Pre-contractual Obligations: The General Contract Law Background

Author:Hugh Beale
Position:Professor, University of Warwick

1. Harmonisation? - 2. Mistake caused by incorrect information - 2.1. Shared principles and terminology: Fraudulent misstatements - 2.2. Different concepts, similar results: - 2.3. Different results: Self-induced misapprehension - 2.3.1. B knew about A's mistake - 2.3.2. A's mistake was unknown to B - 3. The DCFR solution - 4. Indirect duties of disclosure - 4.1. Unfair exploitation - 4.2.... (see full summary)


Hugh Beale

Professor, University of Warwick

Pre-contractual Obligations: The General Contract Law Background

In my first paper in this volume1, I argued that one of the functions of the Common Frame of Reference (CFR) as a legislator's guide or 'toolbox' would be to provide the legislator with 'essential background information'. Firstly, the CFR necessarily includes some rules that do not reflect the law in every Member State. Instead, they may reflect the 'best solutions' to an issue, solutions found in only some of the laws. To include these without explaining what rules apply in the laws of the other Member States would be highly misleading. To gain an accurate picture, the legislator needs to have information about the different laws in the various Member States. This is the function of the comparative notes that will be included in the final version of the Draft Common Frame of Reference (DCFR). Secondly, European legislators need to know what is a problem in terms of national laws and what is not. If a particular issue is already regulated adequately in the laws of the Member States, and this is done in a reasonably harmonious fashion, then there is no reason for the European legislator to apply harmonisation measures. Thirdly, if legislation at the European level is to be enacted, it should as far as possible be drafted in terms that will be understandable from the standpoint of each national system, and which can achieve a reasonable 'fit' with that system. Again, therefore, the European legislator - or at least the person responsible for the detailed drafting - needs to know how particular issues are treated in the laws of the different Member States.

Thus, in addition to principles, definitions, and model rules, the CFR should contain what I term 'essential background material'. Information about the different laws would be made available in the notes to each article, so that it would be grouped under headings with which the legislator will be familiar.

In this paper, I want to give a practical example of this role in providing essential background information. Wilhelmsson's paper2 deals with pre-contractual information duties in the existing acquis and the DCFR - in particular, the information that a business is required to give to a consumer. But all Member States, as part of their general law, have some rules that apply when a party has entered into a contract on the basis of inaccurate or incomplete information about the facts. These are the rules on fraud, misrepresentation, and mistake, and - in some countries - the duty to disclose. These provisions of general contract law normally apply to consumer ('B-to-C') contracts as well as to contracts between businesses ('B-to-B') and contracts between private parties ('C-to-C')3. In order to decide whether it is necessary to maintain or extend the directives that require disclosure of information before a contract is made, the legislator needs to know what rules the Member States already apply as part of their general laws of contract.

I will also show consider the provisions of the DCFR as 'model rules' that might be adopted as part of, for instance, an optional instrument. How do they differ from the national laws, and how suitable are the DCFR provisions for an optional instrument?

Thus, in this paper I deal with the rules of general contract law that may give a party a remedy when they have entered a contract under some form of 'misapprehension' of the facts - for example, about the characteristics of what they are buying or the circumstances of the contract4. (I prefer to use the neutral term 'misapprehension' rather than 'mistake', because the word 'mistake' often carries with it an implication that a kind of mistake is involved that is legally relevant. As we will see, in some systems only a very narrow range of 'mistakes' may be grounds for relief; in others, a far wider range of 'mistakes' may be legally relevant.)

The misapprehension may be the result of one party being given incorrect information by the other, or by a third party, or it may be the result of the party's own misunderstanding, in which case we can call it 'self-induced'. The DCFR contains rules on all of these topics. To what extent do these rules merely state principles that are common to all Member States? Are there substantial differences meaning that, in some Member States, consumers or other parties who enter contracts under a misapprehension are significantly better protected than they are in other Member States? Might such differences constitute hindrances to the internal market?

What I will attempt here is a brief survey of the treatment of these issues in the laws of some of the Member States, and a comparison to the provisions of the DCFR. Because space is limited, I hope I may be forgiven for dealing only with the laws of England, France, and Germany. Even with these I will have to resort to some broad generalisations, with the consequent risk that many of the nuances of each system may be lost. I will also have to limit the discussion to selected topics. Thus I will deal only very briefly with the case in which self-induced misapprehensions are shared by both parties5; and I will not deal at all with the complex problem of contracts entered into on the basis of incorrect information from third parties6. I hope, however, to be able to say enough to demonstrate the need for a toolbox to provide the kind of background information I have described.

1. Harmonisation?

Given the title of the volume, we should begin by asking whether this area is one in which there has been, to date, any degree of harmonisation. This might seem to be a field that is ripe for harmonisation. As we will see, at first sight the laws of the Member States mentioned above differ markedly, particularly as to mistake and duties of disclosure. I will argue that, if we look behind the variety of concepts and terminology, and concentrate on the actual results reached in concrete cases - this adaptation of the well-established 'functional approach' is the basis on which the Principles of European Contract Law7 (PECL), for example, are founded - the differences become much less. Nonetheless, this is one of the areas of general contract law in which there are some very striking differences.

Obviously, there has been some harmonisation through implementation of the EC directives that require certain types of pre-contract information to be given - for example, the Distance Selling Directive8 and the Package Travel Directive9. However, these apply only to B-to-C contracts. On B-to-B and C-to-C contracts there is very little. The Commercial Agents Directive, for example, says nothing about pre-contract information, though arguably commercial agents need to be properly informed before they enter into a contract10. It is, of course, true that 'soft law' instruments such as the UNIDROIT Principles of International Commercial Contracts11 (UPICC), the PECL materials, and even the DCFR itself contain provisions that are set forth in broadly similar terms. However, soft law of itself does not achieve harmonisation. The most it can achieve on its own is some harmonisation of practice. Thus, there will be some harmonisation in practice if these instruments are adopted by the parties to govern their contract (so far as that is permissible under the applicable national law: under the Rome Convention, it is not possible to adopt such soft law to displace the governing national law entirely), or if the soft laws are applied by arbitrators as statements of 'internationally accepted principles' and the like12.

What in time I hope we will be able to say is that the soft law instruments have led to some degree of convergence between the laws, as national legislators and courts have drawn on them when reforming or developing national law. This is the subject of other papers in the volume, and I will not discuss it here, save to say that this process is only just beginning - with Estonia setting the pace!

2. Mistake caused by incorrect information

given by the other party

I will start my comparison with the case in which a party has entered a contract under a misapprehension about the subject matter or the surrounding circumstances that was caused by incorrect information given by the other party. Since we are dealing with general contract law, I will resort to disembodied characters. Let us call the (female) party who claims she entered into the contract under the misapprehension party 'A' and the other (male) party to the contract - the one who gave A the incorrect information - party 'B'.

2.1. Shared principles and terminology: Fraudulent misstatements

I begin with a case in which we find a good deal of similarity between the systems, not only in results but in the terminology and concepts used. This is where A entered into the contract under a misapprehension because B had deliberately given A information that B knew to be incorrect. It is normal to refer to this as a case of fraud. In some systems, it is called fraudulent misrepresentation, while in others it might be more common to call it mistake induced by fraud, but the difference in these concepts seems to be minimal13. The remedies are also broadly similar in the different systems. Thus, even if the fraud is related to a fairly minor matter, A will have the right to avoid the contract; and B will also be liable to pay damages. The liability for damages will...

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