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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Italy

In Zachary’s case the mistake of law provisions could be used successfully; he can annul his insurance contract claiming that he was mistaken about the law regarding his employer’s duty to insure. The condition that a mistake of law must be the only or principal reason for entering into the contract in order for annulment to be admitted is met.15 It makes no difference whether Zachary’s insurance was made with the same or a different insurance company.

The Netherlands

In principle, an insurance contract concluded after another insurance contract that covers exactly the same risk to the very same interest in the same object is void (art. 252 WvK16).17 If his employer has taken out the insurance for his employee (i.e. in order to cover his risk) the second contract is void. It does not make a difference whether the insurance policy is with the same or with a different insurance company.

However, there is an exception: if the first contract was concluded without a mandate from the insured and without his knowledge, the first contract is void if the conclusion of that first contract comes to the knowledge of the insured only after the conclusion of the second contract (art. 266 WvK).18 That is what seems to be the case here. Therefore, not the second contract (between the insurer and Zachary) but the first one (between the insurer and Red Hot Pizzas) is void. Here also the law says nothing on whether it would make a difference whether the insurance policy is with the same company or with a different insurance company. However, one could argue that in the former case the insurance company is under a duty to inform the prospective insured (Zachary) that it has already covered the same risk (Zachary’s risk of damage to his car) in an insurance contract with another party (his employer, Red Hot Pizzas), and that if it does not do so ‘it would be contrary to good faith (art. 6:2, art. 6:248 BW) to invoke’ the invalidity of the (first) insurance contract. In other words, one could argue that there should be an exception for the case when it is the same insurer in both contracts.

15The condition is laid down by case law, Cass 1963, n. 1233; Cass 1971, n. 1194; Cass 1977, n. 4977; Cass 1981, n. 180; Cass 1982, n. 2688; Cass 1995, n. 2340.

16See art. 7.17.2.24a NBW, which adopts a different principle: the insuree may, at his choice, invoke the one or the other insurance.

17Cf. Asser/Clausing/Wansink (1998), no. 279.

18Cf. Asser/Clausing/Wansink (1998), no. 283.

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Similarly I do not believe unjustified enrichment would provide relief. The appropriate remedy would be repetition. However, the ‘condictio sine causa’ would not apply as when Zachary paid the insurers they were entitled to such premiums under the contract of insurance. The insurer would pay up if his car was damaged. The other possible condictio, ‘condictio indebiti’, would be similarly unhelpful. It operates when the defendant has been given money under a mistake that the money was due. Although Zachary mistakenly thought that he had to effect a contract of insurance, once he did so, there was no mistake that the money was now due. Therefore both insurance policies are valid. It would make no difference if Zachary’s insurance policy was with another company.

Spain

In this case, if not more than twenty days have elapsed since either of the insurance policies has been effected, Zachary could attempt to cancel his policy, with payment to the insurance company of the proportional part of the insurance premium for the period used (art. 32 of the Law on Insurance Contracts).

Otherwise, it would be complicated to try to declare either of the insurance policies void: case law and legislation are very strict in admitting mistake as a defect of consent, and always seek to protect the security of transactions. It would be difficult for Zachary to prove that his mistake was excusable since, if he had acted diligently, he would have asked Red Hot Pizzas whether or not he was obliged to insure his vehicle.

Comparative observations

This case concerns double insurance, a common enough occurrence no doubt, and the central issue raised is whether there is a duty on the insurer to inform the insured that his insurance constitutes a double insurance. If a duty were to exist, it could only really be expected under hypothesis (a) where the same insurer has been used by the employer and employee. The diversity of answers given show once again that national laws are more protective of insurer than the insured and that very few countries actually allow the contract to be annulled for defects of consent.

(i) Where special rules are laid down by law, two types of situation exist:

(a)In cases where the insurance is taken out with a different insurer the insured is allowed to avoid the second insurance policy. This is the case in Austria, Belgium20 and Germany.

(b)Some countries consider double insurance is impossible. This is the case in Portugal and the Netherlands and means that the second (Zachary’s) insurance contract is void. Dutch law contains an exception that works to the detriment of Zachary in the case where insurance is taken out with a different insurer, since it is the first insurance taken out by the employer, without the employee’s authority, and not Zachary’s second insurance, that is void. The Dutch reporter has suggested that an exception to the exception would probably exist when the second insurance is made with the same insurer under hypothesis (a).

(ii)In a number of systems the double insurance is valid. This is the case for England, France, Ireland, Norway, Scotland and Spain. In England and Norway it was pointed out that Zachary can always terminate his contract but he will not necessarily be entitled to the return of the premium. If two insurance contracts for the same insured interest are valid, two further related points need to be examined: (a) should the insurer have informed the potential insured that he was taking out a redundant policy? This question can only be raised if it is the same insurer; and (b) can double recovery be made if a claim is brought? Inevitably the second question is of less immediate concern regardless of the fact that it is most significant in practice, but we will see that for some systems the questions are connected. Under English law the answer to the first question is that the insurer, as well as the insured, can have duties of disclosure in this type of contract, although the insurer’s duty appears to have been raised only rarely in litigation. The approach of English law to double insurance is, on the whole, to allow the contracts (both formed properly according to the normal common law rules) to stand, but not to allow the insured to benefit from the double insurance (indeed, the insurers gain, because both insurers keep their respective premiums in full). There has been no attempt, though, to provide general rules of priorities of claim between the overlapping insurance policies, which might be more efficient from an economic perspective.21 Conversely, under German law taking a strict

20Under Belgian law this situation differs if the policy is made with the same insurer, here the insured who took out the second insurance is entitled to a reduction of the premium.

21See M. A. Clarke, The Law of Insurance Contracts (3rd edn, London, 1997), pp. 784--5.

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view of the insurer’s knowledge, it was considered that the insurer would be liable for damages in culpa contrahendo since it was supposed to know about the employer’s insurance policy and failed to inform the insured. The insurer will cancel the contract and repay the insured in full.

(iii)The possibility of claiming annulment for a mistake may also exist. France rejects this option since the mistake was one of motive. Under Austrian law, the mistake qualified as a shared mistake would be admitted by the courts. Likewise under German law, a common mistake as to the underlying basis of the transaction would be admitted. Under Greek law, two paths are possible: either a fundamental mistake as to quality constitutes an operative mistake leading to annulment or a shared mistake, that the basis of the transaction was lacking, so that it would be contrary to good faith not to allow annulment. Spanish law considered the mistake inexcusable. Italy was the most positive about using the special mistake of law provisions here, which would entitle Zachary to annul his insurance contract.

(iv)French law might also allow a claim not based on defects of consent but on absence de cause. It is worth mentioning, since it is of doctrinal interest that a claim for absence de cause seems to be functionally equivalent to the absence of the basis of the transaction (under German law) and to the lack of object (Dutch law) in certain circumstances. The point should not be laboured since in this context French case law is somewhat ambivalent about whether the foundation can be satisfactorily invoked in the case of double insurance.

In conclusion and to return to the duty to inform, one could now justifiably ask why the insurer is not under a duty to inform the insured about double insurance. The sole exception is Germany which is highly protective of the insured’s interests in this case. The following remarks only apply to systems that do not consider double insurance void. One can only guess at the answer which is probably economic; if it is true that the duty to inform is often imposed for protective end-goals, the object of its protection is perhaps the insurer and not the insured. Looked at from this point of view, double insurance is a windfall for insurers and unacceptable for the insured especially when it is the same insurer who knows about the existence of both insurance policies. This is a significant factor if the roles of the parties are reversed. It has been held in French law, for example, that the insured has a duty to inform the insurer of the existence of cumulative insurance policies that he wishes to pay

for, as this affects the insurer’s evaluation of the risks.22 Less cynically, it might be noted that the duty to inform oneself is perhaps not too heavy a burden for the insured employee to bear in this context. If the question of double insurance were considered more generally, and not only in situations where a relationship of employer and employee is also involved, this might not always be the case. A law and economics analysis would suggest that the most significant question is to assess the relative cost involved to each party to inform the other, since in practice, an insurer may not know that double insurance is effected by several clients on the same risk. The German solution seems to take no notice of such considerations since a duty to inform is imposed arising out of the constructive knowledge of the insurer.

To summarise, this case clearly shows that the duty to inform has its limits. It also raises the crucial question: whom is the duty to inform really protecting? Finally, economic analyses may elucidate that the duty to inform is not always efficient.

22See for an example of this principle, Civ 1, 13 May 1997, RTDCiv 1997, 923, which constitutes a ‘revirement’ of previous case law.

information to his employer which would lead to his or her dismissal.2 If however, Mary has attempted to gain an advantage with fraudulent intention, Monstrous Inventions Ltd is no longer obliged to pay under the terms of the settlement3 and can raise exceptio doli as a defence.4

(ii) The contract between Mary and Monstrous Inventions Ltd is a settlement agreement. By retiring early, Mary may suffer a loss of income as pension payments are generally lower than a salary. To compensate the difference Mary receives a certain amount from her employer. In settlements only the mistake as to the content of the contract is considered important. A mistake in motive, does not, therefore, entitle the company to annul the contract (§ 901 ABGB). A mistake as to the person (§ 873 ABGB) is examined by analogy with a mistake as to the importance of the quality of physical goods (§ 871 ABGB). The importance of the person is thus examined in accordance with business usage and the intention of the parties.5 The honesty of an employee is a very important aspect for such a settlement and is therefore part of the subject matter of the contract. The mistake is therefore as to the content of the declaration. The mistake is important as Monstrous Inventions Ltd would not have concluded the contract if it had known the true facts, particularly since if it had known the true facts it could have dismissed Mary immediately. Because of this, Mary should in any case have recognised the mistake. Therefore, it is a fundamental mistake in the sense of § 871 ABGB.

Belgium

As a preliminary observation, it is worth noting that Monstrous Inventions Ltd cannot derogate from employment law in its settlement,6 nor can it benefit from its mandatory provisions contained designed for the exclusive benefit of the employee.7

2RG 22.12.1925 JW 1926, 795 commented on by Stoll, see also J. Taupitz, Die zivilrechtliche Pflicht sur unaufgeforderten Offenbarung eigenen Fehlverhaltens (Tübingen, 1989), p. 72.

3OGH 7.10.1974: Bydlinski, Juristische Methodenlehre und Rechtsbegriff, p. 493; Mader, Rechtsmißbrauch und unzulässige Rechtsausübung (Vienna, 1994), p. 237.

4 See RG 22.12.1925 JW 1926, 795. 5 OGH 30.11.1960 EvBl 1961/76.

6 And see, for the same observation as to the entering into of a settlement contract relating to an employee’s rights or obligations: F. Spanoghe, ‘Van het water, de wijn, het zand en . . . oude koeien. De dading in het Belgisch recht’ in Flemish Bar Association,

La fin du contrat -- De behoorlijke beeindiging¨ van overenkomsten (Brussels, 1993), nos. 68--75.

7Arguably Mary would herself not even be entitled to do so, provided that the agreement is more favourable to her than the statutory regime resulting from the 1978 legislation.

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Monstrous Inventions Ltd might consider two types of remedies.

(i)Monstrous Inventions Ltd did make a mistake in awarding a supposedly juicy financial retirement package to Mary whereas Mary had been dishonest enough to provide the company with a sufficient reason to terminate her contract. In fact, Monstrous Inventions Ltd erred on the moral character of the contracting party. This particular type of mistake is qualified to be a mistake as to the person of the contracting party and, in Belgian law, it is generally admitted as a vitiating factor in intuitu personae contracts. As an employment contract is qualified as intuitu personae, there is no doubt that the package offered is qualified in the same way.

Monstrous Inventions Ltd will, however, most probably not pass the test of excusability: it acted through Dracula, its -- competent -- managing director whereas the investigation as to Mary’s dishonesty had been led by one of its also competent departments. Monstrous Inventions Ltd is therefore deemed to have known about the investigation made concerning Mary. The circumstance that Dracula did not in fact know may not, therefore, be considered as ignorance on his part but as an act of mismanagement (especially since he acted without consulting with the personnel department). As a result, Dracula may be liable to the company (art. 7 of the Companies Code) but the company itself will not be entitled to avail itself of such ignorance.

(ii)As we have seen in Case 1 the remedy based on fraud normally avoids the issue of excusability. The question however is to determine whether Mary was, according to the circumstances, under an obligation to reveal her dishonesty. It probably will depend upon the importance and the nature of what she actually did.

It does not seem therefore that Monstrous Inventions Ltd has much chance of annulling the contract.

England

Once the contract to terminate Mary’s employment has been concluded, it is too late for Mr Dracula to use the allegation of dishonesty to terminate the employment. On the facts given, the employer enters into a contract to terminate the employee’s contract by making various payments, but without realising that he might have been able to terminate it without payment. It is not clear whether Mary had her own dishonest acts in mind (we are only told that she did not know of the investigation) but this would not, in any case, affect the position since there is no duty on an employee to disclose his or her own misconduct to his or her