Учебный год 22-23 / Mistake, Fraud and Duties to Inform in European Contract Law (The Common Core of European Private Law)-1
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The second distinction is more important. Unlike Bob, Damien appreciated the bargain he was getting before the contract was formed. Since Steuart’s Trs v. Hart81 it has been a principle of Scots law that a party cannot ‘snatch at a bargain’. In that case the pursuer sold a piece of his land in the belief that the feu-duty82 for the whole area would fall to be paid by the purchaser of the plot. The land had been advertised on this basis and the terms of sale did not contradict the pursuer’s belief. However, this intention was not achieved. Further, although the defender was aware of the pursuer’s belief, he did not inform the pursuer that he was mistaken. As the mistake did not prevent the contract from being formed, it was still valid. The appropriate remedy for the court was to grant rescission.83
The First Division of the Court of Session84 did not base their judgment on precedent nor classify the nomen iuris as either mistake or taking advantage of the other part. These omissions were highlighted in Spook Erection (Northern) Ltd v. Kaye.85 Again, the pursuer was mistaken as to the quality of the subjects in a sale of land. He believed the property was under a 999-year lease. The defender, knowing the pursuer’s belief, did not inform him that he had discovered that the term of the lease was only 99 years. Unsurprisingly, given the similarity of the facts, the pursuer relied on the Steuart’s Trs principle that a person should not knowingly take advantage of another. However, while appreciating the argument, the court did not find the dicta in Steuart’s Trs appropriate or sound in principle. Lord Marnoch questioned why favouring the seller, when the buyer had received a good bargain, should be seen as preferable. Therefore he refused to grant rescission.
In Spook Erection the court distinguished Steuart’s Trs on the grounds that the earlier court had been influenced by the pursuer’s uninduced, unilateral mistake and not simply because the defender took advantage
Scotland (1997) SC (HL) 111. The effect of this obligation based on good faith appears to be restricted to cautioners.
81(1875) 3 R 192.
82Feu-duty is a monetary burden on land in Scotland. The holder of the land is bound to pay a Superior the specified amount. Statutory intervention in the 1970s has decreased the number of properties so affected. The feudal system in Scotland is soon to be abolished: the Abolition of Feudal Tenure, etc. (Scotland) Bill 1999.
83Before rescission is granted, restitutio in integrum must be possible, i.e. the parties must be able to be restored to the positions they were in before the contract was formed.
84The Court of Session is the highest civil court in Scotland. The Inner House of the Court is divided into two divisions; First and Second.
85(1990) SLT 676.
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of the pursuer’s ignorance. Lord Marnoch also maintained that uninduced unilateral mistake was irrelevant after Stewart v. Kennedy. However in Angus v. Bryden,86 Lord Cameron of Lochbroon argued that Steuart’s Trs remained good law. He maintained that a party would usually be personally barred from denying the terms upon which he was prepared to contract by pleading unilateral mistake. Therefore a purchaser could accept a seller’s offer despite his knowledge that the seller had undervalued the goods. There would, however, be grounds for rescission if the final offer that the buyer accepted was drastically different from the offers being proposed during negotiations so that the buyer knew the final offer was made under mistake. As there were no prior negotiations between Célimène and Damien, she would remain personally barred from relying on her unilateral mistake.
However, by applying the alternative interpretation of Stewart v. Kennedy, it could be argued that the principle against snatching at a bargain survives despite Spook Erection. But this would not aid Célimène. As stated, the remedy of rescission operates differently from declaring a contract void ab initio. As Célimène’s contract with Damien was validly concluded, he was able to pass on his title to the Louvre. This third party intervention prevents restitutio in integrum and thus bars annulment.87 Therefore the availability of a remedy for Célimène is dependent on an interpretation of Stewart v. Kennedy which permits uninduced unilateral mistake.
Spain
In the contract of sale Célimène made a mistake as to the essential conditions of the subject matter, which were the main reason for the contract. Célimène was unaware that there was a picture of great value among the objects she was selling: this is a fundamental mistake which comes under the second alternative in art. 1266.1 of the Civil Code.
As explained in Case 1 the excusable nature of the mistake is determined according to the following factors: (i) the diligence of the mistaken party in concreto, and the standard is less high when a layperson contracts with an expert;88 (ii) consideration must be given to whether the other party collaborated in the mistake: the fraudulent or faulty nature of that party’s action is not an essential requisite.
86 (1992) SLT 884. 87 The Scottish term is ‘reduction’. 88 Supreme Court Ruling 4/1/82.
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Clearly, on that basis, Damien did manoeuvre to bring the sale to fruition, intentionally concealing information known to him and in the knowledge that, had Célimène been aware of it, the contract would probably not have been made, at least not on the same conditions. While he did not contribute directly to the production of the mistake, he should have advised the seller of the information which he, as an expert in the field, had at the time when the contract was concluded (this may indeed amount to ‘negative fraud’ due to an omission).
On the other hand, given Célimène’s personal circumstances, a high degree of diligence cannot be required since the information about the true value of the picture was not easily accessible to her. Added to this is that, as a non-expert in the field, she contracted with an antiques dealer who was fully aware of the true value of the painting, so that we must conclude that Célimène was the victim of an entirely excusable mistake.
Thus the requirements are met for Célimène’s defective consent to be a cause for annulling the contract, pursuant to art. 1266 of the Civil Code. Célimène must bring the claim for annulment within four years, as provided for in art. 1301 of the Civil Code, which also establishes that time starts running from the moment when the contract was concluded.
Comparative observations
I -- The salient features of this case, again concerning a mistake made by the seller in relation to the object of her sale, are as follows. There is a difference in the status of the contracting parties, one a professional with expertise in the field and the other a consumer, without specialist knowledge. The effects of the annulment of the contract for mistake, where mistake is operative, are conditioned by the protection of third party rights which have interfered in the initial sale. Furthermore, the non-mistaken party’s behaviour (keeping silent about the object sold and paying twice the purchase price) are subject to a number of interpretations and inform us about different national laws’ views about silence. Three possible remedies can be considered here, mistake, fraud/lack of good faith and variants of laesio enormis.
Mistake
There is a fundamental mistake here in Austria, Belgium, France, Germany, Greece, Italy, The Netherlands and Spain. Célimène can therefore ask for the contract to be annulled (or under Dutch law annul the
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contract herself) on this basis. As there is no ambiguity as to authorship and as the parties are in an unequal bargaining position, no bars will preclude Célimène from asking for judicial89 annulment of the sale. In addition, the fact that Damien was aware of Célimène’s mistake strengthens her case. As a consequence, no compensation or protection will be given to the non-mistaken party under Austrian, German or Greek law. The difficulties which arise will, therefore, be evidential (not substantial) and practical since the painting has now passed into the hands of a bona fide purchaser. All such legal systems (except for Portugal) have means to protect such a third party purchaser which means that in a majority of cases the consequences of the annulment will not be restitution in integrum. In France, Belgium, Italy, the Netherlands and Germany restitution of the subject matter of the sale is converted into its true monetary value, i.e. Damien will be ordered to pay the difference between the contract price and the real value of the painting to Célimène. In Austria, if the painting has been sold on, an alternative remedy to annulment lies in adapting the contract, namely obliging Damien to pay the higher price that he himself received. Again, the result is the same, despite the slightly different legal basis. It is submitted that in Greece, according to a somewhat controversial interpretation, if the annulled (void) contract of transfer of title is assimilated to a lost good, the rules protecting bona fide third party purchasers will not apply and Célimène will even be able to claim title over the painting itself. In the Netherlands, a similar solution as to the qualification of mistake itself is reached through a more causal analysis of mistake, namely that Damien should have informed Célimène as to the value of the painting. Conceptually this is a mistake, even though it overlaps with the next ground, since the duty to inform does not exist independently but is covered by both mistake and fraud.90 In addition, even though mistake may be declared extra-judicially, Célimène may be obliged to go to court, thus making the solution converge even further, since if title has passed on to a third party, she will be entitled to restitution of the real value (which will be compensated in part with the price she received) and if Damien refuses to pay she will ask the court to order specific performance.
As for England, Ireland and Scotland, the legal analysis diverges. Under English and Irish law, the factual particularities have no bearing on the
89As stated, in the Netherlands, judicial annulment is not required.
90See introduction for an explanation of the different foundations of the duty to inform.
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legal qualification, there is no mistake here just as in the previous case. The English view of mistake is certainly the most severe. In Scotland, however, there could be, according to a certain interpretation of case law, an essential unilateral uninduced error. In practice however, if such a mistake does not render the contract nul ab initio and where restitution is no longer possible since the property has been passed on to a third party purchaser, reduction or annulment is no longer an effective remedy. This seems to be an intermediate position since the equivalent of annulment cannot be converted into monetary restitution as under civil law.
Fraud/lack of good faith
For France, Belgium, Greece, Austria, Portugal fraudulent concealment of facts known by one party to be material to the other suffices to constitute a fraud by virtue of a case law interpretation of the provisions of the Civil Code on fraud. Silence by Damien who knew the true value of the painting gives rise to tortious liability on the basis of what could be called fraud by omission. A similar result can be obtained by an extensive interpretation of good faith provisions. It should be noted, for example, that under Portuguese law liability is implied not from the equivalent of fraud but from culpa in contrahendo and the duty to negotiate in good faith. However, the position in Italy is less certain as the case law on the point is sparse. An action in fraud gives rise to both annulment and damages but the remarks already made as to the effectiveness of a remedy in annulment apply, barring Portugal, which gives little protection to a third party in such a case and would consider that restitution ad ante is still possible. Likewise, in Norway, the solution can be assimilated with the above approach since a remedy would be available under § 33 of the Contract Act (and/or the more comprehensive § 36 of the same Act). As Célimène can prove that the contract is contrary to decency and good faith -- the fact that Damien is a professional buyer dealing with a non-professional is decisive -- she is entitled to ask for the contract to be annulled with restitution. However, the fact that the painting has passed into the hands of a bona fide purchaser means that restitution will be provided in its monetary equivalent. In addition compensation may be awarded; damages are meant to put the innocent party in the position she would have been had the contract not been made. Thus most reporters agree where both mistake and fraud are optional remedies,
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since fraud is easy to prove in these circumstances, it will be preferable as damages may be awarded as well.91
Conversely, in England, Ireland and Scotland, the law’s view of silence is much more restrictive. There is no equivalent to fraud by omission. Damien’s silence cannot be a ground for annulment and/or damages in the absence of a prior duty to disclose. Here a real divergence lies in the protection awarded to the victim of the other party’s silence. It is somewhat difficult to give a satisfactory explanation of the unwillingness of the common law to protect such a victim although one could suggest that if the residue of the caveat emptor principle applies, a fortiori caveat vendor. In the same way, German law is more reluctant to impose a duty to disclose in these circumstances, a less extensive interpretation of § 242 BGB would apply under German law; absent a fiduciary relationship between the parties, there is no reason why Damien has acted contrary to good faith and he should be able to benefit from his discovery. German law joins the common law position here, which may be explicable on the basis of underlying (and somewhat inexplicit) economic rationales.
Laesio enormis and unconscionability
Although a number of common law remedies may be invoked under the general heading of unconscionability, such as the rule in Fry v. Lane -- sale by a poor and ignorant person under English law; snatching at a bargain -- the rule in Steuart Trs v. Hart under Scottish law, in practice such a remedy is useless since it renders the contract voidable and once title has passed on into the hands of a third party, the contract is no longer capable of being annulled. In contrast, the remedy of laesio enormis may be successfully invoked under Austrian law as may qualified lésion under Belgian law. Greek law takes a similar view as the meaning given to immoral contracts coincides with the Roman law concept of laesio enormis. Conversely, German law will reject such an attempt, under § 138 I and II of the BGB, since once again a more economic analysis prevails: since Damien’s behaviour has prevented Célimène from making a profit,
91On the additional question of damages for fraud, the conceptual evaluation of damages differs slightly. Under Austrian law, for example, the equivalent of ‘reliance damages’ may be recovered, namely reimbursement for expenditure incurred as if the contract were to be performed (§ 1874 ABGB). Whereas under French law, for example, the analysis varies: damages awarded on the basis of tortious liability compensate the victim for all the loss suffered as a result of the fraud (art. 1382 of the Civil Code).
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as opposed to suffering a loss, which she would not have made except for his discovery, German law does not consider that Célimène can be deemed to have been exploited according to this doctrine.
II -- Despite the similarities of legal analysis it is essentially the operation of a convergent legal bar, in the form of protection given to the bona fide third party purchaser for the object of the sale, which brings together the various different legal systems, but not always to the same conclusion. In the legal systems where there is a legal qualification of fundamental mistake it should be noted that the effectiveness of the remedy of retrospective annulment and restitution in specie is diminished as practically impossible. It is therefore possible to identify a similarity of outlook in relation to the limits of mistake; the protection of the mistaken party to what is essentially a unilateral mistake, does not prevail over the property rights of an innocent third party. However, differences may lie in the form in which restitution of the subject matter of the sale may be converted into monetary compensation. This possibility highlights the conceptual differences between annulment known to civil law systems and the void/voidable distinction known to the common law, since even where alternative remedies might lie in English and Scots law, on the basis of either unconscionability or snatching at a bargain, the material impossibility of awarding restitution, when a contract is voidable, precludes the operation of the remedy altogether.
More importantly, this case highlights a difference of outlook in relation to the parties’ behaviour, status and in particular silence. Generous interpretations protecting the inexperienced seller given in a form of laesio enormis, under Austrian, Belgian and Greek law (see above), will treat severely the so-called exploitative behaviour of the buyer on this basis. Other systems resort to an extensive notion of mistake, fraud or lack of good faith to arrive at a similar, or even more generous result, since additionally, compensation may be granted. Obviously, the interpretation depends on its teleological aim (see, for example, German law’s application of § 138 BGB). A divergence arises between systems protective of a deemed weaker party, whose interests are put to the forefront, and those which seem to prefer the research and discovery of economic values, albeit at an individual cost, where each party must bear the risks. The division between these competing values is not straightforward but arises out of a multiplicity of factors (legal theory, economic considerations etc.). In this case the national legal systems clearly do not all adopt one common legal value: priority given to economic considerations, or
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conversely, to protecting a party whose informational power (lack of expertise) does not match the other party’s, highlights a clash in outlook. This can also be explained by a split in legal theory: some legal systems still cling to the idea (or the myth?) of contracting on equal footing (even if the parties are not, de facto, equal), while others admit this inequality and are more wary of how the stronger party can take advantage of the weaker.
It is interesting to note that the Italian and German reporters have made suggestions de lege ferenda that take us back to Roman law. If the rules relating to discovery are applied by analogy, maybe an intermediate solution would be the fairest (awarding half to both discoverer and owner). This is not, as yet, positive law!
Case 3
Emile v. Far Eastern Delights
Case
Far Eastern Delights, an ancient oriental art gallery, sold a Chinese statuette to Emile, an amateur art lover. The piece was described by Far Eastern Delights’ catalogue as ‘Tang dynasty, practically intact with very few restorations’. Emile has now discovered that the head and hands are in fact very recent, and that little remains of the original work. What remedy, if any, is available?
Discussions
Austria
(i) This case again covers a mistake as to the content of the contract (mistake as to the characteristics and qualities of the subject matter).
(a) On one view, there seems to be a common mistake to both parties, if it is considered that Far Eastern Delights did not know that the Chinese statuette sold had not been a pure and practically intact original statuette of the Tang Dynasty. This mistake common to both parties, however, is less problematic than in Case 1. As already described, the prevailing view and the unbroken line of authorities under which a common mistake is to be added to the cases named and recognised in § 871 ABGB and, therefore, entitles both parties to a right to annul or to adapt is criticised on the grounds that a mistake common to both parties does not fit with the system of § 871 ABGB which emphasises the importance of protecting the non-mistaken party since in case of a common mistake both parties are equally worthy to be protected. In Case 1 the parties are equal in that they both have more or less the same knowledge and business experience. Here however, the two parties are not equally worthy to be protected as the gallery is clearly a professional
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expert in ancient oriental art and Emile, an amateur art lover. Consequently and following the legal opinion of the minority, Emile is also entitled to annul or to adapt the contract respectively depending on whether the contract would not have been concluded at all or under other conditions (especially for another price) if the true and correct facts had been known.
(b) In this case the gallery is to be blamed for the mistake and the erroneous information given to Emile; if it should have noticed the true and correct value of the statuette because of its expertise, then Emile is entitled to damages under the culpa in contrahendo doctrine (see Case 2) in addition to the right to annul and adapt the contract for uninduced unilateral mistake. Recent case law has confirmed that liability for damages lies in cases of merely negligent as well as fraudulent misrepresentation.1
In the case of a contributory fault by Emile (where Emile could have noticed the mistake by using proper alertness and due diligence, therefore, being negligent himself) this might reduce the amount of the claim for damages against the gallery if it had not misled Emile on purpose (compare with Case 2).
(ii) The doctrine of the laesio enormis applies here as well. In the case the statuette was worth less than half the price paid, Emile is entitled to annul the contract. Far Eastern Delights, however, has the right and possibility to ‘save’ the contract -- even against Emile’s wishes -- by paying the difference between the purchase price and the real value of the statuette.
Belgium
Four remedies are theoretically available to Emile. In spite of the variety of remedies available, chances for Emile to succeed appear as remote as in Case 1. The order of presentation chosen reflects the remedies least likely to succeed in increasing order.
(i) Emile could allege a breach of the statuette’s conformity on delivery (art. 1604 of the Civil Code). This action is based on the obligation of the seller to deliver the thing in conformity with the contractual provisions.
1See generally Welser, Das Verschulden bei Vertragsabschluß im Österreichischen Recht, ÖJZ 1973, 281; Rummel in Rummel I Rz 2 to § 874; Koziol/Welser, p. 139; in contrast to on purpose only Gschnitzer in Klang IV/1, 145) and as to the latest case law (OGH SZ 48/102, SZ 49/94, SZ 51/26, JBl 1980, 316; the former case law recognised liability for damages only in the case of a mistake induced by a deliberate misrepresentation
cf. OGH SZ 36/22.