to sign the

23BGH NJW 1951, 705; BGH DB 1967, 2115.

24RGZ 62, 201, 205; RGZ 77, 309, 312; RGZ 88, 278, 282 f.: RAG JW 1930, 2729, 2730; BGH WM 1956, 316 f. = BB 1956, 254 = DB 1956, 228; BAG NJW 1971, 639, 640; BGJH BB 1994, 2439, 2440; in overview and (with further references) MüKo/Kramer, § 119

para. 52; cf. also Henrich, Rabelsz 35 (1971) 55 ff.; Soergel/Hefermehl, § 119 paras. 11 ff.; Flume, AT II, 450 and 453.

25BGH WM 1984, 27 f. comes to the same result.

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loan document as secretary of the borrower was a common practice in banking business. It is controversial whether in this case the contract must be regarded as non-existent26 or having binding force.27 In the latter case the contract can probably be annulled on the grounds of mistake. If, however, the first view is adopted, the bank is entitled to be compensated by Nell on the grounds of precontractual liability since her negligent behaviour is in breach of the principles of (objective) good faith and common usage. In accordance with the express provision of art. 198 § 1 AK she is liable to compensate the bank for its negative interest or damage resulting from its reliance on her behaviour.

An intermediate view submits28 that the issue whether or not behaviour should be considered as a legal act is a matter of interpretation. Interpretation is effected on the basis of the criteria laid down by the two general provisions, arts. 173 and 200 AK. More specifically, it is submitted29 that if the person could with some attention realise that third parties might consider his conduct as a declaration of will, the act must be considered as legally binding. It is obvious here that the existence of a contract is not in dispute. It is however necessary to examine whether it remains possible for Nell to annul the contract of guarantee that she did not realise she had made.

Nell can seek to annul the contract on the basis of mistake. There is an involuntary discrepancy between the meaning of her declaration and her will (art. 140 AK). Her mistake is fundamental according to the objective and subjective criteria of art. 141 AK. Nell’s mistake affects such an important element of the contract that she would not have concluded it had she known the true state of affairs. However, once again, Nell is obliged to compensate Scrooge Bank since it was not at fault in being unaware of her mistake (art. 145 AK).

As Nell signed the document without having read it, the bank could allege that annulment is excluded as contrary to good faith (art. 144 § 2 AK), since Nell has shown negligence without which she would have avoided making the mistake. The special conditions of the case however, the fact, for example, that she trusted David because he was her husband would, I think, justify annulling the contract by giving priority

26See for example Gazis, General Principles of Civil Law, p. 58. With reservations E. Michelakis, in ErmAK Intr. Notes to Arts 127--200 (Athens, 1954), n. 102.

27Karakatsanis AK 140 n. 7; Spyridakis, General Principles, p. 579.

28M. Stathopoulos, ‘On the Method of Interpretation of the Declaration of Will’ (1969) NDiK 25, p. 6, Papantoniou, General Principles of Civil Law, p. 293.

29Papantoniou, General Principles of Civil Law, p. 294.

to the will theory to the detriment of the security of transactions. Nell was induced into the contract by David’s fraud, but she is not however entitled to annul on this ground as the fraud was committed by a third party.30 According to art. 147 AK annulment can only be sought if the other party to the contract, here the bank, was aware or should have been aware of the third party’s fraud.

Annulment has retrospective effect, so that when the guarantee contract becomes void this means that Scrooge bank granted the loan without the guarantee. In turn, the Bank could therefore, seek to annul the loan agreement on the grounds of mistake or fraud.

As to whether a duty to inform or ensure that Nell is informed lies on the bank, it is submitted31 that good faith imposes on the lender a duty to inform the guarantor about any fact that could affect his decision to provide the guarantee, e.g. information about the extent, nature and importance of the principal obligation. Thus, if the creditor has concealed from the guarantor the real economic situation of the debtor with the purpose of inducing him to give the guarantee, the provisions on fraud (art. 147 AK) may be applicable. However, case law holds32 that in view of the nature of a guarantee as a unilateral contract, a duty to inform only exists when the guarantor declares that providing the guarantee depends on the information given to him about the economic situation of the principal debtor.

Ireland

Owing to the fact that there can be said to be no misrepresentation made by the bank, there are no remedies available to Nell. Neither can the bank be held to be aware of a mistake. Similar to law in England, Irish law recognises the doctrine of non est factum (this is not my deed). This doctrine applies in relation to a written contract that can be avoided in circumstances where one party to the contract was unable to understand the document and was in ignorance of its character and he was not unduly irresponsible in making the mistake. The doctrine is narrowly construed by the Irish courts and has tended to be successfully invoked only in extreme cases such as where one party was suffering from a disability such as illiteracy -- see Bank of Ireland v. McManamy.33 Nell will have difficulty in convincing an Irish court that she should be protected by this doctrine.

30See Karakatsanis AK 147 n. 12; Spyridakis, General Principles, p. 616.

31Kafkas, 847 AK p. 440 note 1a.

32AP 194/1956 EEN 24, 710; Ef of Athens 1177/1956 EEN 24, 156. 33 (1916) 2 IR 161.

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The Irish courts tend to be concerned that adequate protection is given to an ‘innocent’ party such as Nell when such cases arise and would frequently expect banks to shoulder the loss, which results as a consequence, on the basis that banks must share a measure of culpability in failing to make sufficient investigation in a case such as this to ensure that Nell understood what she was doing.

Italy

Nell is in a bad position, she can sue David for delictual liability (art. 2043 of the Civil Code) for he induced her to sign a guarantee pretending it was an extra document for the mortgage but the burden of proof will be very onerous and David will not be able to compensate her. Nell cannot claim she was mistaken since mistake is assessed objectively in Italian law and prima facie she is capable and had she read the guarantee contract, she should have been able to understand it.

Until recently, according to a decision of the Supreme Court, the only way to obtain the guarantee’s annulment was provided by arts. 1325 (conditions of validity) and 1418 (causes of nullity of contract) of the Civil Code:34 ‘when a party signs a contract drafted by the other, under a misrepresentation about the real nature of the obligation arising out of it, there is not fraud but an absolute lack of conditions, i.e. absence of causa’.35

The Netherlands

Nell may challenge the validity of the contract but this may be unnecessary.

Nell was mistaken as to the content of the document she signed. She thought that she signed the loan document for a short-term loan from the bank in her capacity as secretary of her husband’s one-man company,

34Article 1325 Indication of conditions: ‘The conditions of validity of the contract are:

(i)agreement of the parties (1326 ff.)

(ii)causa (1343 ff.)

(iii)object (1346 ff.)

(iv)form when prescribed by law, under penalty of nullity (1350 ff.).’

Article 1418 Causes of nullity of contract: ‘A contract that is contrary to mandatory rules is void, unless the law provides otherwise. A contract is rendered void by the lack of one of the requisites indicated in art. 1325, unlawfulness of causa, unlawfulness of the motives in the case indicated in art. 1345, and lack of the object of the requisites set out in art. 1346. A contract is also void in the other cases established by law.’

35 Cass 1977, n. 163.

whereas she actually signed a document for what subsequently proved to be a personal guarantee for David’s business. Is she now personally bound by a guarantee contract (borgtocht) for the debts of her husband’s oneman company?

It could be argued that no guarantee contract was concluded since there was neither consensus nor was Scrooge Bank justified in relying on the fact that Nell wanted to conclude such a contract. There is no consensus ad idem since Scrooge intended to conclude a contract of personal guarantee whereas Nell intended to contract a short-term loan on behalf of David’s one-man company. Under Dutch law this is a case of ‘mistake improper’ (oneigenlijke dwaling).36 Proper mistake is a defect of will: a party intends to conclude a contract, but his will was formed in a defective way: he would not have wanted had he known better. Improper mistake is the case where a party did not intend what he declared; he said one thing but he wanted another.

Here Nell declared (by signing the document) that she wanted to be bound to an agreement of personal guarantee but actually she did not want to be bound at all; she only wanted to bind her husband’s company, and she wanted that company to be bound to a different type of contract, i.e. a short-term loan. In other words she wanted to conclude a different type of contract and in a different capacity. Therefore no contract was concluded on the basis of consensus (wilsovereenstemming) (art. 3:33 BW).37 However, what if the bank did not know that Nell was mistaken? No evidence is given that the bank knew that the husband had misled his wife. Can the bank argue that its reliance should be protected? Under the Dutch Civil Code reliance is protected in principle if it is reasonably justified in the circumstances (art. 3:35 BW).38 However, is the bank here justified in its reliance? Probably not since the bank was under a duty to investigate whether Nell knew what the object of the document she was signing was and what the consequences of her signature would be. Sometimes a party is only justified in its reliance if it made some investigations before.39 Such a duty is more likely if

36Cf. on the distinction between mistake and mistake improper, and on its origins (Savigny) Asser/Hartkamp II (2001), no. 174.

37Article 3:33 BW: ‘A juridical act requires an intention to produce juridical effects, which intention has manifested itself by a declaration.’

38Article 3:35 BW: ‘The absence of intention in a declaration cannot be invoked against a person who has interpreted another’s declaration or conduct, in conformity with the sense which he could reasonably attribute to it in the circumstances, as a declaration of a particular tenor made to him by that other person.’

39Asser/Hartkamp II (2001), no. 110.

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that party is a professional and the other a non-professional.40 And in the particular situation of a private person giving a personal guarantee to a bank for the debts of one of his beloved ones the courts seem to want to protect that person. This was explicitly decided for mistake in the proper sense (see the case Van Lanschot/Bink41 that I will discuss in a moment), but the same must hold for a case of improper mistake like this one. In legal doctrine it is even argued that there should be a general protection of guarantors for relatives’ debts (‘bezwaarde verwanten’) against banks in the form of a stricter duty to inform persons who are about to give guarantees for their relatives.42

Could Nell also annul the contract on the basis of mistake in the proper sense? She probably could, because even if she did not argue that she thought she had signed a document to a different effect and thus would not challenge that consensus was reached and a contract concluded, she would be protected by the law because she could challenge the validity of the contract on the basis of mistake. She could invoke the decision in the Van Lanschot v. Bink case. In that case it was held:

A contract of personal guarantee like the one at hand may be annulled for mistake, if the guarantor when forming his opinion on the likelihood that he would be called upon, based himself on such an erroneous perception of the state of affairs that, had he had a correct perception of the situation, he would never have been prepared to stand surety. This rule also applies in case the mistake was not induced by the other party.

In our case Nell could equally argue that the bank should have informed her as to the risks related to the personal guarantee she was about to give.

From the statement of facts it seems that Nell went to the bank alone. This raises an interesting question. Article 1:88 s. 1 sub. c BW says:

One partner needs permission from the other for the following legal acts: [a, b] c. contracts with the effect that he will bind himself, outside the ordinary course of his business or profession, as a surety or joint and several debtor [. . .].43

Article 1:89 BW says that the partner may annul the contract concluded in violation of art. 1:88 BW. If the bank cannot prove that the husband actually gave his permission, he could annul the personal guarantee. He would probably not do this immediately, of course, but he may have

40 Asser/Hartkamp II (2001), no. 110. 41 HR 1 June 1990, NJ 1991, 759, note Brunner. 42 Tjittes (1996), pp. 53--7. 43 My translation.

an interest in doing so when the bank invokes the personal guarantee. Would the law allow him to do so? The principle nemo auditur turpitudinem suam allegans would probably be a bar but that principle is not generally accepted by Dutch law.44

Norway

Two sets of invalidity rules could be applied to the question as to whether fraudulent misrepresentation by a third person (David) can be pleaded by Nell, the guarantor against Scrooge Bank.

(i) The first set of rules relates to fraudulent misrepresentation as given in the Contract Act, § 30, para. 1, second clause, which reads:

The same applies [namely, the promise is invalid] in cases where a third party has obtained a declaration of will by fraud, and the second party was, or should have been, aware of the fact.

Fraudulent misrepresentation is applied here to a so-called invalidity, which may only be pleaded against bad faith addressees of a contractual promise: in Scandinavian theory called ‘relative invalidity’ (relativ ugyldighetsgrum) as opposed to ‘strong invalidity’ (sterk ugyldighetsgrum), which operates against parties in good faith, see below. If there were no conditions attached to the signing of the guarantee, which should have raised the bank’s suspicions, Nell is bound according to this rule. She cannot invoke David’s fraudulent misrepresentation against the bank as it was in good faith. She can, of course, present a claim for compensation to David, but this would probably not have much point.

(ii)The other set of rules that are relevant, the principles relating to forgery (falsk) are not laid down by statute. According to Norwegian and Scandinavian law, the pseudo-declarer is not bound by false or forged declarations. This rule involves a strong invalidity objection, that is, that it could also be applied against an addressee acting in good faith. According to this principle, Nell is not bound by her declaration.

(iii)The question, then, is which of the two sets of rules should be applied. If David had signed Nell’s name, a classical forgery would have been present. The problem is that Nell, herself, has signed the guarantee. We are then, formally, within the area of fraudulent misrepresentation under the Contract Act, § 30.45

44Cf. H. J. Van Kooten, Restitutierechtelijke gevolgen van ongeoorloofde overeenkomsten (diss., Utrecht 2002).

45It might also be appropriate to consider the situation a mistake in the transaction, cf. the Contract Act, § 32, para. 1.

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Nonetheless, there is in theory a tendency to judge cases, where the promisor does not realise that a promise has been given, according to the law of forgery.46 This means that the promisor for a start does not become bound, regardless of the addressee’s good or bad faith. The thinking is supposedly that the same conditions apply in these situations as with real forgery, namely, that one has few chances to protect oneself against this type of misuse. There is, to my knowledge, no firm legal position regarding this question.

If the pseudo-declarer had behaved negligently, this person would presumably still not be considered bound.47 However, it would generally be a common understanding that the promisee in such a case can claim compensation through the reliance interest.48 It is beyond doubt that Nell has acted negligently in signing the guarantee, and therefore can be made liable to pay damages to the bank.

In the present case, the rules governing compensatory damages completely eliminate the protection provided by the invalidity regulations. The reliance interest corresponds to the size of the loan. The rules regarding contributory negligence of the party suffering the loss (the bank) can, however, apply. According to the Damages Act, § 5--1, compensation in these cases can be reduced or cease to apply, if this seems reasonable.49

Portugal

In this case, David has committed a fraud (dolo). According to art. 253◦ of the Civil Code there is a fraud when someone makes a suggestion or acts deceitfully with the intention of inducing or not disclosing one of the parties’ mistake. Article 254◦ specifies that the fraud can be performed by a third party, but in this case the contract can only be annulled if the other party knew or should not be unaware of the fraud. However, if anyone acquires a benefit as a direct consequence of the fraud the contract is voidable in relation to that benefit, where it concerns the author of the fraud or someone who knew or should not be unaware of it.

Therefore, if Scrooge Bank knew or should not be unaware of the existence of the fraud, Nell would be able to obtain the judicial annulment

46See H. Ussing, Aftaler (Copenhagen, 1974), p. 159; L. L. Andersen et al., Aftaler og mellemmænd (Copenhagen, 1991), p. 228; as well as A. Adlercreutz, Avtalsrätt (9th edn, Lund, 1991), vol. I.

47According to J. Hov, Avtalerett (Oslo, 1992), p. 212. In cases of gross negligence (culpa lata), the validity of this position might be questioned.

48See Hov, Avtalerett, p. 212 and Ussing, Aftaler, p. 42.

49The Damages Act of 13 June 1969, no. 26.