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 causation criterion is potentially quite wide. On one reading it would cover mistakes caused by information given negligently or innocently by the non-mistaken party. For some systems this might be considered as an overly-generous protection. This is of course a question of policy. The knowledge criterion linked to good faith and fair dealing includes actual and constructive knowledge.25 It clearly imposes a standard of behaviour on contracting parties to act honestly and fairly with one another. In order to understand the implications of this provision it is crucial to consider whether this provision is aimed at reliance-based or commerce-based protection. As it is clearly not aimed at intentionbased protection, that question will not be considered. Moreover, it is not necessarily the case that the purposes of reliance-based and commercebased protection are opposed to one another. The drafting seems to be sufficiently wide to allow judicial interpretation to take into account both underlying rationales, although this does not necessarily mean that both rationales will always be admitted. If the text does not dictate the rationale that some may consider objectionable,26 it follows that if judges were to employ this provision they would sometimes be obliged to choose one of these rationales. In other words, when presented with a dispute, the judges will determine what is contrary to good faith and fair dealing (either on the basis of reliance or commerce or both) in order to decide whether or not the mistake is operative. Judicial interpretation will no doubt be coloured by national legal concepts as well as extra-legal considerations (social, political, economic, cultural etc.). If such a hypothesis is not refuted, arguably, judges will carry on doing what they did before the introduction of such a provision. The main practical benefit would be to have evacuated intention-based protection on the grounds that it no longer corresponds to our conception of the contract nor of contract-making.

Bearing these underlying rationales in mind, the prevalence of the duty to inform and its significance in the law of contract needs further consideration. If a shift in underlying rationales has been identified, inevitably legal concepts must adapt as well.

25It is beyond the scope of this study to assess whether this criterion is useful and workable. On good faith, see Zimmerman and Whittaker (eds.), Good Faith in European Contract Law.

26Certain authors have recently expressed the desire for a text if incorporated in a code to be more and not less political: see U. Mattei, ‘Hard Minimal Code Now’ in S. Grundmann and J. Stuyck (eds.), An Academic Green Paper on European Contract Law

(The Hague, Boston, London, 2002), p. 215.

General conclusions

Extrapolating from the duty to inform: the present and the future

The main preoccupation of this enquiry has focused on duties to inform and their relationship with mistake and fraud. We have seen that the scope of duty to inform is broader than that of mistake and fraud; while overlapping these two concepts it also widens their range since it includes negligent behaviour, which is not admitted by all legal systems under consideration; moreover duties to inform differ from traditional defects of consent. One difference lies in the source of duties to inform, which can arise in three ways. First, duties to inform have been derived as a result of case law interpretation of codified provisions: these provisions concern legal concepts belonging to the defects of consent, i.e. mistake and fraud. On one view this is a duty that has used an existing legal concept as a stepping stone. Secondly, also as a result of case law interpretation, duties to inform have been inferred from general clauses also present in codified systems, the most obvious example of which is the old § 242 BGB (now §§ 311 II, 241 II, 280), now classified as a precontractual duty to inform. In one sense, the distinction between these two sources of duties to inform is rather fine since arguably both categories are just examples of extensive case law interpretation of codified concepts. Thirdly, duties to inform have been imposed by specific legislation, either by national legislation or by the transposition of European Directives. A question then arises as to why case law and also, to an even greater extent, European legislation27 have used duties to inform. Does the duty to inform fulfil a particular purpose not fulfilled by existing legal concepts and does it function well?

In the light of the empirical and comparative observations made throughout this study, it may now be useful to identify what function the duty to inform is fulfilling in European contract law. This will enable us in turn to reassess our initial hypothesis, namely that the duty to inform has a protective function.

This study has shown that duties to inform are indeed protective, but not along the lines of the classical model. First, if the legislative source of the duty to inform is considered, protection is directed at certain

27Emphasising the legal formant is critical here since it is submitted that specific duties to inform imposed by legislation may fulfil a different purpose than duties derived from case law. The reason is that legislative duties are general in their application, as opposed to casuistic and moreover, they are limited to certain types of contractual relationships.

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categories of persons in specific contracts (special relationship theory). Secondly, and consequently, duties to inform have been shown to set standards of behaviour. This is substantiated by the recent green paper of the European Commission on Consumer Protection which includes the duty to disclose as one of the relevant elements of fair dealing.28 A further question follows: why is this necessary, why should the law tell contracting parties how to behave? Thirdly, the requirement of a duty to inform illustrates the shift towards focusing on the content of the contract and not the quality of the party’s consent. The emphasis lies not on informed consent but on being informed about the contract’s content.29 One explanation of this tendency would be to classify this as an effect of the standardisation of contracts: as contracts are increasingly standardised, the duty to inform helps guarantee that a minimum contractual content exists and that the parties know about it. It is suggested that these three functions of the duty to inform are interrelated.

(i) The first assertion that the duty to inform is directed at certain categories of persons can be substantiated by the examples in cases where the party who is the recipient of the information is in a special relationship with the other party. A special relationship may be expressed by law. The person to whom the information is owed may be a consumer in a contract of sale or credit (Cases 6 and 8); a guarantor (Case 9); or an insurer (Case 10). A special relationship, expressed by case law, can also be inferred from the status of the parties. The presence of a duty to inform owed by an employee to his employer was not demonstrated on the facts (Case 11). At first sight, this finding is surprising in view of the relationship between employers and employees, generally presumed to comport a reinforced duty of cooperation30 and considered to belong to a special relationship either by law or from the status of the parties. However, it appears that an employee’s duty to disclose to the employer is not absolute. This contrasts with an insured’s duty to inform the insurer, which is practically unlimited. It may be inferred first that a duty to inform cannot be deduced from every special relationship, the relation between the two criteria is not deductive but subject to casuistic

28See Follow-Up Communication to the Green Paper on EU Consumer Protection, Com (2002) 289 Final, containing proposals for a framework directive for consumer protection.

29Ibid., again, the Commission’s Green Paper illustrates this nicely.

30This may be expressed in some jurisdictions under the wide heading of good faith, it could also be expressed in terms of a fiduciary relationship or by the presence of an obligation of confidentiality between the parties.

considerations. Second, it should be noticed that the special relationship does not necessarily give rise to an equal bilateral duty to inform the other party. For example, in a contract of surety the duty to inform is clearly one-sided (any information required to be given goes from the lender to the guarantor). In insurance and employment relationships, a duty to inform may lie on both parties, though not necessarily to the same degree. Indeed Case 10 highlights the asymmetrical nature of the duty to inform incumbent on the insurer and insured. It is submitted that emphasising that the parties are in a special relationship might be a way of taking the unilateral and asymmetrical nature of this relationship into account. Furthermore, it is contended that the laws’ awareness of the parties’ asymmetry may be an attempt to recognise that the parties are not equal.

This study has focused to some extent on examining the status of the parties and it is therefore important to examine the relevance of this criterion. First, as already suggested, it may be inferred from the results that the criterion is mainly casuistic and is thus used for a number of purposes. For example, Case 1 has shown that the status of the parties can operate as a bar on the question of whether or not a mistake is excusable. As far as the duty to inform is concerned, the status of the parties may be posited as a condition for the existence of the duty (Case 2 is a good illustration). It is submitted that this is a way of emphasising the person in the contractual relationship.31 An objective version of contract might not focus on the status of the parties in quite the same way; rather the main question is whether the contract complies with business practice -- fair dealing and business usage. Here the emphasis is on the contract, the parties’ status is contingent on this. The emphasis is different but that does not mean that the status of the parties is irrelevant to the requirement to impose a duty to inform, as the solution under Norwegian law illustrates.32 To summarise, in order to determine the existence of a duty to inform both the status of the parties and their relationship to one another may be helpful indices but not necessary conditions.

31See H. Maine, Ancient Law: its Connection with the Early History of Society and its Relation to Modern Ideas (1861) (Everyman’s Library Edn, London, 1917) ‘from status to contract’. It is open to debate if it is now more appropriate to reverse the phrase ‘from contract to status’.

32See the Scandinavian report where duties to inform are imposed, because one party has less knowledge and the other party has knowledge or should have had the requisite knowledge, see Case 2 for an example.

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(ii)This study has demonstrated that there is a link between imposing duties to inform and raising the standards of behaviour expected of contracting parties. The relationship may be one of cause and effect: by imposing duties to inform, certain standards of behaviour are set. Or it could be the inverse. Since the law purports to raise standards of behaviour to a certain level, it has achieved this end by means of the duty to inform. However, this is not the only means: for example, laying down a requirement that the errans has to use a minimum standard of care, i.e. his behaviour must be excusable, is another way of raising the standard of behaviour expected of the parties, particularly the errans. Furthermore, this goal is partially achieved through the use of good faith as a barometer for precontractual behaviour, through (fraudulent) concealment etc. Apart from concerns that may be raised as to whether good faith provides a workable and useful standard for contracting parties and the courts,33 a preliminary question needs to be addressed. Why is the law concerned with raising standards of behaviour? Is this part of a standardisation process? This may be part and parcel of the law’s changing view of contract law. A further explanation will be offered below.

(iii)It is submitted that the objective of contract-making has changed so that its aim is to achieve a certain minimum content of the contract, judged by an objective standard, to ensure that it corresponds to the parties’ expectations. Duties to inform can be seen as means to achieve objective standards of contract (if you are properly and sufficiently informed you know what is in the contract) and fair standards of contract-making. The instrument is novel since it aims to cover both the content of the contract and the contract-making process (procedural and substantive fairness).

In the light of the above, the purposes of duties to inform must be reassessed.

Initially, it was suggested that duties to inform have a protective endpurpose. This study has demonstrated that there is a connection between imposing duties to inform and setting standards of behaviour incumbent on contracting parties. In the light of these findings the nature and the efficacy of this protection can now be reconsidered.

33The literature on this question is too abundant to be cited here. See for example G. B. Teubner, ‘Legal Irritants: Good Faith in British Law or How Unifying Law Ends up in New Divergences’, (1998) 61 MLR 11 ff. For a more favourable view of good faith, cf. Zimmerman and Whittaker (eds), Good Faith in European Contract Law.

If the duty to inform forms part of the pattern to protect the reliance of a party, as suggested above, then certain controls are needed. In order to protect reliance, post hoc facto protection, as traditionally provided by defects of consent such as mistake and fraud, is insufficient. As already mentioned, annulment is a drastic remedy, it ‘protects’ too late, it upsets the security of transactions etc. If all three identified functions of the duty to inform are considered, it can be seen that its purpose is not exclusively protective. Indeed, if the duty to inform contributes towards setting standards of behaviour, it can be inferred that its purpose is also normative.34 Certain behaviour (failing to inform when the duty lies) is thus discouraged since a breach leads to liability. It may be preferable to refer to this as a disincentive measure, prophylaxis rather than punishment. As suggested elsewhere, punishment has criminal or moral overtones that do not fit with all legal systems’ conception of contract law.35

It has been suggested that the third function of the duty to inform is linked to changing views of contract law where the content of the contract lies at the core and not the unvitiated consent of the parties. The purpose behind this function is rather difficult to characterise; indeed it might not be feasible to do so. Perhaps this is a side effect of the standardisation of contracts that norms must be set for behaviour and content. Perhaps there is no relation of cause and effect. However, the relationship between the duty to inform and the content of the contract, namely the impact of the information on the contract, clearly exists. Rather than speculating on the nature of this relationship, it may be more helpful to examine its content, nature and efficacy.

The content of the duty to inform

The material content of information provided in accordance with a duty to inform can be divided into (a) procedural rights (e.g. cancellation) about the dynamic process of contract-making and (b) the content of the contract itself. This distinction is highlighted in the case where the

34Some might prefer to suggest that this is an example of the regulatory effect of private law on the market. See H. Collins, Regulating Contracts (Oxford, 1999). See also, in a similar vein, for an account of how private law could enforce rules on marketing information, T. Wilhelmsson, ‘Contract Law Enforcement of Provisions on Marketing’ in H. Collins (ed.), The Forthcoming Directive on Unfair Commercial Practices: Contract, Competition and Consumer Law Implications (The Hague, London, New York, 2004),

pp. 223 ff.

35See in General Introduction, p. 9.

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transposition of a European Directive has resulted in harmonised solutions (see Case 8). Breach of the second category entitles the consumer who ought to have received the information to prolong the former category, i.e. cancellation rights. This illustrates that certain information is considered crucially important for the contracting parties to perform the contract (otherwise their contractual relationship is suspended or discontinued).

The nature of duty to inform: reliance-based liability

Examining the content of the duty to inform raises further enquiries into the nature of this duty. This study has demonstrated that the duty to inform is a negative and positive duty: the national legal systems’ various attitudes to silence have been compared, e.g. in Cases 2, 4 and 6. Requiring a party to disclose information is a way of admitting the parties’ inequality: this may be deduced, a contrario, from treating silence as reprehensible. The inequality itself is engendered by the presence of materially important information affecting the contract to which only one party has access. At least two explanations are possible: a moral explanation and an economic efficiency argument.

The moral explanation would suggest that imposing a duty to provide information is evidence of, or can be measured in terms of a norm of behaviour. A stark example can be given by referring to Case 4. According to the common law’s interpretation of these facts, relying on the caveat emptor principle and allowing the seller to remain silent implies that the parties behave on an equal footing. It is plausible to suggest that this allows the parties to behave in a self-interested fashion, i.e. they are allowed to look after their own interests. There is no value statement attached to this observation. The contrary view adheres to a morally different view of human nature. If the seller is obliged to inform the buyer about the changes to the right of way affecting the property, arguably this forces the party in possession of the information to take into account the other party’s interests. It could be submitted that this raises the standard of behaviour between the parties, or to put it another way, the level of what constitutes ‘fair dealing’ is placed at a higher rung up the ladder. Once again, no value statement is intended. The induction is empirical and not normative. Another way of looking at this is that it is not only a moral issue but also a political one. Kennedy explains these two opposing sets of moral values or codes as individualism versus altruism, suggesting that the law makes inherently

political choices about its priorities.36 To summarise: the presence or absence of a duty to provide information can be measured in moral terms relating to behavioural norms.

The economic efficiency argument concentrates not on how contracting parties behave or should behave but on how allocating the information inequality is measurable on the market. The first question is whether or not it is efficient37 to require the party with the information to provide it to the other uninformed party. Of course numerous economic analyses of law38 have already pointed out an important differentiating factor: whether the party who possesses the information has acquired it casually or deliberately (at a cost). According to Kronman, for example, it is clearly not cost-effective to require the party possessing the information to disclose it if he has acquired it at a considerable cost or personal investment as this would act as a disincentive to acquire valuable information. It has been shown that Kronman’s analysis leads to eliminating duties to inform in the majority of cases.39 However, this leads to a clash with other economic dictates in that perfect competition of the market requires parties to have equal access to information. If duties to inform are not imposed, inevitably there will be informational asymmetry and the goal of perfect competition will never be attained.40 Cooter and Ulen41 have proposed another distinction in terms of productive, redistributive and destructive facts. This distinction has also been criticised as it is unclear that the criterion is workable in reality.42 Furthermore, a transaction-costs analysis suggests that the cost of acquiring information is relative and not absolute. It is therefore the lowest cost-avoider who should bear the brunt of providing information. Fabre-Magnan’s analysis incorporates the transaction-costs analysis, albeit implicitly. She submits that if the law requires parties

36D. Kennedy, ‘Form and Substance in Private Law Adjudication’ (1976) 89 Harvard LR 1685.

37I am assuming for the sake of argument that efficiency is measurable in terms of cost-effective rules.

38A. T. Kronman, ‘Mistake, Disclosure and the Law of Contracts’ (1978) 7 J. Legal Studies, 1; R. Posner, Economic Analysis of Law, (5th edn, New York, 1998), pp. 122ff.

39See M. Fabre-Magan, ‘Duties of Disclosure and French Contract Law: Contribution to an Economic Analysis’ in J. Beatson and D. Friedmann (eds.), Good Faith and Fault in Contract Law (Oxford, 1995), pp. 99 ff at p. 110.

40See for example, M. Trebilcock, The Limits of Freedom of Contract (Cambridge, MA, 1997), ch. 5 on Asymmetric Information Imperfections, pp. 105 ff.

41R. Cooter and T. Ulen, Law and Economics (3rd edn, Reading, MA, 2000), pp. 275--6.

42See Fabre-Magnan, ‘Duties of Disclosure and French Contract Law’.

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to disclose information about their own obligations (e.g. the seller in relation to the condition of his house; the insured in relation to the condition of his health or car etc.), the duty is efficient. In addition, the economic and moral criteria converge.43

To summarise, the distinction proposed by Fabre-Magnan, of emphasising the nature of the information coincides with the transaction-costs analysis since the person required to provide information about his own obligation or the subject matter of the contract to which he has easier or better access is also the lowest cost-avoider. It follows that, duties to provide information can be convincingly explained by coinciding economic and moral considerations.

It was suggested earlier that the relationship between the three functions of the duty to inform (special relationships, standards of behaviour and content of the contract) are interrelated. This assertion requires further consideration. It is submitted that the link is provided by examining the concept of reliance-based liability. Reliance-based liability may be induced from a special relationship between the parties. Moreover, such liability actually is induced from special relationships.44 This proposition is sometimes formulated the other way round: it has been suggested for example in English law that the existence of a ‘special relationship’ is a criterion for grounding liability for misleading statements.45 Or again, that certain contracts, categorised in English law as uberrimae fidei require that the parties behave in a certain way with reinforced duties to disclose. Or even, more recently, that a certain contract (of surety) not belonging to any previously recognised category submits the parties to a special duty to disclose information.46 Other legal systems may express a similar idea somewhat differently, since the point of departure is inverted. In systems where the general rule is to provide information, certain contractual relationships will simply reinforce the existence of

43See Fabre-Magnan, p. 119 who suggests that duties of disclosure (sic) are ‘morally very satisfactory in that they prevent people from trying to obtain fraudulently more than they deserve from the contract, but they are economically efficient in that people pay only for what they receive and no more’.

44See above, when a duty to inform is imposed in a special relationship. This is because the nature of the relationship entitles one party to rely on the other, thus giving rise to a duty to inform in the presence of material information. If the party possessing the material information breaches the standard of expected behaviour that involves disclosure, and thus breaches the reliance the other party put in him, he will incur liability.

45Hedley Byrne v. Heller (1964) AC 465.

46See Etridge v. Bank of Scotland (No. 2) (2002) UKHL 44. This is one interpretation of Lord Scott’s opinion, at paras. 181 ff.

a general duty, e.g. the professional seller must inform the consumer. In contrast under English, Irish and Scots law, the duty to inform is not the general rule but the exception. This is why the law highlights certain contractual relationships, to impose a special duty to inform. It makes sense then that the law should influence the way parties behave in certain relationships in order to protect the parties’ reliance on one another. If contracting parties respect the law’s incentive or deterrent (depending on which way you look at it) this should have the effect of reducing the incidence of reliance-based liability. Certain empirical observations may follow from this proposition.

Some legal systems lean towards recognising what might be identified as reliance-based liability even if it is not denominated as such. Austrian, German, Greek and Portuguese law all explicitly recognise reliance-based liability in the form of negative interest.47 Norway, and Scandinavia in general, explicitly recognise reliance between contracting parties (take Case 12 as an example where the absence of reliance is a determining factor) as does the Netherlands (see below). It is suggested that other systems implicitly recognise such a basis for liability by using the duty to inform as a means to achieve this end. This could help explain why French law imposes a duty on contracting parties to provide information to the other party (see Cases 4 and 6 for example) since if information in the possession of one party is not disclosed, the other party is entitled to annul and/or claim damages. Recognising a right to annul and claim damages may amount to admitting that the relationship between the parties justifiably induces reliance. Moreover, English, Irish and Scots law recognise that certain special relationships give rise to extra protection. There is of course nothing new about this; contracts of insurance were designated uberrimae fidei as early as the eighteenth century.48 It is in this sense that it has been suggested that there is a strong link between the duty to inform and reliance. The nature of the link is more complex: is it because the parties rely on one another (bilaterally or unilaterally) that a duty to inform is incumbent on one (or both) of them?

Two observations, the first descriptive, the second speculative, follow. This study has shown that duties to inform are increasingly being used. To take a legislative example, European Directives frequently have

47L. Fuller and W. Perdue, ‘The Reliance Interest in Contract Damages’ (1936) 46 Yale LJ, pp. 52--96. For a historical explanation of Fuller and Perdue’s transposition, see D. Friedman, ‘The Performance Interest in Damages’ (1995) 111 LQR 628.

48Carter v. Boehm (1766) 3 Burr. 1905 per Lord Mansfield at p. 1909.