Case 3: Mistake about ownership of land to be sold

94 pr econtractual liability in european private law

The principles of precontractual liability have changed slightly since 1976, in that the negotiating party’s obligation to give information about his change of mind has become more strictly interpreted by the OGH. But in this case it is clear that A’s conduct was not such that B could realistically have formed the impression that the contract with A would certainly be concluded.

Denmark

Under Danish law a seller is strictly liable for lack of title to the object sold. If B can prove that there was an agreement between A and B,3 the contract is valid and A is liable in damages for breach of contract. It is doubtful whether a court would award the architect’s fee, since it may hold it unwise for a party to hire an architect before the sales contract is perfected.

England

B’s only arguable remedy is in the tort of negligence, for the loss suffered by his reliance on A’s careless statement about his ownership of the land.

It has been accepted by the courts that one party may owe another party a duty of care in relation to statements made during the negotiations: and this can apply to a vendor of land making statements to a possible purchaser.4 A claim in tort should not hinge on whether the parties ultimately concluded a contract, although cases based on the duty to take care in making the statement during the negotiations have typically involved claims based on loss resulting from entering into the contract rather than, as here, losses suffered in anticipation of a contract which did not materialise.5 If a court finds that A did owe B such a duty, we do not know whether A has breached the duty: it depends on whether he failed to take such care as a reasonable man would have done in his circumstances to discover that any statements he has made about his title to the property were false. We do not know whether it was reasonable for him (as a non-lawyer) to believe that he owned the property. If there is a duty that is broken, B could recover from A such of

3See Danish report on case 11.

4Gran Gelato Ltd v. Richcliffe (Group) Ltd [1992] Ch 560, 569.

5Esso Petroleum Co Ltd v. Mardon [1976] QB 801; Gran Gelato Ltd v. Richcliffe Group Ltd [1992] Ch 560. See, however, Box v. Midland Bank Ltd [1979] 2 Lloyd’s Rep 391 (bank manager, making statement about likelihood of acceptance by head office of customer’s application for a loan, owed duty to customer).

his losses, within the scope of the duty, as are of a kind that A could reasonably have foreseen he might suffer as a result of the breach of duty. These would include the expenses that B has incurred in the negotiations, but would only include the costs of employing the architect if on the facts A should have expected that B would employ an architect at this stage.

There are no other remedies available. There is no contract between A and B: even though they have reached agreement on the terms of the sale contract, they do not intend the contract to be binding until 2 December when they sign the sale contract; and anyway in English law a contract for the sale or other disposition of an interest in land must be in writing, signed by both parties.6 There is no evidence of any separate, collateral contract which might already have been concluded about A’s title to the property, and no such contract will be implied: under standard conveyancing practice in England a seller will during the course of the negotiations for the sale of land give information to the buyer about such things as his title to the land.7 But these representations will not generally be contractually binding outside the sale contract itself. There is no basis for an estoppel, nor a claim in restitution (A has not been enriched). There can be no claim in the tort of deceit, since any misrepresentation A may have made about his rights in the property is made honestly: we know he did not discover the defect in title until 1 December.

This case again illustrates the general reluctance of English law to impose liability during the precontractual phase. In the case of a sale of real property it is well established that, up to the moment of the formal contract, either party is generally free to withdraw unless they have entered into some specific obligation to continue, such as a contract which grants an option for the other party to enter into the main contract of sale, and in effect binds the party granting the option not to withdraw the offer of a contract. And although a misrepresentation made during the negotiations can give rise to liability (in tort) for damages, the courts may be reluctant to impose such liability where the contract is not concluded since it would undermine the party’s freedom to withdraw from the negotiations.

6Law of Property (Miscellaneous Provisions) Act 1989, s. 2.

7The facts of this case are in practice relatively unlikely to occur, at least if the parties are legally represented: it would be normal for the seller not only to make statements about his title during the negotiations, but also to supply evidence of it.

96 pr econtractual liability in european private law

Finland

The sale of land is one of the most important types of contract in Finnish law that are subject to a specified form. This also gives an extraordinary character to precontractual liability questions. The Finnish Code of Real Estate (Maakaari 1995) has express provisions on the legal status of a pre-contract (pactum de contrahendo).8 Applying these provisions to this case seems to impose precontractual liability on A, on the basis of some kind of culpa in contrahendo. This liability would cover B’s negotiation expenses and reliance-based investment costs (such as the architect’s drawings).

The Code of Real Estate (Ch. 2), section 1, sets the requirements for form and contents of a contract of sale of land. The contract has to be concluded in a written form, signed by the seller and the buyer, and confirmed by a notary public. The minimum contents of the contract (matters that have to be agreed upon in the written document) are also prescribed. Infringement of these requirements renders the contract invalid.

Section 7 prescribes that the same form and other requirements that are applicable to a contract for the sale of land apply also to a precontract for the conclusion of that contract. Also the minimum content of a pre-contract is defined, including the date on which the final contract is to be concluded and any conditions to be fulfilled. The price can be left to be agreed upon later, according to the standards specified in the pre-contract. The period of validity of the pre-contract, if not otherwise agreed, is five years. The provision also states the main entitlement of a party arising out of the pre-contract: the right to demand the conclusion of the final contract on the terms agreed upon, or a claim for damage caused by the breach of the pre-contract. The compensation covers the positive (expectation) interest.

Section 8 contains a definition of damages arising out of withdrawal from making the final agreement that are recoverable on the basis of a pre-contract not drafted in the prescribed form. The compensation covers reasonable expenses from advertising, visiting the property and other necessary measures pertaining to the conclusion of the contract. If any deposit has been paid the receiving party has to refund the part of it exceeding the amount of these expenses. So, in line with compensation rules applicable to cases of invalidity of contract, the negative

8On the pre-contract, especially concerning a contract for the sale of land, in Finnish law, see Hemmo, Sopimusoikeus I, p. 161.