Case 11

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the courts to apply this principle liberally, asking in each case whether it could reasonably be expected that a person knows the relevant law, it is clear that B has contributed by his own negligence to his losses resulting from wasted expenditure. Formal requirements for the validity of contracts for the sale of real property ought to be known by those entering such a contract. That may lead a judge to refuse any compensation of B’s loss by A, especially if he finds that both negotiating parties are to blame for negligent disregard of statutory formality requirements. In this case the third sentence of case §878 ABGB may apply by way of analogy.1

Nevertheless, B may be awarded compensation for his wasted expenses if there are reasons for B not having had knowledge of the formal requirements for the contract, whilst A knew of them or ought to have known as a professional (for example, as an estate agent). In an early decision the OGH held2 that a prospective party to a contract who, during precontractual negotiations, negligently and unlawfully caused the other party to make a mistake in his assessment of the circumstances that might form an obstacle to the valid conclusion of a contract, could be held liable for the other party’s reliance loss. Therefore, misleading the other party with regard to formality requirements may entail a claim under culpa in contrahendo principles.3

If A and B did not know the formality requirement at the time of agreement, there is no liability because A and B are equally to blame for not having known the law.4 In situation (i), a judge may find a duty on the more experienced party to instruct the less informed party of the formality requirement; and it is even more likely that a judge may find in situation (ii) that such a duty lies on a professional vis-a`-vis a layman,5 since experts are subject to a higher degree of care according to §1299 ABGB. Violation of this duty will entail liability for B’s reliance loss: only his wasted expenses will be compensated. In situation (iii), A’s conduct may qualify as a fraudulent inducement of an error by B. B’s

1‘A person who, when entering into the contract was or should have been aware of [the] impossibility [of its performance], is liable to the other innocent party for any damage suffered by him through his reliance upon the validity of the contract, [provided that the other party was not aware thereof himself].’

2OGH 8 Oct. 1975, SZ 48/102.

3 P. Rummel in Rummel, Kommentar zum ABGB, vol. I, §866, N. 17. 4 §2 ABGB.

5It is unlikely that A will be held liable only for a part of B’s wasted expenses because of B’s contributory negligence: cf. P. Rummel in Rummel, Kommentar zum ABGB, vol. I, §878, N. 6.

negligent ignorance of the formality requirement will not entail a reduction of the damages for which A is liable under culpa in contrahendo principles.

Denmark

The case is difficult to decide since Danish law has so few formal requirements, and none for the sale of land. However, in Denmark it is very difficult for a party who alleges that there was an agreement to sell real property to prove it, if it was only oral; in most cases, the plaintiff has not been able to prove that a contract was made,6 but there has been at least one Supreme Court case in which the court held that a contract was made, and in this case the defendant was ordered to convey the property to the plaintiff.7

England

In the basic case given, A has no liability to B. The formality requirement for a contract for the sale of a house is that all the express terms of the contract must be in writing, signed by both parties. In the absence of such writing there is no contract for the sale of the property,8 and B therefore can have no claim for damages for breach of contract. Nor on the primary facts is there any other contract. No tort is committed by A; there is no representation by A to B which might found an estoppel; and there is no claim in restitution (A does not receive any benefit from B).

In the variant cases:

In situations (i) and (ii), it does not make any difference if A knew of the formality requirements, or if A is a professional. The mere fact that A is knowingly taking advantage of a statutory formality, or is in a superior (professional) position does not assist B: in principle, this formality rule is absolute.

In situation (iii), it may, however, make a difference if A has misled B about the formality requirement. If B can show that A was fraudulent (that is, he did not honestly believe his statements to B about the formality requirement) he may have a claim in the tort of deceit for the losses he has suffered in reliance on A’s false statement. The fact that A’s misrepresentation is one of law (as to the statutory requirements) rather than of fact does not prevent B basing an action of deceit on it.9

6See Andersen, Madsen and Nørgaard, Aftaler og Mellemmænd, p. 89.

7See, e.g., U 1988 522 H.

8Law of Property (Miscellaneous Provisions) Act 1989, s. 2(1).

9Until recently a misrepresentation of law was held insufficient to give rise to certain claims, but this rule has now been reversed: Kleinwort Benson Ltd v. Lincoln City Council [1999]

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The damages recoverable in an action of deceit would be calculated to compensate only B’s out-of-pocket losses incurred in reliance on the representation, and not the expectation loss he suffers by failing to receive his ‘dream house’. However, it is not clear that any of B’s out-of- pocket losses are recoverable on the facts, since his estate agents’ fees and travel expenses appear all to have been incurred before the representation, not in reliance on it.

Another possible remedy, but which appears not to be available on the facts here, is through the doctrine of proprietary estoppel.10 Although the contract of sale does not come into existence in consequence of the failure to comply with the statutory formalities, if proprietary estoppel can be established the court might in awarding a remedy require A to confer on B the interest which the contract would have conferred had it complied with the formalities. In such a case the court is not enforcing the (void) contract itself but is giving effect to an equitable doctrine which operates outside the statutory rule for the formality of the contract.11 However, on the facts it seems unlikely that proprietary estoppel can be established: the claim requires proof by B that he has acted to his detriment on A’s representation that he will obtain a certain interest in property. Even if such a representation can be shown, B appears not to have relied on it since his expenditure appears to have been incurred before the representation.

Finland

This case is similar to case 3. In both cases there is a sales transaction that is subject to the formality requirements of land. According to the

2 AC 349 (restitution of money paid under a mistake of law); Pankhania v. Hackney LBC [2002] EWHC 2441 (Ch), [2002] All ER (D) 22 (Aug.) (misrepresentation of law), approved in Brennan v. Bolt Burdon [2005] QB 303 (mistake of law). Even before these cases, however, it appeared possible to obtain a remedy in damages for a fraudulent misrepresentation of law: Cartwright, Misrepresentation, Mistake and Non-Disclosure, para. 5.08.

10See the English report on case 2.

11Yaxley v. Gotts [2000] Ch 162. The Law Commission Report which proposed the Law of Property (Miscellaneous Provisions) Act 1989 contemplated that proprietary estoppel could be available as a means of giving effect to an agreement which did not comply with the formality requirements of the Act: Law Com. No. 164 Formalities for Contracts for Sale etc of Land (1987), pp. 18–20. However, in Cobbe v. Yeoman’s Row Management Ltd [2008] 1 WLR 1752, Lord Scott at [29] cast doubt on whether it is possible to use the doctrine of proprietary estoppel in this context, although his Lordship did not discuss the Law Commission Report, Yaxley v. Gotts or other Court of Appeal decisions which had followed Yaxley: Kinane v. Mackie-Conteh [2005] EWCA Civ 45; Oates v. Stimson [2006] EWCA Civ 548. For further discussion, see pp. 463–4 below.

Finnish Code of Real Estate, this kind of contract has to be concluded in a written form, signed by both parties, and confirmed by a notary public. The provisions of the Code of Real Estate, prescribing the legal consequences of a contract not complying with the formality requirements, can be taken as the basis for the solution of this case, too.12 There is also a question of the duties of disclosure under general contract law, which are not much modified by these provisions.

A would be liable according to the rules of culpa in contrahendo. The basic case and its variations (i), (ii) and (iii) illustrate different aspects that would be taken into account as affecting the degree of A’s fault. No one may make use of legal rules in a speculative sense, to get an advantage from the other party’s ignorance of them, even if a party’s right to rely on his ignorance of law is limited (ignorantia iuris nocet).13 Even in the basic version of the case there are some hints of A’s speculative intention. A seems to make use of the formality requirements and B’s ignorance of them in order to avoid the contract. This is considered wrongful conduct, and A would thus be liable on the basis of culpa in contrahendo.

The liability covers B’s negative interest, mainly the costs he has incurred in coming to the agreement. According to section 8 of the Code of Real Estate, which defines the scope of damages arising out of withdrawal from making the final agreement, the compensation covers reasonable expenses from advertising, visiting the land and other necessary measures pertaining to the conclusion of the contract. So B’s costs mentioned in the text (such as estate agents’ fees and travel expenses) are compensated.

B’s ‘complaint’ that ‘this was the house of his dreams, and he will now only be able to find a less satisfactory property’ may refer to some kind of non-pecuniary damage he claims to have suffered. The Finnish contract law rules do not add much to the tort law rules14 on non-pecuniary damages. In this case they cannot be applied, and it

12According to their wording, the provisions deal only with the pre-contract but can be considered to express principles applicable also to final contracts not concluded in the legal form.

13Hemmo, Sopimusoikeus, vol. I, p. 147.

14VahL ch. 5, ss. 2 and 6. These rules concern the compensation of pain and suffering, or defect and other permanent handicap in connection with personal injuries, and mental suffering caused by criminal offences against personal freedom, honour or domiciliary peace.