This is Part III of my ongoing series of blog posts on the topic of pre-contractual duties of information in English, French and EU contract law.
Go to: Introduction -> Part II -> Part III -> Part IV -> Conclusion
In this part, I shall consider situations where one party knows, or should have known, that the other party is mistaken and fails to provide him with information to correct this assumption. I shall look at how both English and French law deal with such situations, and the extent to which they encourage, or mandate, disclosure or more generally the provision of pre-contractual information.
A) England: the refusal of any general duty of disclosure
The general proposition under English law is that a party who knows that the other party is entering into a contract under some mistake is under no legal obligation to disclose this. Indeed, per Blackburn J: “whatever may be the case in a court of morals, there is no legal obligation on the vendor to inform the purchaser that he is under a mistake, not induced by the act of the vendor”. This proposition was later extrapolated by Lord Atkin, into a principle of general application beyond the law of sale. In effect: “the principle of caveat emptor applies”.
1) Requirements and ‘encouragement’ of disclosure
There are, however, certain situations where a party will be under a duty to disclose information during contractual negotiations. These duties take two forms: disclosure as to the terms of transaction and, more rarely, disclosure as to the facts surrounding the transaction.
– Common law requirements of disclosure as to the terms
The common law has developed a number of requirements of disclosure, ranging from the requirement that standard form terms must be communicated before the contract is concluded, to the requirement that particularly onerous conditions must be brought to the attention of the co-contractor in a fair manner.
In the words of Collins: “the sum of all these rules is to require the parties to disclose the terms of a proposed contract in good time for their consideration, clearly, fully and drawing the other party’s attention to any unusual and onerous clauses”.
– Statutory requirements of disclosure
There exist a number of statutes and regulations which impose duties of disclosure for certain contracts). It is interesting to note that most of these are the result of European law.
– Contracts uberrimae fidei and particular types of contract
One further exception to this principle is to be found in the case of contracts uberrimae fidei (of the utmost faith), in which full knowledge of the facts is a condition of validity of the contract. These contracts include contracts of insurance, and to a varying extent, contracts to subscribe for shares of a company, for family settlements and for suretyship.
A breach of any of these contracts will create a right of recision, although it will not give rise to liability in damages, in the absence of a voluntary assumption of responsibility, either at common law or under the Misrepresentation Act s.2(1).
– Relationships of trust, confidence or dependence
Another source of such duties is to be found in fiduciary relationships, such as between principal and agent, business partners, or directors of a company. The parties in these relationships will be required to provide full disclosure of information, in the absence of which the contract may be voidable and the party in breach may have to account for any profits made as a result of the non-disclosure.
This principle has been extended through the equitable jurisdiction to avoid contracts on grounds of undue influence. As a result of this doctrine, we can now identify a number of situations which will give rise to a duty to disclose information.
One such situation is to be found in Lloyds Bank v Bundy, in which a bank assumed a relationship of trust and confidence as a result of dealings over the years with a farmer. A duty to ensure that all the information about the credit transaction be disclosed to the farmer was found to exist in those circumstances. Similarly, duties have been found to exist in dealings between shareholders of small family firms, as well as between beneficiaries under a will.
As we have seen previously, false or misleading statements may give rise to liability for misrepresentation. By extension, statements or silence may be found to be misleading where they omit certain material facts to the transaction, as the facts not disclosed may, depending on the circumstances of the case, be impliedly represented to not exist.
Furthermore, where a statement is made and subsequently becomes false prior to the formation of the contract, one may expect this fact to be disclosed.
It should be noted that the courts have permitted contractual clauses that negative any breach of duty to disclose information, thus denying any implied representation. These exclusion clauses will, however, need to be evaluated in light of the requirement of reasonableness per section 3 of the Misrepresentation Act 1967.
3) Implied terms
Implied terms, which are construed by the court on the ground that they are necessary to give efficacy to the transaction, also provide a strong mechanism for encouraging disclosure at the pre-contractual stage. Indeed, these terms may constitute warranties which may spur the co-contractor to supply information so as to avoid a potential breach of contract.
Under the Sale of Goods Act 1979 section 14, a seller, acting in the course of business, is held to imply that his goods are of satisfactory quality and reasonably fit for their usual purpose. The seller will be able to avoid liability by disclosing any defects to the buyer before the contract is concluded. Conversely, if the buyer makes evident the purpose for which he is buying the goods, then the seller may be held to an implied warranty that the goods are fit for this purpose. As liability cannot be excluded in contracts with consumers as a result of the Unfair Contract Terms Act, and in other contracts their exclusion is subject to a test of reasonableness, there is, therefore, a strong incentive to disclose information.
Furthermore, the desire to avoid the imposition of judicially-implied terms may also lead the seller to provide information to the other contractual party.
4) Attempts to introduce a general duty
In 1786, Lord Mansfield attempted to introduce a general duty to disclose, saying: “good faith forbids either party by concealing what he privately knows to draw the other into a bargain from his ignorance of that fact and his believing the contrary”. Beyond the concrete application to insurance contracts, this doctrine did not survive as a general principle. Lord Denning attempted a similar feat in 1975, by seeking to establish a doctrine of ‘inequality of bargaining power’, where relief could be granted where one party was impaired by “his own ignorance coupled with undue influence… by one who may be moved solely by his own self-interest”.
Beyond dogmatic concerns, it has been argued that one of the reasons why these doctrines never took root lies in English law’s preference to developing propositions of law incrementally, which is to be contrasted with the civil law method of induction-deduction from general principles.
B) France: from party autonomy to contractual solidarity
Early interpretations of the Code Civil, as reflected in the wording of article 1134, adopted a similar posture to the English one, seeing party autonomy and self-reliance as going hand-in-hand. Since the late 1950s, however, France has increasingly recognised pre-contractual information duties. Beyond penalising active fraudulent behaviour, as seen above, the courts have allowed, in certain circumstances, for passive fraudulent behaviour to be challenged. This was then reinforced by specific pre-contractual information duties provided by statute, without the need to show a defect of consent.
1) Fraud by silence (réticence dolosive)
In 1971, the Court de Cassation held that “dol may be constituted by the silence of a party hiding from his co-contractor a fact which, if it had been known to him, would have stopped him from entering into the contract”. As a result of this, for silence to be actionable one no longer had to be mistaken as to the substance of the contract.
This concept has been applied in a broad variety of situations such as a failure to disclose the widening of a road, or even failure to disclose a planning scheme which would eliminate a level crossing and sharply diminish the number of customers of the business being sold.
By contrast, the French courts have generally taken a different approach to fraudulent silence by the buyer. In the Baldus case, the Cour de Cassation held that a buyer is not required to inform the seller of the real value of the goods being sold. This was reiterated in 2007, in a case involving the sale of land by a consumer to a professional buyer, where the court found that the buyer was under no obligation to disclose his knowledge regarding the value of the land. These cases would appear to be limited to disclosure as to value and will not prevent a claim, for réticence dolosive, where, for example, a professional buyer did not disclose his knowledge of an impending change to the planning permission of the land, thereby affecting the value of the property, or when the buyer is under an obligation of disclosure.
There would, therefore, appear to be a judicial trend towards limiting the scope of these duties. Indeed, the Court de Cassation has recently recognised that an erreur inexcusable by the alleged victim may now prevent an action for réticence dolosive. This gives strength to the assertion that there is also a duty to inform oneself.
2) A free-standing duty to inform
Besides obligations of disclosure which arise as part of the doctrine of fraudulent silence, there seems to exist a separate duty to inform based on a general principle of good faith and fair dealing (devoir de loyauté) developed under articles 1134-3 and 1135. The courts have used this doctrine, without reference to either mistake or fraudulent silence, to impose liability for non-disclosure. This obligation would seem to require the following elements : (i) a party who possesses actual knowledge or is deemed to have it as a result of his profession; (ii) this information must be of determining importance; (iii) the other party’s lack of knowledge must not be inexcusable; (iv) this reliance must be legitimate.
Accordingly, in 2003, a bank was held to be in breach of its duty to contract in good faith, where it failed to make the guarantor of a loan aware of its knowledge as to the financial situation of the debtor.
The degree of information required may range from a simple duty of disclosure to a duty to advise the other party, in complex contracts where one has a particular expertise, as to the expediency of the contract. The courts have gone even further, requiring in some cases the professional party to seek out information in order to be able to inform the other party. As can be expected, certain categories of professionals such as lawyers, notaries or doctors will have more onerous duties imposed upon them.
3) Specific statutory duties
Article L111-1 of the French Consumer Code says: “All business suppliers of goods or services must, prior to conclusion of the contract, ensure that the consumer is made aware of the essential characteristics of the goods or services.” ((Chapter I: ‘General obligation of information’, article article L111-1
- translation on legifrance.gouv.fr ))
This provides strong protection, absent all allegations of fraud, as the consumer buyer does not need to prove the existence of the obligation and need only show a breach. This wide ranging duty is supplemented by numerous other specific duties.
C) Comparative remarks
We have seen the common law’s opposition to a general obligation of disclosure. This is reinforced by the exceptional imposition of duties by statute or by the courts in specific and limited circumstances. Nevertheless, one can clearly see dynamic market individualism at work, whereby paradigms such as contracting as self-interested dealing and free agreement are somewhat tempered by commercial practice and opinion. Indeed, various devices have been used by the courts, such as judicially implied or statutorily implied terms, as well as a broadening of the concept of misrepresentation, in order to fill the information gap, by prodding contracting parties towards disclosure. These devices have been used sparingly and are limited in their scope. This should come as no surprise given that one of the main rationales behind limiting information duties lies in concerns over contractual certainty.
By contrast, building upon a solidarist perspective, French law does not presuppose an abstract equality between the parties and has, accordingly, recognised that certain classes of contracting parties deserve higher levels of protection. In summary, besides a general duty to inform, where good faith demands it and where this might determine the other party’s consent, French law also reinforces a professional seller’s duty to inform consumers by legislation. We have also seen that the concept of fraudulent silence, which has been instrumental in developing these information duties as a general principle of contract law, has recently seen its scope narrowed by the courts. In particular, the recognition that one party’s ‘inexcusable’ fault may prevent him from claiming against his co-contractor who withheld information, and that there is no obligation of information as to the value between buyer and seller, are to be welcomed as common-sense limitations of the scope of contractual solidarity and as discouraging undue reliance.
In effect, both systems recognise the importance of freedom of contract but appear to give it a different weight in light of the value attached to either commercial certainty or consumer-welfare and contractual morality.