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

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In making these decisions, attention should be paid not only to the content of the contract, the position of the parties, and the situation at the time of entering into the contract, but also to the conditions and other circumstances which subsequently emerge. The regulations of paragraphs 1 and 2 hold similarly when it would seem unreasonable to apply trade practice or other laws of contract traditions.124

This provision gives the courts jurisdiction to intervene in contractual matters if they consider the contract ‘unreasonable’.125 The intervention might require setting the contract aside or -- what is most commonly the case -- a modification of the contract. The decision is based on a broad, total evaluation of all aspects of the relationship between the parties. Both the circumstances at the time the contract was entered into and those arising later can be taken into account.

The present case concerns a sale between professional parties. The courts will, therefore, exercise care in applying the Contract Act, § 36. Furthermore, there is an element of speculation or risk involved in this type of contract. It would, therefore, be only in extreme circumstances that the Contract Act, § 36, would be applied.126 It could also be argued that claiming invalidity in such cases would be regrettable as, in this way, the desire to track down undiscovered works by recognised artists could be discouraged.

The seller’s own circumstances could be significant in assessing unreasonableness. If Anatole, himself, ought to have discovered the identity of the artist (or possible artists), this would not favour the application of the Contract Act, § 36. This is not conclusive, however, but the more the party that claims invalidity according to this provision is at fault, the less likely the claim will be accepted.

(ii) If Bob had knowledge of the seller’s mistake at the time he entered the contract (which is not very likely in the present situation), the case would be somewhat stronger. Traditionally, a claim of invalidity would be applied in this type of case and not a breach of contract. Whether a legal contractual duty of disclosure by the purchaser exists is very unclear

124The Danish version of the General Clause originally differed from the Swedish and the Norwegian in that the courts were only given the authority to set the contract aside, either wholly or in part, and not to reword the contents of the contract. A more recent revision of the law has done away with this distinction.

125The expression ‘contrary to good business practice’ does not have a distinct meaning, and is covered by the criterion of unreasonableness.

126Ot. prp. no. 5 (1982--3) p. 36 reads: ‘If the contract is characterised by speculation by both parties, this will not normally be considered as modifying the contract.’

in Scandinavian legal doctrine.127 In the case where one of the parties has knowledge, § 33 of the Contract Act, would normally be applied together with § 36 of the Act (See Case 2).

The question hinges on the extent of the duty of disclosure in this type of contract. Probably, the courts would, to a large extent, let each party reap the fruit of his particular knowledge (such as the origin of the artist) as long as there is nothing else to object to in the setting out of the contract. In other words, an invalidity claim would not succeed. The actual facts also favour this solution. Anatole is an expert in his field. He has taken the initiative to make a sale, and such a situation is a well-known risk when selling objets d’art. Furthermore, the identity of the artist is still uncertain. Here, also, the question arises as to the seller’s own situation. Normally, however, it is assumed that a failed duty of disclosure has greater weight than a failed duty of examination.128 Only when the factual conditions are entirely obvious would the duty of disclosure be waived.

(iii) If the purchaser’s actions concerning the sale could be considered both as a breach of contract and as a breach of the validity rules, the question arises as to the relationship between the two legal remedies. A number of Scandinavian authors have claimed that breach of contract should have priority over invalidity rules (the theory of consumption).129 It is not for the aggrieved party to choose which remedy he prefers. This opinion, to a large extent, corresponds to the rule on mistake now incorporated in art. 3.7 of the UNIDROIT Principles of International Commercial Contracts.

The approach cannot be considered as having reached its final solution in Scandinavian law. Conclusive judgments relating to this matter do not, to my knowledge, exist,130 and writers have been sceptical of the

127The question is touched on by C. Hultmark, Upplysningsplikt (Stockholm, 1993), p. 45, who is opposed to such duty of disclosure. The seller’s duty of disclosure, on the other hand, is a well-established legal concept in Scandinavian law, see below.

128See V. Hagstrøm, Fragmenter fra obligasjonsrett (Oslo, 1992), vol. II, chs. 12 and 51, p. 34.

129See S. Jørgensen, Kontraktsret, Aftaler (Copenhagen, 1974), vol. 1, p. 120; K. Rodhe, Obligationsrätt (Stockholm, 1956), p. 345; A. Christensen, Studier i köprätt (Stockholm, 1970), pp. 4--5; B. Gomard, Almindelig kontraktsret (2nd edn, Copenhagen, 1996), p. 162; and K. Krokeide, TfR 1979.132, p. 154.

130On the contrary, some judgments take no account of the consumption doctrine. Hence, the Swedish Supreme Court in NJA 1985.178 gave the seller the right to demand the delivered goods returned from the purchaser’s bankrupt estate as a result of invalidity based on the doctrine of contractual assumptions, something the seller could not have done by termination.

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theory of consumption.131 Seen realistically, the question about the relationship between the two legal remedies has to be considered in light of the individual type of invalidity in relation to the terms of the individual contract. It cannot be taken for granted that the findings will be identical in all these situations.

Portugal

According to Portuguese law, Anatole has a chance to get a court to annul the sale, if he proves he was under a mistake when he contracted. According to arts. 251◦ and 247◦ of the Civil Code, a party whose consent was given by a mistake relating to the object of the contract can demand its annulment if the other party knows or should not be unaware that the mistake was fundamental for him. It should be recalled that Portuguese law uses the criterion of the non-mistaken party’s knowledge of the mistake and has not adopted the bar of an excusable mistake.132 It follows that Portuguese law is highly protective of the mistaken party.

On an initial consideration of the facts, if the seller refers to the painting as a work of an unknown artist and the painting proves to be an authentic Degas, it would be easy for Anatole to obtain judicial annulment of the sale, because Bob could not ignore the fundamental nature of the mistake. Anatole referred expressly to the painting as a work of an unknown artist, and Bob made the acquisition with this in mind. If the painting proves to be a work of Degas, Anatole concluded the sale under a fundamental mistake, of the nature of which Bob could not be unaware.133 In this case, the mistake would be considered as referring to the essential qualities of the object (error in corpore). A quality is essential when it is decisive to the contract, according to its economic or legal finality. The case law and doctrinal opinion state that the essentiality is given by the subjective point of view of the mistaken party and not by the objective point of view of the market.

However, under a secondary interpretation, which infers that the paintings were not by Degas himself, it would be a bit more difficult for Anatole to obtain the annulment of the sale, because of the nature of

131See, for example, Hagstrøm, Fragmenter fra obligasjonsrett, p. 23.

132See the explanation in the General Introduction above at p. 21.

133See ‘Ac. STJ. of 4/1/1972’, in BMJ 213, pp. 188 e ss., P. de Lima and A. Varela, Código Civil Anotado (4th edn, Coimbra, 1987), vol. I, p. 235, P. Nunes de Carvalho, ‘Consideraç˜oes sobre o erro em sede de patologia da declaraç˜ao negocial’, in ROA 52 (1992), pp. 169--82 (172) and D. Ferreira, Erro Negocial. Objecto -- Motivos -- Base Negocial e Alteraç˜ao das Circunstanciasˆ (Coimbra, Almedina, 1998), p. 23.

this mistake. In fact, if the paintings prove to be by a pupil under Degas’ supervision, they are still the work of an unknown artist as stated by Anatole when he made the sale. However he is still under a mistake, and the mistake refers not only to the value of the object sold, but also to the qualities of the paintings, as he did not know the influence that Degas may have had on the paintings (error in qualitate).134 To obtain the annulment of the sale on this basis, Anatole would have to prove in court that he would never have sold the paintings at this price if he had known of this quality (the fundamental nature of the mistake) and that Bob knew or should have known that the paintings would not be sold at a price so far below their real value, if Anatole had had known the true facts (arts. 251◦ and 247◦ of the Civil Code).

Scotland

The area of mistake in contract in Scots law is fraught with confusion and conflicting views. The approach adopted is the result of eclectic research.

Under Scots law it is not enough for a party challenging the validity of a contract simply to aver that one of the contracting parties consented under mistake. In order to be successful the pursuer must go through a number of steps. Mistake (error) operates in two ways; ‘mistake in intention’ and ‘mistake in expression’. A ‘mistake in intention’ is when the pursuer asserts that one or both parties to the contract consented under mistake. As they did not intend so to bind themselves there has been no consensus in idem. The lack of consensus means the contract has never truly been formed, therefore it is treated as being void ab initio. A ‘mistake in expression’ is when the final embodiment of the contract does not accurately express the intent of the party or parties. Anatole’s error is a ‘mistake in intention’.

Mistake in intention is further divided into ‘mistake in transaction’ and ‘mistake in motive’.135 A mistake in transaction is when a party has misunderstood what she has bound herself to, or the contract has been interpreted in a way contrary to how she believed herself to be bound.

134Legal writers state that if the mistake only refers to the price in the market (A sells for a price because he does not know the price has increased), it is not a mistake about the qualities of the object, but only a question of usury. See M. de Andrade, Teoria Geral da Relaç˜ao Jurídica (Coimbra, Almedina, 1992), p. 251; S. Vaz Serra, ‘Anotaç˜ao’ RLJ 107◦ (1975), pp. 39--41 and D. Ferreira, ibid., p. 23.

135J. D. Stair, The Laws of Scotland. Stair Memorial Encyclopaedia (Edinburgh, 1999), vol. 15 para. 686.

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A mistake in motive is when a party is not disagreeing with the terms of the contract but that due to her misapprehension of the circumstances it is not what she intended. The distinction is not always clear. I believe Anatole’s mistake was a mistake in transaction. His mistake in relation to the artist meant that he misunderstood what he had bound himself to sell. Another difference between mistake in transaction and mistake in motive is that there is only a remedy for mistake in motive if another party to the contract induced mistake.

Having classified the mistake as one of intention and transaction it must then be shown to be fundamental (essential error). Only a fundamental mistake will prevent formation of contract. The definition of what is fundamental has caused problems. Originally in Scots law the distinction was between a mistake that was ‘substantial’ and a mistake that was ‘insubstantial’. A by-product of this is the continuing tendency in Scots law to refer to fundamental mistake (essential error) as ‘error in the substantials’. This is just one example of the confused state of Scots law in this area. A distinction is also made between a mistake which excluded consent and that which did not exclude consent. This consensus approach was not without limits. To ensure objectivity the mistake had to be one of a recognised type. The categories represent the mistakes that the reasonable man would view as preventing consent. These were most famously stated by the Institutional Writer, Bell136 as:

mistake as to the subject matter

mistake as to the person undertaking the obligation or for whom the obligation is undertaken

mistake as to the price or consideration

mistake as to the quality of the thing engaged for (quality being either tacitly or expressly agreed as being essential)

mistake as to the nature of the contract that was entered into.

This position was affirmed by Lord Watson in Stewart v. Kennedy.137 A mistake which fitted one of Bell’s categories was prima facie a fundamental mistake. However Lord Watson appeared to recant upon this definition in the later case of Menzies v. Menzies.138 Instead of requiring the mistake to be one of Bell’s accepted five, any mistake where ‘but for this the party would not have entered’ the contract would be operative. Although still consensus-based, this introduced an element of

136G. J. Bell, Principles of the Law of Scotland (10th edn, W. Guthie, Edinburgh, 1899), Section 11.

137(1890) 17 R (HL) 25 at 28--9. 138 (1893) 20 R (HL) 108 at p. 142.

subjectivity and appeared to extend the scope of mistake. As I will state later, other aspects of Menzies qualify this width. Whether or not Lord Watson intended to overrule his earlier approval of Bell is not clear. It has been argued that since the pursuer in Menzies limited his challenge to mistake in motive then the Menzies interpretation of essentials should be limited to that area. This would leave intact the general requirement of fitting the mistake into one of Bell’s five examples. As I have already classified Anatole’s mistake as one of transaction, Bell would be applied. As the parties were both agreed as to the subject matter being contracted for, Anatole’s mistaken belief as to the identity of the painter affects only the quality of the pictures. Therefore he made a mistake as to the quality of the thing engaged for.

Merely establishing the mistake as fundamental is not enough. The principle of objectivity requires that the mistake is not only of a type that the reasonable man would see as vitiating consent, but that it did so apply in this contract. This can be shown by the consequences the mistake creates. Although two mistakes may fall into the same category as laid down by Bell, the courts will treat them according to the severity of the events that flow from them. This is particularly so in mistake as to quality, where it has been expressed that the resultant situation will have to be a fairly extreme case before the courts will intervene.139 Such an extreme case was Earl of Wemys v. Campbell.140 There the court held that the presence of deer on an estate was integral to a lease of a ‘shooting of the deer forest of Dalness’. Accordingly, the absence of stag during the shooting season constituted a sufficient mistake as to quality to invalidate the contract. Similarly, the terms of the contract must have sufficiently directed each party’s mind to the essential quality141 so that a reasonable man would see it as essential to the contract. Therefore, the validity of Anatole’s contract with Bob will only be at risk if the identity of the painter (the quality of the subject matter) was an essential part of the agreement to which both parties directed their minds. The quality of the subject matter will most obviously be seen as essential to the contract if it has been expressly agreed to by the parties. However, its importance can also be inferred from the circumstances of the transaction. Then the parties are said to have tacitly agreed to the quality of the subject matter being essential. It is possible that Anatole falls into the latter case. Anatole and Bob are both what could be called professional

139W. M. Gloag, The Law of Contract (2nd edn, Edinburgh, 1929), p. 447.

140(1858) 20 D 1090.

141G. J. Bell, Commentaries on the Law of Scotland (7th edn, J. Meharen, Edinburgh, 1870), p. 314.

does pass these hurdles, it must be defined as either unilateral, common or mutual.144

In Anatole’s case there are elements of both unilateral and common mistake. It is clear that Anatole was under a unilateral mistake. It could be inferred that Bob had relied on Anatole’s catalogue for his knowledge of the painting; if so, Anatole’s mistake would then be shared (common). The classification of the mistake affects the availability of a remedy. In common mistake the contract is void ab initio. Both parties were under a mistake which affected their intention, therefore they did not reach consensus in idem. As the contract is treated as if it never existed Anatole would not need to seek the court’s intervention. Further, if Bob resold the painting as proposed, the ownership of it would not pass to the buyer, but remain with Anatole.

The effect of unilateral mistake is less certain. As it is still an example of a mistake in intention, the Institutional Writers such as Stair stated that because the consent of the party under mistake had been affected, then like common mistake the contract is void ab initio. However, there is a feeling that it is unfair on the innocent party that the other should be able to rely on his own mistake. This school of thought claims support in Lord Watson’s dicta in Stewart v. Kennedy145 and Menzies v. Menzies.146 Lord Watson stated that onerous contracts reduced to writing,147 where the mistake concerned the legal effects of the contract, would not be invalidated by a unilateral mistake, unless it had been induced by the misrepresentation of the other party. Further, the contract would be regarded as validly formed, but voidable. Therefore, unless the pursuer is granted rescission of his contract by the court, the defender remains the new owner and can pass on good title. In Menzies, Lord Watson applied Stewart v. Kennedy and required the mistake to be induced by the misrepresentation of the other party. This led to the view that an action for unilateral uninduced mistake is no longer competent except in gratuitous obligations. So, while Menzies on the one hand extended the scope

144In unilateral mistake, only one of the parties is consenting under mistake. In common mistake, the mistake is shared by both parties. In mutual mistake, while both parties are under mistake it is not the same mistake.

145(1890) 17 R (HL) 25. 146 (1893) 20 R (HL) 108.

147Stewart v. Kennedy involved a different conflict with the principle of consensus in idem. The practice and sometimes legal necessity of putting some obligations in writing led the courts to refuse to look behind the four corners of the written contract to examine the true intent of the parties. As a result of the Contract (Scotland) Act 1997 s. 1, provided the contract does not express itself as being conclusive in its terms, extrinsic evidence is now admissible to prove additional terms of the contract.

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of mistake by its subjective definition of essential, it limited its effect in cases of unilateral mistake.

On the other hand, MacBryde148 argues that this conclusion takes account of the fact that Stewart v. Kennedy149 was only concerned with onerous contracts and that it should be restricted in accordance with the rest of Lord Watson’s dicta. Thus, only those contracts reduced to writing where the unilateral mistake is over the legal effect of the contract should require inducement. All other unilateral mistakes should operate to prevent formation, even if uninduced.

There is no case law in point with Anatole’s situation, therefore it is uncertain which of the two views the court would adopt. Recent cases that have denied a remedy for uninduced unilateral mistake in relation to the legal effect of a contract, have concerned transactions where the contract has been reduced to writing and has been onerous.150 The courts have made particular reference to the existence of these factors and have not excluded the possibility that there could be uninduced unilateral mistake in other onerous contracts resulting in their being void.151 However, it has also been stated that the law in relation to uninduced unilateral mistake is too confused to give a conclusive statement of its effect.152 Consequently, the theoretical approach that I have outlined causes great difficulty in practice. There is no clear statement on such definitive areas as what will be regarded as essential mistake, when it will be seen as sufficient or if there is a remedy for unilateral uninduced mistake. This situation has been recognised by the Scottish Law Commission in their Memo Number 37 on ‘Constitution and Proof of Voluntary Obligations’, but until it leads to fruitful reform, practitioners will continue to seek remedies other than in mistake.

To conclude, I do not think Scots law would provide a remedy for Anatole. Although his mistake is one of intention and in transaction it is not an essential mistake. The facts do not show that the identity of the painter was expressly or tacitly agreed as essential. In the absence of this, the subject matter of the contract would be more properly seen as the painting itself not the painter. Therefore the mistake as to the identity of the painter is not essential.

148See W. W. McBryde, The Law of Contract in Scotland (Edinburgh, 1987), p. 180.

149Ibid., p. 2.

150McCallum v. Soudan (1989) SLT 522; Royal Bank of Scotland plc v. Purvis (1990) SLT 262.

151(1989) SLT 522 at p. 523 per Lord Morison and 1990 SLT 262 at p. 265 per Lord McClusky.

152Steels Tr v. Bradley Homes (Scotland) Limited (1972) SC 48 at p. 56 per Lord Dunpark.

Spain

As an introduction a brief analysis of defective consent under Spanish law as provided by art. 1365 of the Civil Code153 will be outlined. Case law has adopted a strict approach to mistake which is subject to the following conditions: (i) a mistake must relate to the substance of the subject matter or terms of the contract which constituted the main reason for concluding the contract; and (ii) a mistake must be excusable, which means that it could not have been avoided by the mistaken party’s average or normal diligence, according to principles of good faith. Diligence is assessed according to all the circumstances of the case, including the personal circumstances of both parties to the contract. The basic function of the idea that a mistake should be excusable is to prevent the mistaken party being protected where such protection is not deserved because of the mistaken party’s negligence, in which case the protection shifts to the other contracting party under the principles of contractual liability, good faith and legal certainty.

(a)Applying these conditions to the facts it is therefore necessary to determine the scope of the mistake made by Anatole in this particular case. In this sense, clearly, what led him to describe the two paintings that are the subject matter of the contract as ‘by an unknown artist’ was his absolute ignorance of their possible author, whether the work of Degas himself or one of his pupils: this is a decisive factor in determining the price of a painting. Had Anatole known what he was selling, the price would not have been the same since his mistake arose from the conditions of the item which were largely the reason for concluding the contract so that, had they not been present, the contract would not have been concluded, at least not on the same terms. Therefore, the mistake of one of the contracting parties, the seller in this case, referred to the essence of the matter.

(b)Was Anatole’s mistake excusable? The degree of diligence required varies according to the situation of the person claiming to have suffered a loss. This is therefore greater if a professional or an expert154 has made a mistake, whereas when a layperson contracts with an expert, the standard of diligence required is less high. Finally, in assessing diligence, it is necessary to consider whether the other party assisted with its conduct, even though it may not have been fraudulent or at fault.

153Article 1265 of the Spanish Civil Code states: ‘Consent given by mistake, under duress or intimidation or with fraud is null and void.’

154Supreme Court Ruling of 28/2/1974.