Учебный год 22-23 / Mistake, Fraud and Duties to Inform in European Contract Law (The Common Core of European Private Law)-1

(i) Is there an operative mistake here? Under Austrian law, there is a qualified mistake but the conditions of § 870 ABGB are not fulfilled, likewise under French, Belgian and Spanish law, the mistake would be considered inexcusable. Under English, Irish and Scottish law there would be no mistake. In contrast, under German and Greek law, the mistaken party (Nell) could plead mistake but in practice the remedy is unhelpful, since Nell would have to pay negative interest to the other contracting party (the bank). There is quasi-unanimity that mistake is not a probable nor efficient remedy; indeed many reporters did not even consider invoking mistake! Two important exceptions exist: the Netherlands and Norway.

(a)In the Netherlands, Nell could perhaps claim proper mistake (a defect of the will) or mistake improper, described as a case where the party did not intend what he declared, he said one thing but he wanted another: there is therefore no consensus ad idem.55 The mistake is clearly unilateral and it is thus arguable that the bank’s reliance should be protected. Here however, Dutch law shows itself to be progressive since a reinforced duty on the Bank to investigate whether Nell knew what she was doing (a duty to inform itself, not to inform the other contracting party) may work in Nell’s favour.

(b)Once again, in the absence of a theory on defects of consent Norway has developed an original variant, based on case law that might interpret Nell’s promise as a case of forgery. This is clearly a legal fiction. The result looks rather similar in practice to German and Greek law’s position as regards mistake. Although the forgery will entitle the person to claim the contract is invalid, if it is argued that the ‘pseudo-declarer’, i.e. Nell was negligent, she must compensate the bank for her negligence. Obviously, in practice this would eliminate all practical effects of the protection.56

(ii)A more obvious avenue for Nell would be to try and rely on the fraudulent behaviour of her spouse, David, the third party to the contract. There is a consensus that if David (third party and principal debtor) is not an accomplice of the other contracting party -- the bank -- David’s fraud, namely his misrepresentation about the nature of Nell’s undertaking, cannot be invoked by her: this is the case in Austria, Germany, Belgium, France, Germany, Greece, Norway, Portugal and Spain.

55This may be compared to a Smith v. Hughes situation or an erreur-obstacle under French law.

56Unless contributory negligence on the bank’s part is proven, thus reducing the quantum of damages.

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The same rule basically applies in England except that an exception has been invented for this particular kind of case. It could be expected that Ireland would follow but Irish law does not appear to have adopted this approach. Because of the non-commercial relationship between Nell and David, the case falls straight into the rule set out in Barclays v. O’Brien,57 thus enabling Nell to annul the guarantee contract. The reason why she can do so is not directly on the basis of David’s fraudulent misrepresentation but linked to the omission by the bank to take the necessary steps to bring home to Nell the risks that she is running by standing as surety. It is considered that this constitutes a reinforced duty on the bank, which is designed to provide protection for a party in a weak informational position, due to her relationship with the principal debtor. Whether the bank’s duty to inform the dependant party is sufficient or adequate protection is controversial.58 In that respect, a comparison with the protection awarded by Dutch law is instructive: the result is fairly similar in that the law protects guarantors guaranteeing relatives’ debts. Arguably, however Dutch law is more protective in its reinforcement of the bank’s duty to investigate the guarantor’s situation: this is surely more efficient than merely telling the potential guarantor to take advice since the onus is on the bank to carry out its enquiries. French law may make use of the general principle to contract in good faith, coupled with an allegation of fraudulent concealment by the bank, if it is considered that the bank should have informed Nell about David’s financial situation before she signed the guarantee. However, the burden lies on Nell to adduce evidence that the bank fraudulently concealed such information or did not contract in good faith, so it could be contended that the law offers a qualified protection for the guarantor. Nevertheless, it can be inferred that this case is particularly interesting from a comparative point of view since the protection offered by England is apparently considerable, thus contradicting the assumption that civil law systems are more protective than common

57As developed and explained by Royal Bank of Scotland plc v. Etridge (No. 2) [2001] UKHL 44, [2002] 2 AC 773.

58Feminist criticism suggests it does not go far enough to protect sexual inequality; others may suggest it is just a panacea for the sake of appearances, since the subsequent cases applying the rule admit a minimum compliance by banks (it will suffice for the bank to tell the interested party to take advice, even if the advice is not obtained). Furthermore, of what real protection is advice which needs paying for anyway? See for example, B. Fehlberg, Sexually Transmitted Debt: Surety Experience and English Law (Oxford, 1997); R. Auchmuty, ‘Men Behaving Badly: An Analysis of English Undue Influence Cases’, (2002) Social and Legal Studies 11(2), 257.

law systems of ‘weak’ parties. Moreover, Scots law arrives at a similar conclusion by the use of good faith.

(iii)Protection may, however, be provided for by consumer protection legislation (suggested by the Austrian and French reporters) although French law will be of limited value in practice, since it will not entitle Nell to annul the contract. It is suggested that under Austrian law, the legislative duty on the bank to inform the guarantor about the principal debtor’s financial situation is highly protective and will enable her to claim the guarantee is unenforceable on the basis of the bank’s failure to inform. This is comparable to or perhaps even stronger than the protection provided under Dutch law. It is interesting then to compare the levels of protection, layer upon layer, granted either by defective consent doctrines or by a lex specialis.

(iv)Two last heteroclite suggestions: under Italian law it has been suggested that there is an absence of conditions -- causa (art. 1325 of the Civil Code) -- which would enable Nell to annul the contract. Under Dutch law, the provisions of matrimonial law may entitle the principal debtor, Nell’s husband, to annul the contract, since it was guaranteed without his permission!

To conclude: in Austrian, Dutch, English, German, Greek, perhaps Italian, Norwegian and Scottish law, Nell could annul the contract. In some cases annulment is tempered by Nell having to pay negative interest damages to the bank (Germany, Greece, Norway). These legal systems concede a degree of individual protection, which is counterbalanced by reliance, a concept used to protect a conflicting value, namely that of the security of transactions and the allocation of risks. Only five legal systems allow Nell to annul the contract outright. To achieve this aim, three mechanisms, or protective devices, can be identified: (i) the bank should advise or inform the guarantor; (ii) the bank should make its own enquiries; and (iii) the Bank should advise the guarantor to take independent legal advice. These may be variations on a theme. It is difficult to ascertain which mechanism gives greater protection to the surety, but the case shows that the duty to inform does indeed play a protective role in this instance. This comparative enquiry also confirms that this is a hard case where conflicting priorities are obvious: there are clearly no easy answers, policy not legal logic determines the outcome.

According to the prevailing view, annulment would have effect ex nunc.4

(b) Zachary can terminate the contract with another insurer as a result of §§ 59 ff. VersVG. Moreover, Zachary is obliged to cancel the second contract immediately after he has found out about the double insurance.

Belgium

(a)Article 42 of the law of 1992 dealing with over-insurance by the insured in good faith applies. According to this provision, Zachary is entitled to a reduction of the premium in keeping with the insured interest.

(b)When the contracts have been concluded with different insurers, art. 42, line 2 of the 1992 law applies.5 Assuming that the policy subscribed by Zachary’s employer was sufficient to cover the risk, compliance with the 1992 law will lead, in the absence of an agreement intervening between the different insurers, to avoiding the most recent contract that is precisely the insurance contract that Zachary took out.

The question as to whether Zachary might invoke an absence of cause (arts. 1108 and 1131 of the Civil Code) appears quite academic when one considers the detailed rules of protection of the insured’s interests laid down in the 1992 law. In any event, a lex specialis argument might also be raised against the continuing application of the general rules of defective consent.

England

The general position is that the double insurance of risks does not automatically invalidate either insurance policy: unless one or other policy contains conditions against overlapping policies (or otherwise regulating the consequences of double insurance -- for example, the proposal for one policy requires express disclosure of other policies) both policies are valid. If, however, the risk materialises and claims arise under both policies, the insured has the right to claim under either policy but not to recover more than his loss by a double claim. (This is, however, subject to

4 Koziol/Welser, Grundriß. I 129 mwA in n. 61.

5Article 42 line 2 of the law of 1992 provides: ‘When the insured amount is spread among several contracts entered into with several insurers, the said reduction is to be operated, in the absence of an agreement between all the parties, on the amounts insured by the contracts in the order of their date beginning with the most recent and eventually generates the avoidance of one or more contracts of which the insured amount would thus be rendered void.’

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the terms of each policy: it is not uncommon for insurance contracts to provide expressly that, in the event of double insurance, the insurer shall be liable only for his rateable proportion of the loss.) The insurer who pays then has the right to make a restitutionary claim for contribution from the other insurer, a claim which arises independently of contract but can be modified by contract between the parties.6 In the absence of specific contractual provision, the insured has no claim to recovery of any part of the premium paid to either insurer, since both insurers were on risk and the premium is generally regarded as indivisible.

(a)Zachary might argue that the insurer had a duty to disclose the other, overlapping policy, since an insurer has the duty to disclose material facts. There appears, however, to be no case law to indicate how the courts would view this: there are very few cases on the insurer’s (as opposed to the insured’s) duties of disclosure and it might well be thought too onerous on insurers to have to check whether there are other policies with other clients that cover the same risks. And it is unlikely that Zachary can successfully plead mistake: if he had himself entered into a second insurance policy with the same insurer, he and the insurer both forgetting the earlier policy, there might be an arguable case of common mistake. But the fact that his policy just overlaps with another policy taken out by his employer makes this case quite different.

(b)Where Zachary’s policy is with a different company from that used by his employer, there can be no question of either the insurer or Zachary having had a duty of disclosure since neither knew the circumstances of the overlapping insurance policy. And Zachary cannot claim mistake: although there does not appear to be guidance in the case law, it is not likely to be arguable that the (shared) mistake was sufficiently fundamental to make the contract void, since the double insurance of risks, with different insurers, is not uncommon in practice; and the insurer would not have been likely to refuse the risk just because there was another insurance policy, between different parties, which covered it.

France

Zachary will want to try and allege that the insurance policy to which he subscribed for his vehicle is void, which would enable him to recover the amounts already paid. To do so, he could try to claim absence de cause

6North British and Mercantile Insurance Co. v. London, Liverpool and Globe Insurance Co. (1876) 5 Ch D 569.

of the second contract (art. 1131 of the Civil Code), since a mistake about his personal reasons for contracting (erreur sur les motifs) is an inoperative mistake.

Zachary may allege that the contract has no cause since an identical insurance contract for the same purpose exists already. There is a certain amount of case law where this argument has been invoked, though not always with success.7 The case law is somewhat contradictory, for example, the independent purchase by husband and wife of tickets for the same theatre performance was annulled on the grounds of mistake whereas double insurance is not always annulled on the basis of absence of cause.8 Some scholars suggest this is because double insurance does not eliminate the counterpart of the insurer’s obligation, on the contrary it reinforces his likelihood of guarantee, and if the cause is assessed objectively, this suffices. In other words, the fact that the insurance contract has no subjective utility for Zachary is irrelevant. This position is, however, subject to academic criticism on the basis that it takes the idea of utilitarianism too far.9

Germany

Double insurance policies are quite common and are normally caused by the policy holder’s absent or incorrect information. Nevertheless, it is basically up to the policy holder to inform himself about the type and extent of the risks insured against and about the insurance policy he enters into for this purpose. The insurer is not under a duty of disclosure -- even if in the meantime many insurance companies offer to thin out the ‘private insurance policy jungle’ as an individual service -- except in the case where the policy holder is insured with the same insurance company twice against the same risk.

(a) In this case § 60 VVG, which gives the policy holder a right to terminate the contract, would not apply, because this provision is designed for cases in which the same risk is insured by different insurers. But because the insurance company is supposed to know everything that its employees know, it is supposed to have entered a second insurance contract on the same risk intentionally.10 As a consequence, Zachary can set

7See for a full discussion of the question, Ghestin, La formation du contrat, no. 854, pp. 853 ff.

8 Ibid., for an explanation of the case law.

9 See P.-Y. Gauthier, ‘Contre Bentham: l’inutile et le droit’, RTDCiv 1995, pp. 797 ff.

10E. Schilken, Wissenszurechnung im Vertretungsrecht (Bielefeld, 1983); R. v. Book, Allgeméiner Teil des Bürgerlichen Gesetzbuches (Tübingen, 2001), 610 ff., Larenz/Wolf, AT 885 ff.; cf. for example BGHZ 132,30 = JZ 1996, 731; BGH NJW 1999, 284.

Greece

According to art. 15 L 2496/1997 double insurance is valid. Both insurers are liable jointly up to the extent of the insured value.12 Zachary took out a motor insurance policy for his own vehicle, because he believed he was bound to do so. If he took out an insurance with a different insurer, he has made a mistake as to motive which is not fundamental (art. 143 AK). If however he took out an insurance with the same insurer who was aware of the first insurance, Zachary’s mistake will enable him to annul the insurance contract on the grounds of fraud (art. 147 AK). His mistake is due to the insurer keeping silent about a fact as to which there exists a duty to inform by law according to morality and good faith.13

As the law gives annulment retrospective effect (art. 184 AK), Zachary is entitled to the restitution of the premium paid to the insurance company on the grounds of unjust enrichment (arts. 904 ff. AK). It is however controversial whether the insured person who annulled an insurance policy is entitled to the premium if the insurer has already incurred expenses for performance.14 Since the insurance contract is a long-term contract, it is more correct to accept that annulment is precluded according to art. 144 AK as contrary to good faith. It is generally submitted that if a long-term contract has functioned for a certain time its annulment is equivalent to termination, that is it takes effect in nunc. Otherwise annulment would conflict with the security of transactions.

Ireland

The fact that there are two insurance policies governing the same risks will not render either or both invalid under Irish law. In this case, there seems to be no obligation to disclose the other policies of insurance and both remain valid. However, in the event of the insured risk occurring, there is no right to recover under both policies. The claimant cannot find himself in a better position than if only one policy covering the risk was extant.

12For the problems arising from double insurance see V. Kiantos, Insurance Law (7th edn, Thessaloniki, 1997), pp. 225 ff.

13R. Chadzinikolaou-Angelidou, Insurance Contracts (Athens, Thessaloniki, 2000), p. 114 on the duty of the insurer to inform the insured as a means of consumer protection. See also art. 4 LD 400/1970.

14See Z. Skouloudis, Private Insurance Law (3rd edn, Athens, 1999), p. 175.