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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should the buyer be awarded protection in a case like this and if so, how? A preliminary answer may lie in both a technical approach and an enquiry into what might be considered fair. Several reporters have highlighted the fact that an advisory duty is necessary in contracts of sale where the parties have imbalanced specialist knowledge. In Germany, for example, this advisory duty has displaced the lex specialis rule on sales but it is contended that the new duty may disappear when such sales become more commonplace. This contention supports the hypothesis that duties to inform can play a pre-emptive role in contract law and in regulating standards of behaviour expected of contracting parties.

A further answer may be found if this case can be contrasted with another hypothesis where the parties are on equal footing and there is no imbalance of specialist knowledge. Are the legal rules as to silence different in the latter case? In legal systems where no protection is given on the facts here, a fortiori no protection would be given where parties are on equal footing. Moreover, in the majority of legal systems, no duty to inform would be imposed where the parties are on equal footing and there is no imbalance of information.46 An inference could be drawn that imposing a duty to inform should be limited to specific contracts where a special need to protect one of the parties arises. This merely proves the point that it is a question of legal policy whether protection should be facilitated or increased, de lege ferenda.

Technical questions also arise in connection with the more substantive normative question. We have seen that a duty to inform can be imposed under heads of contractual and precontractual liability. There are then different types of duties to inform. Is the precontractual duty to inform, provided for in special legislation (e.g. in French and Belgian consumer law), comparable to a contractual duty to inform provided for in specific, or general contract legislation (e.g. in Scandinavia)? It is submitted that the difference is one of means and not of finality.47 Does a duty to inform incorporated in legislation provide ‘better’ protection48 for the party claiming a breach than that provided in the remedies for

46Take the example of a sale of business between individuals dealing in the course of business where the buyer fails to carry out the necessary enquiries about the value of the business and the seller is not obliged to inform him on the basis of caveat emptor. In other words, in a situation where the seller’s silence would not be considered reprehensible and he could not be accused of any foul play.

47See Comparative Conclusions below pp. 399--400.

48From the point of view of the claimant, ‘better’ must mean there are procedural advantages in relation to the burden of proof and limitation but also that the remedy is (more) satisfactory.

defective consent? One could surmise that if legal systems have thought it worthwhile to implement the duty to inform in specific or general legislation (a policy choice), this is precisely with the aim of reinforcing such a duty. It can be deduced that the duty to inform is perceived as a means of protection for a contracting party who does not have the same informational strength as his co-contractor. It can also be inferred that remedies for defective consent are perceived as inadequate when such protection is considered necessary, thus confirming one of our initial hypotheses.49

49 See in General Introduction, pp. 8--12.

false expectations about the increase in the value of the shares she has made a non-fundamental mistake as to motive (§ 901 ABGB). As the duty to inform cannot be interpreted extensively the bank would have been obliged to inform only if the news in the press had already been known to the bank. In that case a mistake as to motive can lead to annulment as it has been caused by the other party’s intention to deceive (§ 870 ABGB).

Belgium

Three remedies might be considered:

(i) Cinderella may bring a claim against the company on the basis of its failure to provide occasional information as set out in art. 5 of the royal decree of 3 July 19964 (enacted pursuant to art. 19 of the law of 6 April 1995 relating to secondary markets, the status and control of investment enterprises, intermediaries and counsellors as to investments). This decree transposes into Belgian law some of the provisions deriving from EC directives as to the obligations imposed upon the issuers of securities listed with the stock exchange relating to annual, periodical or occasional information to the public.5 Non-compliance with this obligation is a criminal offence under art. 148 10◦ of the law of 1995.

It is quite arguable that the company, as issuer of the shares, did not comply with its obligation to provide occasional information under the royal decree. We do not know however whether the publication in the press occurred upon the company’s initiative6 or whether the company obtained an exemption from the managing committee. If Cinderella can nonetheless prove that the company retained significant information for an excessive period of time and can show the chain of causation between the company’s omission and the loss (in value of the shares)

4 Article 5 § 1 provides that: ‘The companies will make public without delay:

1◦ Any fact or decision of which they are aware and which, if made public, would be susceptible of influencing significantly the quotation on the stock exchange of the financial instruments. (. . .)

The directing committee may however exempt a company from the obligation mentioned at al. 1, 1◦ , when the publication of some information is susceptible of jeopardising the legitimate interests of the company (. . .)’

5See B. Feron and B. Taevernier, Droit des marchés financiers (Brussels, 1997), pp. 172 ff., the EC directives being referred to are: 79/279/EC of 5 March 1979 modified by 82/148/EC of 3 March 1982 and 88/627/EC of 12 December 1988.

6Publication in the press being considered as the normal way of providing occasional information according to art. 7 of the royal decree of 3 July 1996.

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she suffered, she might be able to invoke the company’s tortious liability on the basis of arts. 1382--3 of the Civil Code since breach of a statutory provision is generally considered to be a fault under these general provisions (see Case 6). Cinderella will probably have a hard time in proving the company’s fault, especially if its legitimate interests might have been endangered by revealing information prematurely and, even more so, if the company obtained an exemption from the managing committee. Chances of success might also be greatly reduced if the company itself took the initiative to publish except if Cinderella can show that the company acted too late.

(ii)Cinderella can also bring an action against the directors of the company based on their negligence in managing the company (that led to the loss of important contracts to a competitor) but this avenue is not very promising for an individual shareholder like Cinderella. Indeed, the action against the directors is reserved for the majority of the shareholders, under art. 527 of the Companies Code, with the only alternative of the ‘minority shareholders’ action’ (art. 562 of the Companies Code) requiring in short that Cinderella must hold either 1% of the voting power in the company or, alternatively, securities amounting to 1,250,000 Euros in the company’s capital. Furthermore, even if Cinderella succeeds in bringing a shareholders’ action against the directors, the damages will be given back to the company, since both these actions are derivative in nature.

Apart from these derivative actions of little interest, Cinderella will only succeed in an action brought in her capacity of individual shareholder if she can prove the existence of a loss which is her own that is not reducible to a fraction of the so-called ‘social damage’ incurred by all the shareholders.7 This is obviously not the case here since all the shareholders will have to bear the loss in value of their shares.

(iii)Cinderella can also bring an action against the intermediary, who acted as Cinderella’s financial agent, for non-compliance with his contractual obligation to inform his client. Recourse to an intermediary to purchase securities listed on a stock exchange is not compulsory when the transaction relates to the transfer of securities representing at least 10% of the voting rights in the relevant company (art. 2 § 3, 2◦ of the law of 6 April 1995). It will be assumed, for the sake of the following analysis, that this was not the case here.

7For a reminder of this principle, see note under Brussels, 7-2-1939, RPS, 1939, no. 3799, p. 160.

Whatever the status of the intermediary (stock exchange company, fortune managing company8), it will normally be considered to be Cinderella’s agent, either acting in the name and for the account of Cinderella (contrat de mandat) or acting in its own name and for Cinderella’s account (commissionaire).9

As such, the intermediary is under an obligation to inform its clients prior to entering into the transaction so that the said clients might arrive at a ‘well thought-out decision’ as to the purported investment (art. 36 § 1, 5◦ of the law of 1995). In complying with its duty to inform, the intermediary must take active steps in order to obtain useful information for its clients about the subject matter, the price and the risks attached to the transaction but may not be liable when no significant information on the transaction appears to be available.10 Recently, the commercial court of Brussels held that the mere fact that a portfolio suffered a loss in value does not, in itself, constitute a fault committed by the intermediary.11 Indeed, the risk-related nature of such operations, of which the purchaser is deemed to be aware, will be taken into account12 and will generally lead the courts to be extremely prudent in deciding against the intermediary.13 A possible clash between the intermediary’s duty to inform and its obligation not to behave as an insider dealer may arise: the intermediary may not be obliged, in obtaining information for its clients, to go as far as gathering ‘inside information’ that might make it criminally liable.

To conclude, Cinderella’s chances of obtaining the annulment of the sale appear almost non-existent (a paradoxical consequence of a market intended to be ‘transparent’) and her chances of being awarded damages are also remote, unless the circumstances are sufficiently favourable to alleviate her evidential difficulties.

England

This case concerns a contract where the thing purchased is, unknown to the buyer, of considerably lower value than the buyer had believed,

8 ‘Société de bourse’ or ‘société de gestion de fortune’.

9 See Feron and Taevernier, Droit des marchés financiers, p. 269. 10 Ibid., pp. 298, 303. 11 RDCB, 1996, p. 1072.

12Feron and Taevernier, Droit des marchés financiers, p. 347.

13In the decision of the tribunal of commerce of Brussels (cited above), the judge went as far as saying that such liability will be retained only in cases of fraud, bad faith and gross negligence whereas the principles would normally allow such liability to be sought even under mere (light) negligence (cf. Feron and Taevernier, Droit des marchés financiers, pp. 350--1).

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although there is no evidence of any misrepresentation of facts relevant to the assessment of the value. And, here again, since the buyer is dealing as a professional at arm’s length in entering into the contract, the undervalue cannot lead to a remedy. Nor is there a remedy for mistake: even if the mistake as to the company’s business can be shown to have been shared by the person who sold the shares to Cinderella (which is necessary if the mistake is one as to the quality of what is bought: see Case 1) the shares are still the same shares she intended to buy -- they are just of reduced value. A case in 1867 decided just this: Kennedy v.

The Panama, New Zealand and Australian Royal Mail Co.14 and there is no evidence that the courts would relax this approach today in a case such as Cinderella’s.

The general rules described in relation to Case 1 apply equally to contracts for the purchase of shares in the stock market. There are also statutory provisions relating to the public issue of a company’s shares: company directors and others have statutory duties to include information about the company in the listing particulars or prospectuses relating to the shares, and are liable to pay compensation for untrue or misleading statements, or the omission of matters required to be included.15 This liability is however unlikely to apply here, since the duty only extends to statements which were untrue or misleading (or should have been made) at the time of the first dealings in the shares. It seems likely that, although the company had already lost important contracts to its Japanese competitor by the time Cinderella bought them, this all happened after the shares were already being traded on the stock market.

France

There is no duty of disclosure on the company to inform investors of the value of the shares, except in relation to fulfilling legal requirements as to the content of prospectus information, which it is assumed is not an issue here. Moreover, since buyers and suppliers do not deal directly with each other16 on the market, no action based on ordinary remedies17 can

14 (1867) LR 2 QB 580. 15 Financial Services and Markets Act 2000, s. 90.

16G. Ripert, R. Roblot, M. Germain and L. Vogel (eds.), Traité de droit commercial (17th edn, Paris, 1998) vol. 1, no. 1841.

17M. Cozian and A. Viandier, Droit des sociétés (16th edn, Paris, 2004), no. pp. 899 ff. Ripert et al., Traité de droit commercial, no. 737 ff.; J. Paillusseau, ‘La cession de controleˆ et la situation financière de la société cédée’, JCP éd. G, 1992, I, 3578; Cass com, 12 December 1995, D 1996, 277, note J. Paillusseau; Paris 5ème ch. B, 2 May 1997, Bull Joly 1997, 783, n. P. Pigassou.

be brought against the seller (2 July 1996 law18). It is, however, possible for a buyer to take proceedings directly against the director of a company whose mismanagement has contributed to the fall in value of the shares. Such a hypothesis may be envisaged, i.e. that the directors were guilty of mismanagement, since it is stated that the company lost some important contracts. Nevertheless, even if this were the case, it should be noted that such actions are of little help to a disappointed shareholder, such as Cinderella. First, as for individual actions, their scope is relatively limited, since the shareholder must prove that he or she has suffered a special loss.19 As an alternative, Cinderella, as a shareholder, could bring a derivative action,20 but in practice this would not be of any help to her since any damages awarded would be of benefit to the company.21

The only claim Cinderella may have therefore, would lie against the intermediary, her financial agent, for failure of a duty to disclose. Under the agency agreement between Cinderella and her financial agent a duty of disclosure does indeed lie on the latter. The courts have imposed a duty of disclosure upon a bank, for example, in relation to the risks taken.22 Moreover the agent cannot escape liability by showing he has merely carried out the principal’s instructions. It is not sufficient to inform the client of the dangers of the market in general when he considers making a risky transaction, he must also be informed about the exact operations or markets.23 The burden of proof lies on the agent to show that the obligation has been respected.24

If Cinderella can prove that as such her agent was under such an obligation (to some extent the variables depend on the kind of agency agreement in question as well as the client’s relative expertise or absence

18M. Germain et M.-A. Noury, ‘La loi du 2 juillet 1996 de modernisation des activités financières’, JCP, éd. G, 1997, I, 4022, spec. no. 24 s.; JCP 1996, éd. E, III, 68046.

19Cass Com, 18 July 1989, Mme Bich v. Coquerel, Rep. Def. 1990, 633, obs. J. Honorat.

20Ripert et al Traité de droit commercial, vol. 1, no. 1372.

21Y. Guyon, Droit des affaires (12th edn, Paris, 2004), vol. 1: Droit commercial général et Sociétés no. 462.

22Cass Com, 5 November 1991, Bull civ, IV no. 327 the court held that ‘whatever the contractual relations between a customer and his bank may be, the latter must inform the former of the risks taken as far as the speculative transactions are concerned on the stock market, except for case where he already knew about them’.

23Cass Com, 10 January, pourvoi no. 92--13. 172; Cass Com, 23 February 1993; Bull Civ, no. 68; D 1993, 424, n. I. Najjar.

24Cass Civ 1, 25 February 1997, Bull civ I, no. 75: ‘celui qui est légalement ou contractuellement tenu d’une obligation particulière d’information doit rapporter la preuve de l’exécution de cette obligation’; 14 October 1997, JCP 1997, II, 22942, rapp. P. Sargos.

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thereof) and that it has been breached, she can claim damages on the grounds that she lost the chance of making a profit.25

Germany

Cinderella has no possibility of withdrawing from the purchase of the shares if the sale had arisen without any fraud by the bank or the dealer selling them. Annulling on grounds of mistake fails due to the fact that when Cinderella bought the shares she also assumed the risk of the exchange rate. Whoever assumes a contractual risk infringes the principle of good faith if he attempts to free himself from the contract simply because the risk assumed has materialised.26 Nevertheless, the courts have hitherto only applied the theory of the burden of risk in the case of a mistake in declaration (§ 119 I) but not, however, in the case of a mistake relating to a quality made by the plaintiff.

A well-known case is that of RG LZ 1926, 742: in the inflation-ridden years of the 1920s a dealer sold furniture instead of unstable paper currency in return for shares. The value of the shares calculated did indeed correspond to the exchange rate, yet they were, as the dealer later claimed, already reduced in value at the time the contract was concluded and subsequently fell further. The Reichsgericht declined to rescind the contract according to § 119 I on the grounds that trading in shares carried with it the risk of making losses on the stock exchange. However, it was more difficult for the RG to reject an annulment on the grounds of mistake relating to quality. Here, it simply argued that the value of the shares was not one of their qualities and that -- if in fact it was one of their qualities -- it resulted indirectly as a consequence of developments on the financial market.27 The justification given is not intended to confuse; according to the correct view an annulment on grounds of mistake as to quality -- being a special case of a mistake in declaration -- is to be rejected along with the same arguments as an annulment for a mistake in declaration: whoever assumes a risk is bound to bear it should it materialise.

For the same reasons an adaptation of the contract in view of the absence or loss of the transaction’s basis also fails.

The case would only be decided differently if Cinderella had acquired the shares on the basis of a sales prospectus issued by the public

25Terré, Simler, Lequette, Les obligations (2002) no. 701, pp. 679 ff.; Cass Com, 10 December 1996, Bull Joly Bourse 1997, 206, n. H. de Vauplane; Paris, 12 April 1996, JCP 1996, II, 22705, n. P. Le Tourneau.

26§ 242; so-called venire contra factum proprium. 27 RG LZ 1926, 744.

limited company or the bank controlling the sale on the stock exchange. If the company or the bank making the sale knew or should have known that internal occurrences would have had negative effects on the shares’ market price then they would be liable by reason of failing to provide disclosure. According to the principles relating to ‘liability for legal statements made in a prospectus’28 -- which are orientated around the liability imposed by duties of disclosure -- it would be possible for Cinderella to claim compensation for negative interest. In connection with this claim for damages she may also seek to have the contract set aside §§ 311 II, 241 II, 249, 280 BGB.

Greece

Cinderella’s mistake relates exclusively to her motives, consequently it is not a fundamental operative mistake (art. 143 AK).

It could be submitted that Cinderella was mistaken as to the intrinsic value of the shares. It has been said29 that the economic value of a thing or its price is not a quality in the sense of art. 142 AK, consequently a mistake as to the value of a thing is not considered fundamental. This is not entirely accurate. In most cases it is true that a mistake as to the value of a thing will not be fundamental according to the criteria of the law. It will relate to the contracting party’s motives for entering into the contract. If however the false representations of the mistaken person about the economic value result from a mistake as to the qualities of a thing, not necessarily the subject matter of the transaction,30 here of the enterprise, which affect its value, the mistake may be operative. Here, however, Cinderella was not mistaken as to the company’s qualities, e.g. its prosperity and thus annulment according to art. 142 AK is not possible.

Cinderella is not entitled to demand the annulment of the sale for fraud either. The company was not obliged in accordance with good

28See, finally, for example E. v. Heymann, ‘Die neuere Rechtsprechung zur Bankhaftung bei Immobilien-Kapitalanlagen’, NJW 1999, pp. 1577, 1584 ff.

29AP 268/1974 NoV 22, 1269; Gazis, General Principles of Civil Law, p. 65; Bailas, ‘Error as to the Qualities of a Thing’, p. 335; Karakatsanis AK 142 n. 4; Simantiras, General Principles of Civil Law, especially on the value of shares n. 727; Spyridakis, General Principles,

p. 602; see however Georgiadis, General Principles of Civil Law, p. 426; Karassis, Manual of General Principles of Civil Law, p. 103; Klavanidou, Error as to the Qualities of the Thing in Sales, p. 18; Papantoniou, General Principles of Civil Law, p. 396.

30Spyridakis, General Principles, p. 601; for the opposite view cf. Karakatsanis AK 142 n. 4 who maintains that the term thing in art. 142 AK refers only to the object of the transaction.