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

of behaviour expected of contracting parties.114 Let us examine how this can be done.

At first sight, it seems possible to identify four distinct foundations of the duty to inform, the first two of which are related:

The first foundation is fraud, i.e. an intention to deceive constituting an autonomous concept categorised for the most part as a defect of consent. We could describe this as a fraudulently induced mistake. All systems have some version of this concept. The common law version is found in the concept of fraudulent misrepresentation, subject to the observations made earlier about the exclusive scope of the duty to inform and misrepresentation. Under Scandinavian law, this may be covered by more general invalidity rules.115 We have called the German concept under §123 BGB ‘fraudulent misrepresentation’. The immediate remedy is annulment. It may be possible to cumulate this ground with a claim for damages116 or else the fraudulent behaviour of the non-mistaken party will preclude the annulling party from paying compensation for negative interest.117 Alternatively, it is possible in some systems to claim damages exclusively, without claiming annulment, if the latter is barred because of time limitations or because the contract has been confirmed.118 In English law, bars operating to preclude annulment may connote a similar idea.

The second foundation could be called more generally precontractual liability. In French law, for example, the obligation to act in good faith in the formation of contracts is deemed to be encompassed in the general provisions on delict and quasi-delict (arts. 1382--3 Code civil). The generality of these provisions (reference is made to faute) means that a negligent breach of duty to inform is covered here as well as fraudulent breach. Damages are the only remedy subject to the proviso below. This foundation may be cumulated with fraud, where appropriate (including

114The suggestion will be tested in the rest of this study.

115Section 30, para. 1 of the Contracts Act states: ‘If a declaration of will is obtained by means of fraud on the side of the other party, the said declaration shall not be binding for the person who has made it. The same applies in cases where a third party has obtained a declaration of will by means of fraud, and the second party was, or should have been, aware of the fact.’

116For example, in France and Belgium this is possible under arts. 1116 and 1382--3 of the Civil Code.

117This is the position in Austrian, German and Greek law, for an example, see Case 4.

118French and Belgian laws have a doctrine of ‘confirmation’, see the Belgian report, Case 4, for an example.

fraud by omission or fraudulent concealment) so that the claimant may ask for annulment and damages. It is logically sound119 that the remedy is tortious since either the contract is annulled and retrospectively void; or else, if the contract is not annulled, the breach took place at a moment in time when the contract did not yet exist.120 Other versions of precontractual liability exist, the most famous being the doctrine of culpa in contrahendo under § 242 BGB (now §§ 311 II, 241I, 280).121 This action gives rise to a claim for damages or termination as damages in specie. This doctrine is also recognised in Austria, Greece, Italy and Portugal.

It may be submitted that negligent and innocent misrepresentation in English, Scots and Irish law is also a form of precontractual liability. This does not totally exclude fraudulent misrepresentation being treated within this category. This suggestion is made on the basis that damages for misrepresentation are based on tortious liability and make the misrepresentor liable for his actions prior to the contract’s conclusion. Treating misrepresentation as a form of precontractual liability is therefore relatively uncontroversial. A further objection, that has already been mentioned, may however arise. It is not entirely accurate to present misrepresentation within the general category of a duty to inform and the statement requires qualification. Misrepresentation is rather a duty to tell the truth -- that the information provided be accurate -- which is not exactly the same thing as a duty to inform, since the breach of the duty is only remedied at a second later stage, once the information has been given. There is no onus to supply information in the first place.

The third foundation is a duty, which might be qualified as arising by operation of law, thus imposing a norm of behaviour. The meaning of this expression is twofold. Either the duty arises as a result of special legislative provisions (lex specialis) e.g. insurance law, consumer protection, banking law etc.122 or case law says that the duty exists as a result of usage, business practice according to one of the following criteria: the particular contractual relationship, the status of the parties, the inequality of the parties: an inequality as to informational power or an

119Logic is of course not the sole criterion in law; it is also conceivable that such liability be considered sui generis.

120Ghestin, La formation du contrat, no. 665, p. 646.

121See the German report, Case 6 for an example.

122See for examples in insurance contracts Case 10; for consumer protection generally, see Cases 6 and 8; for guarantee contracts, see Case 9.

asymmetry of bargaining power etc.123 It is submitted that a similar idea is expressed in the general clauses of the Norwegian Contract Act (sections 33 and 36) which allow the contract to be put aside when contrary to good faith or when considered unreasonable, where regard should be given, among other factors, to good business practice.124 Moreover, the main emphasis in Scandinavian law lies in the question of ‘unreasonableness’; ‘good business practice’ constitutes only one, albeit significant aspect. Arguably, promoting unreasonableness as a major criterion for interpretation is the strongest evidence of imposing a norm of behaviour. An underlying rationale may be found in the expression of a special relationship of trust or even reliance between the parties. Such a relationship may help explain why such a duty is found to exist. This hypothesis will be tested in a number of different contractual relationships illustrated in the cases.

Plausibly, the common law version of a duty of disclosure may well fit into the third category. As a general principle no duty to inform arises in common law systems according to the adage caveat emptor. However, a duty of disclosure may arise in exceptional circumstances. In these specific and limited circumstances, it may be submitted that the duty to disclose starts to resemble the civil law version of a duty to inform, since a positive duty lies on the person who has the relevant information and the condition of a relationship of trust is inevitably present. It is therefore necessary to identify when and why such a special duty arises, e.g. in insurance law and contracts uberrimae fidei. Furthermore, it is becoming easier to question the primacy of the general principle caveat emptor in English law.125 The cases in this study illustrate usefully the extent to which the principle still exists.

The fourth foundation is of course mistake, i.e. causing a mistake by (negligently) omitting to inform. Such a foundation exists in Dutch law126 and gives rise to a remedy in addition to damages since the contract can obviously be annulled on this ground.

It is crucial to consider the relationship between mistake, fraud and duties to inform, now that they have been presented separately: to what extent are they cumulative legal bases? Is one preferable to the other

123Dutch law relies on art. 6:228 BW, s. 2; Austrian law uses the criterion of business usage; Greek law uses good faith in art. 288 AK. See for an example of the parties’ inequality of bargaining power and knowledge, Case 2.

124See the Scandinavian report, in Case 2.

125Nicholas, ‘The Pre-Contractual Obligation to Disclose: English Report’.

126See for Dutch law, Cases 2 and 6 for example.

as far as the innocent party is concerned? This raises an important and related issue as to whether duties to inform are going to swallow the older more traditional concepts, such as mistake and fraud. To put it another way, we need to investigate whether duties to inform strictly belong to defects of consent and contract formation.

If it is true that mistake, fraud and duties to inform are in the process of evolution, arguably this is a reflection of a change in underlying legal values of contract; in any event this study will enable us not only to identify these changes but also to attempt to ascertain what are the reasons for their occurring. One obvious answer may lie in the fact that the procedures and the circumstances in which contracts are made are changing, to take but one example used in this study,127 contracts qualified as door-step sales are subject to special protective legislation, and this surely has a profound effect on the requirements of consent in contracting.128 Another reason for the shift lies in the fact that expectations about contract-making and contracts in general are changing. This may lead to an enquiry into the relationship between contract-dynamics (contract-making) and contract-products (the end result).129 Inevitably, a study, which examines the lie of the land as to the former, cannot neglect the latter or the relationship between the two. In other words, examining defects of consent requires a description and inspection of both procedural and substantive fairness in contract.130

Such questions will have the effect of bringing others to the surface. Two phenomena, that of specialisation of contracts and that of specific legislation131 (the two being subject to mutual exclusivity and overlap) have to be considered in the development of defects of consent. Do defects of consent still have a remedial role to play in the general

127See Case 9.

128This has been the subject of discussion in French law for example; controversy has arisen over the influence that the ‘cooling-off period’ has had on the time of formation of the contract as well as the nature of consent, since the sanctity previously attached to giving one’s consent is subject to a change -- one can always (within time-limits) take it back! See for example, J. Calais-Auloy, ‘L’influence du droit de la consommation sur le droit civil des contrats’ (1994) RTDCiv 239 ff.; C. Thibierge-Guelfucci, ‘Libres propos sur la transformation du droit des contrats’ (1997) RTDCiv 357 ff.

129See for example on the distinction between contract as a dynamic and static process -- G. Rouhette, Contribution à l’étude critique de la notion de contrat, PhD thesis (Paris, 1965).

130On procedural and substantial fairness, see for example, P. S. Atiyah, ‘Contract and Fair Exchange’ in Essays on Contract (2nd edn, Oxford, 1990), pp. 329 ff.

131See further on this point, p. 36 below.

theory of contract132 and/or in specific contracts?133 Is the role traditionally assigned to defects of consent now residual in the face of increasing leges speciales?134 Is the role of defects of consent diminishing or increasing in European contract law? This study purports to answer such critical questions.

Choice of remedial approach: cutting across legal concepts

Choosing a remedial approach has had the effect of uniting systems that would otherwise seem to display quite extraordinary conceptual differences. However, if an opposition is to be made between a conceptual and remedial approach, it is also important to consider the relationship between legal concept and remedy under each national law. Remedies must be examined in the light of two dichotomies: prevention versus annulment and/or compensation; annulment versus damages. Finally, attention should be paid to whether the remedies offered are the result of general rules or specific legislation. Our remedial choice can be justified in a number of ways.

First, on a purely pragmatic level, and to put it rather bluntly, what counts at the end of the day is the possibility of action for a ‘victim’,135 either of a mistake or of a duty to inform. Examining mistake and duties to inform from a more theoretical conceptual point of view would not only fail to meet the standards of the Trento common core approach but would moreover fall prey to the criticisms of a construction along the lines of a cas d’école -- which is very far from our objectives. Secondly and more critically, even if it may be alleged that our remedial approach is not entirely neutral, it is believed it was the only sensible line of investigation. This line has put the factual approach to the forefront while bringing up to the surface the conceptual mixtures which do not divide

132This begs the question of whether a general theory of contract exists or ever existed, Savaux, La théorie générale du contrat: mythe ou réalité.

133By specific contracts, reference is made to the civil law distinction between nominate or special contracts, as opposed to the general theory of contract. The term is not unknown to English law since it is the title of Chitty on contracts, volume II.

134It should be noted that the interpretation given to the concept of lex specialis varies among the legal systems considered. For example, German law adopts a strict view of lex specialis in the law of sales which means that mistake, but not fraud, may be excluded by remedies under the law of sales, see the German report in Case 3 for an example and further explanation.

135The term is perhaps another example of the moralistic connotations used by the law, see above.

simply into common law and civil law opposites, as may at first sight be presumed. Finally, it has been suggested it is important to examine the relationship between legal concepts and remedies in each national law. What needs to be borne in mind here is the initial crucial question of whether and to what extent ubi ius ibi remedium or inversely ubi remedium ibi ius. In other words, remedies shape their legal counterparts -- the concept or institution -- and vice versa. This is an additional reason why the remedial approach has had the advantage of refining an examination of legal concepts, such as mistake, fraud and duties to inform. It reveals perfectly the stratification of formants136 (legal and extra-legal), which the Trento common core methodology emphasises. Sometimes we will see that the disparity between the stated black letter rule of the law and the reality is flagrant -- and this gap is most accurately revealed by our remedial approach. Thus, our enquiry uncovers a highly textured tapestry and unravelling the different coloured threads is a rewarding challenge.

More concretely, the cases have been designed to display the wide range of choice of remedies available and to emphasise a number of determining factors, which may influence the claimant’s choice. To mention but a few examples, these may turn on the evaluation of damages, time limits, evidential difficulties, the effectiveness or adequacy of the remedy, the retrospective nature of annulment and its consequences in the law of restitution, the retrospective nature (or not) of termination, the passing on of property to innocent third parties and whether this excludes annulment or whether the monetary equivalent can be the object of restitution etc. The remedies available for mistake, fraud and duties to inform are not limited to annulment and damages but can also include rectification and adjustment of the contract. All these factors operate and produce convergence and divergence in the national laws under consideration.

In what fields of law have we applied this approach in our study of mistake, fraud and duties to inform?

A conscious choice was made right at the beginning to avoid the pitfall of narrowing the inevitable link between mistake and contracts of sale. Mistake and the duty to inform inevitably cover a much wider range of contracts; a fact which is sometimes forgotten in the classical textbook approach setting out the legal rules. In this sense, reliance has been

136R. Sacco, ‘Legal Formants: A Dynamic Approach to Comparative Law’ (1991) 39 AJCL 1 ff.; 343 ff.

placed, on the one hand on the theory of defective consent as part of the general rules of the theory of contract and, on the other hand, on the important contribution played by special contracts to illustrate and derogate from the general rules. Although this approach may at first glance seem more influenced by civilian systematic considerations, since the common law does not consciously analyse in categories of special contracts to the same extent, it is believed that this approach is useful and appropriate for a number of reasons, not least because it represents a common reality. In other words, conceptual explanations aside, it is first relevant to categorise the various illustrations of mistake and the duty to inform according to the nature of the contract for the very reason that in the presence of differing conceptual analyses, the nature or type of contract must be a common denominating factor in all national systems (barring disagreement about characterising the nature of the contract, no minor matter indeed). Secondly, this approach enables a comparative enquiry to be made into the varying degrees of influence that specific legislation, be it purely internal or inspired by European Directives, may have on the core of traditional general rules of contract. Comparative analyses can therefore follow without being biased by national legal conceptions of the geographical lie of the land. In our view, clearly, the initial methodological choice will determine, although it is hoped not excessively predetermine, the results of the research undertaken.

It is now helpful to set out more precisely how the cases chosen can be categorised into special contracts. Once again, it should be noted that the choice was not purely theoretical but was largely influenced by existing case law from a number of legal systems. In fact, it should be possible to avoid the criticism of having used unrealistic case studies, since every case is drawn from empirical research.

Description of cases

To describe each case in turn it will become apparent that the cases were designed in clusters to treat different issues that may arise in each type of contract. Cases 1 to 3 (Anatole v. Bob, Célimène v. Damien, Emile v. Far Eastern Delights) concern contracts for the sale of goods and in particular sales of works of art. The variety turns on the status of the contracting parties (their knowledge, their bargaining capacity), the content and manner in which precontractual information is given as well as the availability of the range of remedies. Case 4 (Mr and Mrs Timeless v. Mr and Mrs Careless) also treats a contract of sale but this time the subject matter of the sale is land and hinges on, inter alia, the relevance

of a mistake being qualified as fact or law as well as on the question of concealing relevant and material information concerning the quality of the land before the contract’s conclusion. Cases 5 and 6 deal with sales of second-hand goods but constitute variations on a theme, in that the enquiry focuses on precontractual statements or silence. Is the same standard expected in relation to the content of information given, in view of the fact that the subject matter of the sale is not new? Is the same standard required when the sale concerns a professional seller and non-professional buyer? Case 5 (Bruno v. The Local Garage) concerns a fairly common occurrence, that of the sale of a second-hand car, between a consumer and professional where a false statement was made. This case is a good illustration of the overlap between contractual remedies for non-performance, or breach of contract and remedies for defective consent. Case 6 (Emmanuel v. The Computer Shop) concerns a contract of sale between consumer and professional for an object that requires specialised knowledge. The question raises not only the seller’s silence about material facts which induced the buyer to contract but also the question of how to qualify a duty to inform when the information given has a decisive effect on the performance of the contract. In other words, is it accurate to describe as precontractual a duty to inform which has a long-term effect on the contract as well as inducing a contracting party to contract? The relevance of the reason for qualifying the duty in some systems is that such a qualification will affect the appropriate remedy.

From the sale of business to company law, Case 7 (Cinderella) owes its particularity to the nature of the market in question (shares quoted on the stock market). Thus company law disclosure requirements and regulations may interfere, although as we shall see, this is not necessarily the case.

Cases 8 and 9 examine a contract of loan and a contract of surety respectively. Case 8 (Estella v. Uriah Heep) concerns both a door-step sale and a door-step contract of consumer credit (as between a consumer and a professional). Here, the overlap between general remedies for defective consent and special consumer protection is particularly accentuated. Case 9 (Nell v. Scrooge Bank) concerns a contract of guarantee in a particular context: the fairly frequent case of surety given by one spouse for another to guarantee business interests. This case was inspired by the somewhat abundant case law in English law,137 whereas it has not

137Barclays Bank plc v. O’Brien [1994] 1 AC 180. Of course the German case law is important too, see German report, but it did not in fact directly inspire this case.

necessarily been a subject of so much speculation in other national systems. That said, it is not a matter of purely English law interest but is perhaps an example where English law has set a new trend in relation to the duty to inform in a bank--client relationship. This is worth highlighting for its rarity, since more generally the concept of a duty to inform is less highly developed in the common law than in the civil law systems.

Examining a completely different area of the law, that of insurance contracts, Case 10 (Zachary) examines a mistake which results in a double insurance -- although there is an obvious mistake it will be seen that the remedy available is not always legally categorised under the concept of mistake.

Case 11 (Monstrous Inventions Ltd v. Mary Shelley) looks at the possibility of mistakes arising in a settlement agreement. This case treats a settlement agreement in employment law where the dishonesty of an employee may provide a sufficient reason to invalidate what would otherwise be a valid contract. Here there is an overlap between two types of leges speciales, although in the common law countries, this question would be still considered under the general rules of contract.

Case 12 (Lady Windermere v. Angel) concerns a mistake in relation to a gift inter vivos. Obvious differences between civil law and common law rules arise since only in the former is a gift qualified as a contract. This issue is not crucial here. Moreover, at the end of the day, the qualification of the mistake itself -- is it a purely material mistake? Is it a mistake as to the person? -- may not be very relevant. If neither legal classification is of utter significance, there is one distinguishing feature of the case that differentiates it from the others. The case concerns a gift and we will see that the gratuitous nature of the transaction turns out to be the most significant common denominator coupled with the fact that this necessitates a formal requirement in most countries.

Identifying the limits of the approach: the cases that were abandoned

Finally it may be worthwhile recording the various cases that do not appear in this report for a number of reasons.

First, an attempt was made to include a case on the sale of land where the buyer knew of the existence of important minerals under the land, of which the seller was unaware.138 This case is obviously inspired by

138The facts were as follows: Oriol, a farmer, agreed to sell his land to Andermatt, a water mineralogist, for a reasonable market price. Unknown to Oriol, Andermatt had been carrying out extensive enquiries into the surrounding area and had reason to believe that a source of mineral water existed under the land to be sold. If exploited,

American law and the law and economics approach to the disclosure of valuable information.139 However, since the fact-hypotheticals did not correspond to any real cases under the national reporters’ systems and did not throw up any new legal issues which the other cases had not treated, the attempt was abandoned on the grounds that a set of facts which were both unrepresentative of legal reality and redundant did not deserve further attention. The attempt is mentioned since unfruitful research is in itself revealing: two conclusions are possible -- either one may indeed deduce that the law is lacunose on this point or that such cases never get taken to court, which does not mean that they do not happen in practice. Next, if it were shown that the law were defective in this area, it might be necessary to consider why no special remedy, or in some cases why no remedy at all, would be available.

Secondly, a set of hypotheticals140 which attempted to examine the overlap of mistake in the law of what common law lawyers call restitution (and also here an illustration of condictio indebiti or the action in French law of répétition de l’indu) was also set aside after some discussion amongst the majority of national reporters. The point is mentioned since it touched a raw nerve as to the difficulties that can be encountered in comparative legal research. The case raised a conceptual hubbub -- most national reporters did not want to conceptualise this area as mistake. To put it simply it was generally felt that this was simply not a question of mistake in contract law. Once again, the omission is worth mentioning since it was felt that we had pushed the limits of factual categorisation too far. At some point, and this was the very point, all national reporters showed the desire or need to classify legally the set of facts before them into some sort of coherent order.141 Too much chaos or disturbance was therefore not entirely appreciated. This example is perhaps illustrative

the source could be used both for setting up a thermal establishment and for bottled drinking water. After the sale Andermatt did indeed dig up a new source of water which obviously increased the value of the land beyond Oriol’s imagination. What remedy, if any, is available to Oriol?

139See for example, Kronman, ‘Mistake, Disclosure, Information in the Law of Contract’, who uses as a criterion the distinction between casually acquired information and information acquired at a cost.

140The facts were as follows: Unknown to one another, Janet Keats and John Keats, brother and sister, both took out motor insurance with Eagle Life. Janet had an accident and claimed on her policy. John opened a letter adressed to ‘J. Keats’ and banked the cheque enclosed. What remedy, if any, is available to (i) Janet and (ii) the insurers?

141For an appraisal of the need for legal doctrine to classify, see S. Smith, ‘Taking Law Seriously’ (2000) 50 University of Toronto Law Journal, pp. 241 ff.