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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As an expert on Impressionism, Anatole should have known that the pictures he was putting on sale could have been worth far more than he had estimated in principle, thus demonstrating his complete absence of diligence in not checking the material in his private collection. On the other hand, there is nothing to enable us to establish that Bob was aware of the value and importance of the paintings he was acquiring or that he did anything to encourage Anatole to conclude the contract.

As an expert, Anatole is required to use a high degree of diligence and his mistake must be classified as inexcusable. He cannot, therefore, have the sale annulled.

Comparative observations

I -- Four types of remedies are envisaged here, mistake, basic contractual assumption, laesio enormis and breach of contract.

Mistake

As a preliminary parenthesis, is should be noted that the fact that some countries recognise a mistake on the facts, whereas others do not, is not in itself decisive. Even where mistake is admitted, in practice bars operate in the majority of the legal systems, so that in reality, the legal qualification of mistake is of minor relevance.

Under a number of legal systems there is a mistake that can be characterised as to quality of the subject matter. This is the case in, Austria, Belgium, France, Germany, Greece, Italy, The Netherlands, Spain and Portugal. All these legal systems consider that the mistake is fundamental. A subjective criterion (a unilateral mistake even where the mistake originates in Anatole) suffices. In Italy the mistake must also be recognisable, but such a requirement is probably not fulfilled here. In Greece, an objective criterion (compliance with good faith and usage) is also fulfilled on the facts. However, in Austria, despite fulfilling these prerequisites, such a mistake is subject to a further condition, namely proving that the other party is not worthy of protection. Here this condition is not fulfilled as Bob had already taken action incurring expenses to evaluate the painting. The result is, therefore, to award protection to Bob, which thus precludes Anatole from annulling the contract. Moreover, in France, Belgium, Italy and Spain the mistake is subject to a bar, so that annulment would not be available. The mistake would be inoperative on the grounds that it is inexcusable since the seller is a professional. Such a bar is not always contained in the various Codes but

has sometimes emerged as a result of case law. Greek law, which also recognises the excusable nature of the mistake, would not, as a matter of interpretation apply this condition on the facts. The only objection under Greek law to annulling the contract would be if it were not proven that the paintings were by Degas or one of his pupils, in which case the mistake would be disqualified, since a mistake as to mere value is insufficient to annul a contract. In the Netherlands, the bar to liability is based on the rule on risk allocation: the seller should bear the risk for a mistake concerning value. In all of the above-mentioned countries, the legal formants for the solutions are a combined result of articles in the Civil Code and case law interpretation.

To summarise, only Germany (according to one line of case law authority), Greece and Portugal would actually annul the contract for mistake. Moreover, in Germany and Greece, non-judicial and judicial annulment respectively, would be counterbalanced by Anatole paying Bob the negative interest suffered as a result of relying on the contract’s validity. In practice, the German reporter has pointed out that this might make annulling the contract less worthwhile than is supposed at first sight.

Under an alternative legal analysis, there is no mistake on the facts. In English and Irish law there is no common law mistake, i.e. a mistake of fact shared by the parties, necessary to annul the contract. The absence of representation or warranty as to authorship (a condition which is not satisfied) and the fact that the mistake originated in the seller (a bar if the condition were satisfied) cumulatively prevent the mistake from being qualified as capable of annulling the contract. In addition, the presence of a (unilateral) mistake as to an important quality of the subject matter, absent a misrepresentation, does not suffice to annul the contract. Under Scots law, initially it may appear that Anatole has made a mistake in intention and transaction which could be qualified as an essential mistake as to quality. This interpretation closely resembles the civil law line of thought. However, two further obstacles then arise; first, it is not certain that there is an essential mistake as to quality here since the objective criterion is not met and in this Scots law diverges from a corresponding civil law reasoning, in the absence of express or implied agreement as to the identity of the painter. Secondly, if the mistake is not qualified as fundamental and also unilateral (as opposed to a common mistake) it is uncertain that such an uninduced unilateral mistake would suffice to justify annulling the contract. All countries rely on case law, and in Scots law on works of authority, to arrive at a similar solution.

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Likewise, in Germany, and Greece if the authenticity of the paintings is not established, in the event that the mistake as to the authorship of the painting is qualified as a mistake as to value, and not to quality (the same solution is arrived at by following an objective line of interpretation under Scots law), the contract will not be annulled. Following a similar line of reasoning, under Portuguese law, the mistake would be requalified as one of the painting’s qualities and not an essential quality and annulment might be more difficult to obtain. Ultimately, the question of whether annulment will be granted or not is not dependent on a purely conceptual analysis of mistake but is measured by other factors, see below (II).

Basic contractual assumption (clausula rebus sic stantibus, ‘Geschäftsgrundlage’)

In Germany, another legal doctrine may be invoked, that of the failure of a basic contractual assumption. Such a ground may suffice to vary or adapt a contract but the various conditions, developed by case law, are not met here. Likewise in Norway, Denmark and Sweden, influenced by the German doctrine in the absence of a legal concept of mistake developed their own Scandinavian doctrine of assumption. This has now to some extent been replaced by a ‘general clause’ of legislation relating to contracts (Invalidity and Contract Act). Here, however, the relevant section of the Act is not satisfied since the contract would not be considered unreasonable, i.e. not contrary to good business practice.

In Italy, also influenced by the German doctrine, the Italian courts sometimes invoke a similar concept (presupposizione) as an alternative version to mistake to annul the contract. This may be explained as another way of viewing mistake, which takes into account good faith. However, a subjective criterion is applied and not satisfied here.

Laesio enormis

In Austria, the sale could be annulled on the grounds of laesio enormis. Two cumulative conditions exist: that of an objective undervaluation of price of more than 50% and the seller’s lack of knowledge of the undervalue. Such a remedy is derived from the Civil Code and distinguishes Austria from other civil law countries by its extraordinarily wide field of application. Similarly, Belgium has a wide-ranging doctrine of lésion qualifiée, but unlike under Austrian law, its conditions would not be met here.

Breach of contract

In Norway, were such a ground to exist, it is suggested by legal authorities that such a ground should be given priority over any invalidity doctrine for the simple reason that contractual remedies do not, unlike the latter, give priority to unsecured creditors. However, there is no breach of contract on the facts, in the absence of a breach of a duty of disclosure. Likewise, under English law there is no remedy for breach of contract. Bob is under no obligation to point out the undervalue to Anatole and the mere undervalue of the contract, i.e. inadequacy of the consideration, is not a matter of the court’s concern.

II -- The most obvious distinguishing features of this case are the fact that during a sale between two professionals a mistake is made by the seller as to the value and authorship of the object of the sale. It can be noted first that there is a divide between common law and civil law countries in relation to the status of the contracting parties. The professional status of the parties is not a relevant factor as far as common law countries are concerned, as it does not have any bearing on the qualification of mistake. As far as some civil law countries are concerned however (Belgium, France, Italy, the Netherlands and Spain), the status of the parties has an effect in relation to the operation of bars developed by case law, such as the inexcusable nature of the mistake. Under Greek law, the inexcusable nature of the mistake is recognised by a rule (§ 142 AK), although it was not held to apply in the circumstances. Under Austrian law, a similar idea is set out formally as a legal condition (§ 871 AGBG) and not as a bar developed by case law, namely the worthiness of the other non-mistaken party’s protection. This concept puts to the forefront the notion of reliance. Reliance is also recognised by German and Greek law, though to a lesser extent, since annulment would be granted, counterbalanced by compensating the negative interest of the non-mistaken party who relied on the contract. The first feature (that of the status of the parties) is thus linked to the second: can the mistaken party claim for a mistake which is the subject matter of his own obligation, here the authorship of the paintings? Again, the civil law countries do not object to this in theory (e.g. the Poussin case in French law) although here its limits are defined by the seller’s status. Interestingly, Greek law seems to be much less stringent as to the requirement of excusability, using a broader measure of compliance with good faith.

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All legal systems agree that a mistake as to value does not suffice to annul the contract. The only exception to the rule is the alternative remedy of laesio enormis under Austrian law. Even though both parties have professional expertise, they are not acting in a business capacity and so the rule applies. Thus variants as to the reasoning lead to the same result in practice that mistake will not be operative in a majority of the civil law countries, except for Greece (if Degas’s authorship is confirmed), Germany, according to a line of case law authority, and Portugal.

In the common law countries, as well as Norway, there is no initial qualification of mistake, for numerous reasons: either because Norway does not recognise mistake as a legal concept or because the mistake is uninduced, unilateral and thus inoperative (England, Ireland and Scotland). Nevertheless, in Norway, the status of the parties may be a relevant factor to assess whether the contract complies with business practice, as required by legislation. This question is less important in England, Ireland, Scotland and the Netherlands, which seem to concentrate more on how the mistake arose -- whether it is unilateral and/or uninduced -- rather than on the nature or status of the party causing it. This analysis relies quite explicitly on the underlying importance of the distribution of risks in contract theory and is also present both in one doctrine of mistake in German law155 and in the German doctrine of failed contractual assumptions. It is submitted that the underlying value behind the requirement that a mistake must be excusable is implicitly directed at a concern to protect the security of transactions and confirm the allocation of risks made under the contract. It should be apparent that divergences do not divide neatly into the common law and civil law divide but are rather represented by underlying, and not exclusively legal, factors.

155 See German report.

to the abnormal character of the purchaser’s behaviour. If excusability is assessed objectively, this might be unfavourable for Célimène if the judge thinks that a reasonable man in abstracto should have paid attention to this circumstance.

A remedy based on mistake leads to annulment of the contract but this is impossible here as the new owner of the painting is protected by art. 2279 of the Civil Code which means that Célimène cannot recover the painting. Célimène will obtain, in lieu of annulment, the increase in value obtained by Damien. If Célimène wishes to obtain extra damages, she will have to prove, in addition, a precontractual fault committed by Damien based on art. 1382 of the Civil Code.3

(ii) Célimène could also base her action on fraud which appears to be a preferable solution since such an action entitles the successful aggrieved party to claim either annulment plus additional damages (and the fault, consisting precisely in the fraud committed, is here, contrary to an action based on mistake, already proven against the defrauding party)4 or damages alone.5 Another advantage of the remedies available for fraud consists in the distinction that is made between principal fraud (dol principal) and incidental fraud (dol incident):6 if Célimène does not succeed in proving that Damien’s fraudulent behaviour induced her into contracting in order to have the contract annulled, she will still be able to claim some damages on the basis of incidental fraud. The second reason for Célimène to prefer an action based on fraud is that the issue of excusability will not be raised. Finally, it will probably be easy for Célimène to demonstrate the existence of the intentional and material elements of fraud (see Case 1): there is some case law deciding that the abuse of the other party’s old age and weakness constitutes evidence of these elements.7 Here the fact that Damien spontaneously paid twice the required price for Célimène’s painting works in her favour: it helps to show Damien’s intent to deceive her.8

3Goux, ‘L’erreur, le dol et la lésion qualifiée’, no. 32; A. Meinertzhagen-Limpens, ‘La vente: erreur, non-conformité et vices cachés’ in A. Meinertzhagen-Limpens et al.,

8See Fontaine, ‘Les aspects juridiques de la commercialisation des oeuvres d’art’, p. 407: the purchaser of a work of art who deliberately maintained the seller’s ignorance in order to purchase from him at a low price a work of art that he recognised as authentic commits a fraud.

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The only small risk that Célimène has to assume, basing her action on fraud, is that Damien’s fraudulent behaviour consists here mainly in fraudulent concealment and we have seen that Belgian law generally recognises such ‘negative’ manoeuvre only when there is in casu an obligation to speak on the part of the defrauding party. Considering the parties’ respective positions, ages and expertise (see Case 1), it is most probable that the judge will hold that such obligation exists here.

(iii) Lésion qualifiée may also be a ground of action for Célimène. The conditions are all fulfilled here,9 there must be: (a) a manifest disproportion in the parties’ respective engagements or performances, which is clearly the case here; (b) one of the parties is in a position of inferiority: here Célimène’s old age and lack of expertise clearly place her in such a situation with regard to Damien; (c) the abuse of such a situation by the other party. It must be established that, without such abuse, the other party would not have contracted or would have done so under other conditions. Contrary to the remedy based on fraud, the abuse does not entail an intentional element: merely knowing and taking advantage of the other party’s position suffices.10 Lésion qualifiée can lead either to annulment of the contract or damages.11 In the present state of the law, it is unclear whether the aggrieved party’s negligence (which here would lie in Célimène’s absence of reaction to Damien’s spontaneous offer to pay more than required) would have some consequences on either the admissibility of the action or mitigate the amount of damages awarded.12 To conclude, we would suggest that the remedies of fraud and lésion qualifiée constitute the best options for Célimène.

England

The starting point would be not to distinguish this case from Case 1, and so not to give Célimène any remedy on the facts as stated. On the general principles of mistake and non-disclosure, the distinction from Case 1 -- that here the seller is a non-professional -- makes it a hard case but the principles applicable are identical. The buyer would have no duty

9For a reminder of these conditions, see Goux, ‘L’erreur, le dol et la lésion qualifiée’, nos. 18--22.

10See for instance Liège, 17-10-1996, JT, 1997, p. 569, where the judge, from this point of view, clearly distinguishes lésion qualifiée from fraud.

11Civ Brussels, 17-3-1995, RGDC, 1995, p. 507.

12See Case 1 for the answer provided by the Cour de cassation in the similar debate concerning fraud, see Goux, ‘L’erreur, le dol et la lésion qualifiée’, no. 23.

of information; and as long as he made no misrepresentations about the work of art he was buying, he did not lay himself open to any remedy. A court looking sympathetically on Célimène might enquire all the more carefully into the facts to check that Damien did not make any express or implied misrepresentation, but if they could find no such statement, there is no basis on which to grant any remedy. There is clearly no remedy here for common mistake since the mistake was not shared: Damien realised what he was buying.

There is, however, a faint possibility of an alternative argument by Célimène which was not open to Anatole in Case 1: that the contract should be set aside as an ‘unconscionable bargain’. The basic statement of principle is in Fry v. Lane:13

. . . where a purchase is made from a poor and ignorant man at a considerable undervalue, the vendor having no independent advice, a Court of Equity will set aside the transaction . . .

This is not a fully developed area in English law (although other common law jurisdictions have made much more of it),14 but there have been signs of development which might allow an English court to treat Célimène as a ‘poor and ignorant person’ for the purposes of this rule.15 If that is so, then the burden would shift to Damien to show that the transaction is ‘fair, just and reasonable’, which appears to mean, in essence, that he has not taken advantage of her weakness. It is, though, still rather unlikely that this case would fall under the principle, since it does not fit the fact-pattern of the (relatively few) cases: for example, Célimène took the initiative in the sale, which seems to be motivated more by a desire to clear her attic than by impecuniosity. Even if the court could hold this to be an unconscionable bargain, it would render the contract not void but voidable: that is, Célimène would be entitled to avoid the contract retrospectively, and obtain the return of the picture

13(1888) 40 Ch D 312, 322.

14Commercial Bank of Australia Ltd. v. Amadio (1983) 151 CLR 447 (Australia); Knupp v. Bell

(1968) 67 DLR (2d) 256 (Canada); Nichols v. Jessup [1986] 1 NZLR 226 (New Zealand).

15For example, the principle was applied to allow a woman to avoid a conveyance to her husband of rights in the former matrimonial home, since she was ‘poor’ in the sense of belonging to the lower income group; and ‘ignorant’ in that she was not highly educated and could not be expected to understand the complex legal transaction: Cresswell v. Potter [1978] 1 WLR 255. How far this principle can be developed further in English law remains to be seen, but there have been recent (obiter) statements in the Court of Appeal that the jurisdiction is capable of adaptation to different transactions entered into in changing circumstances: Crédit Lyonnais Bank Nederland NV v. Burch [1997] 1 All ER 144 at p. 151.