Unjustified enrichment: South Africa and Europe

A workshop took place in the famous Raeburn Room at Edinburgh University on Friday 24 January on the theme of “New Directions in Unjustified Enrichment: Learning from South Africa”.

Many great beasts of the enrichment forest were there, from England and Germany as well as South Africa and Scotland. The main speakers were Helen Scott (Cape Town) and Jacques du Plessis (Stellenbosch).  There were responses from Andrew Burrows (Oxford), Daniё Visser (Cape Town) and Hector MacQueen (Edinburgh) followed by general discussion. The focus was on the “unjustified” element in an unjustified enrichment claim and mainly on enrichments by transfer.

Helen Scott explained why she thought that the South African law in this area could not be properly explained without giving a prominent role to mistake and other so-called “unjust factors”. Jacques du Plessis explained why he thought that it was both unnecessary and undesirable to give a prominent role to these unjust factors. He conceded that they could have a weak or subordinate role—e.g. in negating free consent. Both papers were rich and well-argued and a joy to listen to. From the point of view of learning lessons for the development of European private law the most interesting feature was that there seemed to be more consensus than there had been in the same room some 20 years ago when Reinhard Zimmermann and Peter Birks had argued respectively for an absence of legal ground approach and an unjust factors approach.  The dispute now seemed to be largely about what Hector MacQueen called the “starting point” and about the emphasis to be placed on different elements.

A sort of consensus emerged even more clearly after the beautifully incisive response of Andrew Burrows and the general discussion which followed. Andrew noted, as the main speakers had already done in their written papers, that English law now (belatedly!) recognised that an enrichment conferred by mistake would not be recoverable if the recipient had a legal entitlement to it. As it also seemed to be generally (although perhaps not universally) recognised that under a more civilian approach an enrichment obtained without legal ground would not be recoverable if it had been freely and voluntarily conferred, the way seemed to be opening for a both/and approach instead of an either/or approach.

Two fact situations, derived with variations from Andrew Burrows’ presentation, illustrate the convergence.

Situation 1. X owes £20 to Y and £20 to Z, both work colleagues. Intending to pay off Y he puts £20 in a blank envelope with a signed note saying “Here is the £20 I owe you”. By mistake he puts this in Z’s pigeon hole.

Situation 2. X pays Y £100 under a contract which is void on some technical ground. X thinks the contract is void but also thinks that it would be dishonourable in the circumstances to found on a technicality. So he pays freely and voluntarily without error.  

The general view in the room seemed to be that in neither case should X be entitled to repayment under the law on unjustified enrichment, whether it was based primarily on unjust factors or on a lack of legal ground. In the first case, X has paid Z by mistake but, even on an unjust factors approach, he has no right to get the £20 back because Z is legally entitled to it. In the second case X has paid money which was not due but, even under an absence of legal ground approach, he has no right to get the £100 back because he paid freely and without error. Jacques du Plessis noted that South African authorities sometimes treated this last type of payment as a “deemed gift”.

A further question is whether one of these two elements should be regarded as the main rule and the other as a defence. Helen Scott was clear that in the context of the present South African law on enrichment by transfer “unjust factors such as mistake and compulsion are not defences in disguise: their role is not simply to preclude any inference of voluntariness”. Jacques du Plessis thought that in the future there would be much to be said for confining mistake and other such unjust factors to a role in a defence. Andrew Burrows stressed that under English law the recipient’s legal entitlement was not a defence.

Here I was reminded of a recent seminar on the question of defences in general where Eric Descheemaeker made the excellent point that it was often more appropriate to regard the absence of something as an element of the main rule rather than to regard its presence as a defence. For example it is more appropriate to define rape as sexual intercourse without consent than to say that millions of happily married men are rapists but have the defence of consent. In the context of unjustified enrichment it seems to me to be more appropriate to say that an enrichment to which the recipient is legally entitled is a justified enrichment and similarly that an enrichment which is freely and voluntarily conferred is a justified enrichment than to say that either is unjustified but there is a defence.

Many more points were covered in the discussion. For example, what about the burden of proof? Who has to prove what?  What about the Scottish presumption against donation? How might that affect a “deemed gift” approach? Here Lord Hodge of the UK Supreme Court made the valuable observation that a modern court would be reluctant to decide a civil case purely and simply on the basis of a presumption or burden of proof.

There was some criticism of the Wilburg/von Caemmerer taxonomy which has been so influential in recent Scottish and South African writing on unjustified enrichment. What is the significant difference between some of the categories? What is a transfer? This last question turned out to be trickier than might have been supposed.

And there was discussion of the question whether such matters as restitution on the avoidance or termination of a contract should be regarded as part of contract law or unjustified enrichment law. There is a lot of fluctuation on this, with lines being drawn in different places in different systems. The explanation is probably that the law develops in bits and pieces, contract law often developing before unjustified enrichment law, and bits which have developed strong rules of their own might not be readily incorporated into general unjustified enrichment law at a later date. So the divisions are often accidents of history. We can see exactly the same thing happening again in the Common European Sales Law, which has a chapter on restitution when a contract within its scope is avoided or terminated. This uses the Draft Common Frame of Reference (DCFR) but does not follow it exactly and draws lines at different places. It does not have a requirement of an absence of free consent but cases where consent might be present could be dealt with under the “equitable modification” rule in article 176 if the consenting party had a change of mind and sought restitution. Such cases would probably be rare: an example might be where a buyer provides photographic evidence of serious faults in the goods purchased and the seller allows the buyer to keep the rejected goods after termination of the contract rather than return them.

Throughout the meeting I was wondering whether the distinguished contributions would cast any light, critical or otherwise, on the model rules in the DCFR. I concluded that, on the “unjustified” point at least, the DCFR had got it about right. Article VII. – 2:101 makes it clear that an enrichment will be regarded as justified, and hence non-recoverable, if:

“(a) the enriched person is entitled as against the disadvantaged person to the enrichment by virtue of a contract or other juridical act, a court order or a rule of law; or

(b) the disadvantaged person consented freely and without error to the disadvantage.”

This is pretty much what the workshop seemed to want. A dispute about which paragraph should come first would be a sterile one. In the coffee break Sonja Meier (University of Freiburg) told me that she did not much like the DCFR’s approach because it gave too much emphasis to unjust factors. This surprised me — shocked me indeed — because I had never looked at it that way. It made me think a bit and look at the rules again with fresh eyes. In fact I do not believe the DCFR does give too much emphasis to unjust factors. It does not use that ghastly expression (factors are never unjust) and the role of mistake, fraud, coercion etc is simply that they can negate full and free consent. They are mentioned in this context in article VII.-2:103(1). This is a weak role of the type to which Jacques du Plessis referred in his paper. It is very different from using the factors in a closed list of grounds of action.

Finally, a note on terminology. Andrew Burrows made an impassioned plea for the abandonment of the expression “enrichment law” without any preceding adjective. “We do not, after all, talk of loss law.” Nor, it could be added, do we talk of impoverishment law. I have every sympathy with this plea but the problem then becomes “What should the preceding adjective be?” Maybe now that English law recognises that an enrichment to which the recipient is legally entitled is not recoverable it should stop using “unjust enrichment” and talk either of “the law of unjust and unjustified enrichment” or, preferably, “the law of unjustified enrichment”.

 

 

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The Common European Sales Law in Context

Along with some 200 million others I have been following on the internet the world championship chess match in Chennai. Along with a smaller number of others I have been reading from start to finish the new book on The Common European Sales Law in Context, edited by Gerhard Dannemann and Stefan Vogenauer and published by Oxford University Press. There are parallels.

Both the match and the book demonstrate an impressive knowledge of what has gone before, a grasp of theory (which might be described as a distillation of generalities from what has gone before), intellectual effort and precise analysis. The big difference is that the match is competitive but the book collaborative.

The work is collaborative in an interesting way. Most of the chapters have an English and a German author. There are overview chapters by each of the editors. One chapter (on specific performance and the right to cure) is by a Scottish author, Hector MacQueen, and two German authors.

The core theme of the book is a comparison of the rules in the proposed Common European Sales Law (CESL) with the rules on corresponding areas in English and German law. However, it goes beyond that because it includes some matters (such as representation) not covered in the CESL and it includes comparisons with rules in the Draft Common Frame of Reference (DCFR) and, where it is of interest, the Feasibility Study and the revised Feasibility Study which led up to the CESL. These various broadenings of scope must have made it difficult to choose a precise and accurate title. Something like “English and German law through the lens of the Common European Sales Law” might have been tempting but would not have been quite accurate because the book is also about the CESL, and bits of the DCFR, through the lens of English and German law. Many of the chapters also focus, very helpfully, on how the CESL might interact with English or German law.  The main problem here is that the coverage of the CESL is not complete. Transactions will be governed partly by the CESL and partly by rules of the otherwise applicable law.

As it is, the title of the book is slightly misleading as it might induce the reader to expect something on the non-legal context, including the political, economic and social context. There is some discussion of the non-legal context. For example, some authors point out correctly that certain issues which might seem to be troublesome in theory are unlikely to be troublesome in the actual context of cross-border online sales. But the wider context is not the main theme of the book.

The slightly misleading title is the only quibble I have about this excellent book. It is, to my mind, comparative law as it ought to be – not woolly and general but hard and specific. I learned a lot from it. It is a book which helps understanding and which shows understanding. Matti Savolainen, of the Finnish Ministry of Justice, used to say that English was the only language in which the word “clever” was an insult. I wonder if he was right. Maybe all cultures, and hence all languages, have the notion that, while cleverness with understanding is a great thing, cleverness without understanding deserves to be insulted. It is more pernicious even than stupidity without understanding because it is more dangerous. This book demonstrates cleverness with understanding.

And the overall results of the comparison and analysis? Some provisions of the CESL and the DCFR come in for criticism, as could be expected of any new legal text, but some are commended for showing an advance on English or German law or (more rarely) both. Some features of English and German law also come in for criticism – notably the rules on consideration, restitution on termination, and the undisclosed principal in English law and the rules on unfair contract terms in German law. Reassuringly, some potential difficulties of interaction turn out on close scrutiny not to be too problematic after all and others turn out to be avoidable.

It is impossible to read this book without being struck by how much things have changed in the last 40 years or so. English and German lawyers have both had to deal with the same EU Directives and Regulations. German lawyers, and to a much lesser extent, English lawyers have had to deal with the Convention on Contracts for the International Sale of Goods (CISG). Both have now had to deal with a succession of soft-law texts on European private law. Significant differences in the respective private laws remain but there is a lot of common ground.

There is scope for many other tripartite comparisons of this kind.

 

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Early career poster competition: European and comparative private law

Eric Descheemaeker has asked me to publicise this competition. This I am very pleased to do as the event should, if well supported, produce interesting and exciting results and a lot of satisfaction and fun for those entering. Here is the information which Eric has sent me. More can be found at www.law.ed.ac.uk/ecrcompetition . The deadline for receipt of entries is 28 February 2014.

Information

Edinburgh Law School is organising a poster competition on the theme of European and Comparative Private Law in 2013/14. This is open to all EU-based early career researchers, i.e. scholars preparing for a PhD or having been awarded their doctorate less than five years ago.

 

European and comparative private law is defined to include all private-law subjects with an element of comparison between jurisdictions (not necessarily from within the EU) or an examination of the private law of the Union. All approaches are equally welcome. The winners (up to three) will be invited to present and discuss their research with judges and members of the Edinburgh Law School at an event organised in the historical Playfair library on 28 March. Costs will be covered by the University.

 

 For early career researchers, this is a rare opportunity to showcase their research, get to know more established scholars in their field and network with other rising stars in the discipline.

 

 Posters are an increasingly common way to present one¹s research, and for those with no previous experience this is a great opportunity to cut their teeth on this exercise. Examples of prior winning entries, as well as links to online tutorials on how to design a poster, are available on the competition website. All entries will be professionally printed by the University and a digital version will remain available online, so the benefits of participating extend beyond the event itself.

 

 The submissions will be judged by a panel comprising Dr Eric Descheemaeker, University of Edinburgh; Dr Matthew Dyson, University of Cambridge; Dr Albert Ruda, University of Girona; and Professor Stefan Vogenauer, University of Oxford. The criteria are, primarily, the academic excellence of the project and, secondarily, visual communication.

 

 A poster advertising the event has been sent to every University in the EU; if you would like further copies, or indeed have any questions about the event, do please get in touch with the organiser, Dr Eric Descheemaeker, on eric.descheemaeker@ed.ac.uk mailto:eric.descheemaeker@ed.ac.uk.

 

 

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Contracting out of liability for consequential loss under the proposed Common European Sales Law (CESL)

In the last entry it was noted that an innocent seller could have a ferociously disproportionate liability for consequential loss under the CESL and might have no right of redress against sellers further up the contractual chain. The question to be addressed now is whether the parties could contractually exclude or modify this liability. The example we can consider is the sale of an electric toaster by a retailer who receives it in a sealed package from a supplier and sends it on to the consumer. Indeed in some cases the retailer may never see even the package, which will be sent direct from the supplier further up the chain.  

There are three potential restrictions. All limit freedom of contract much more severely in business-to-consumer (B2C) contracts than in business-to-business (B2B) contracts.

The first potential restriction is the anti-cherry-picking rule in art. 8(3) of the Regulation introducing the CESL. This provides that “In relations between a trader and a consumer the Common European Sales Law may not be chosen partially, but only in its entirety”. There is no such restriction in B2B contracts. The effect in the present context is that a business selling an electric toaster to a consumer could not agree with the consumer that the CESL applied with the exception of the Section on Damages in Chapter 16. However, art. 8(3) would not prevent the parties from opting in to the CESL in its entirety but then modifying the effect of any non-mandatory provisions. The provisions on damages in Chapter 16 are non-mandatory.

The second potential restriction is the rule in art. 108 which provides that in a contract between a trader and a consumer the parties may not, to the detriment of the consumer, “exclude the application of this Chapter [i.e. Chapter 11 on the buyer’s remedies, not Chapter 16 on Damages] or derogate from or vary its effect before the lack of conformity is brought to the trader’s attention by the consumer”. The purpose of this provision is to allow the consumer to waive claims – e.g. as part of a settlement – after the event but to protect the consumer from being induced to waive them in advance.  It cannot be interpreted as ruling out contractual modification of the non-mandatory rules on damages in Chapter 16 because that would make some of the rules in the provisions on unfair contract terms redundant.

The third, and most relevant, restriction is in the provisions on unfair contract terms. In a B2C contract a term supplied by the business will not be binding on the consumer if it is unfair (art. 79). This applies only to terms which have not been individually negotiated (art. 83).

There is a list of terms which are regarded as always unfair. Of most relevance in the present context is any term designed to “exclude or limit the liability of the trader for death or personal injury caused to the consumer through an act or omission of the trader of someone acting on behalf of the trader” (art. 84(a). This, however, would not prevent a trader contracting out of liability for death or personal injury not caused by such an act or omission. Where a retailer merely supplies a reputable product in a sealed package, without having any opportunity to check or test the contents, it is difficult to see any act or omission on the retailer’s part which caused the death or injury, if “caused” is taken, as it surely should be, as referring to effective causation rather than “but for” causation.  Another kind of term which is always regarded as unfair is any term designed to “exclude or limit the liability of the trader for any loss or damage to the consumer caused deliberately or as a result of gross negligence”. This would clearly not apply to our innocent retailer. There is nothing else in the list of terms always regarded as unfair which could restrict the sort of contracting out under consideration.

There is also a list of terms which are presumed to be unfair. The only type of term in this list which is likely to be relevant here is a term whose object or effect is to “inappropriately exclude or limit the remedies available to the consumer against the trader… ” (art. 85(b) and (q)).  Here the key word is “inappropriately”. It would not, at first sight, seem inappropriate for an innocent retailer to try, in a completely transparent way, to limit a potential liability grossly disproportionate to the value of the transaction. Even if the term is presumed to be unfair the trader could rebut the presumption by showing that the term did not cause any significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer, contrary to good faith and fair dealing (art. 83(1)). The kind of term we are considering would be designed to remove a significant imbalance – namely the situation where a contract providing a profit of say 2 euros might result in a liability of 2 million euros for consequential loss for which the trader was not morally responsible, over which the trader had no control and in relation to which the trader might have no right of redress against any business further up the chain of supply. 

In B2B contracts there are hardly any limitations on contracting out.  A term would be regarded as unfair only if not individually negotiated and only if  “of such a nature that its use grossly deviates from good commercial practice, contrary to good faith and fair dealing” (art. 86(1)). The use of terms excluding or limiting liability for consequential loss would probably be regarded as in accordance with good commercial practice in many types of commercial sale contracts.

So it would be possible for an innocent retailer to contract “appropriately” out of excessive liability for consequential loss under the CESL.  Retailers’ organisations can be expected to raise this matter in the discussions on the drafting of model contracts for use under the CESL. However, it would be better to amend the basic rule in art. 161 so as to reduce the number of cases where contracting out would be needed.

It is interesting to note that in the USA the question of contracting out of liability for consequential damage is expressly regulated in section 2-719(3) of the Uniform Commercial Code. This provides that: 

 (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

 

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Zimmermann and Wilson on causation and foreseeability

When Reinhard Zimmermann gave the W.A. Wilson Memorial Lecture in Edinburgh on 5 September he discussed questions of causation and foreseeability in relation to the provisions on damages in the proposed Common European Sales Law (CESL) and its main antecedents. This was very appropriate for two reasons. First, the warmly remembered Professor Bill Wilson was a member of the first Lando Commission on European Contract Law and was therefore partly responsible for the influential provisions on damages in one of those antecedents – the Principles of European Contact Law (PECL).  Secondly, Bill Wilson was interested in questions of causation and foreseeability.

Reinhard had little to say about art. 160 of the CESL on the general measure of damages – broadly, such sum as will put the creditor in the obligation into the position in which the creditor would have been if the obligation had been duly performed. This is a widely accepted general rule. Of course it has to be qualified as otherwise it can lead to causation arguments being pursued to ridiculous lengths. And it is qualified by art. 161 which provides that the debtor is liable only for loss which the debtor “foresaw or could be expected to have foreseen at the time when the contract was concluded as a result of the non-performance “. “Could be expected” means “could reasonably be expected” (art. 5(2)).

Reinhard commented at length on this rule, ranging in splendid fashion from Roman law, through four or five layers of texts and various national provisions, to the latest state of play.  He thought it was an understandable choice, given the antecedents, was better drafted than the antecedents and could not be regarded as a mistake. However, he thought it merited further reflection and might benefit from some tweaking. I think he was right and indeed that his criticism was understated. In its present form the rule could operate as a disincentive to opting in to the CESL.

Suppose I am a small retailer who sells electric appliances (like toasters or hairdryers) online across Europe and suppose that I am well aware that sometimes defects in such appliances cause fires. In considering whether to opt in to the CESL I am likely to say to myself. “I do not much like the way the CESL deals with liability for consequential loss. If a defect in an appliance I have sold causes a chateau to burn down I might be held liable for all the loss because such an event might be held to be a reasonably foreseeable result of such a non-conformity with the contract. That seems unreasonable. I sell these things in sealed boxes which I receive from my wholesaler. Indeed my customers expect to get them in sealed boxes and would suspect they were getting second-hand goods if the boxes had been opened.  I have no control over the risk at the point of sale. And I have no control over the risk at the point of use. This is a matter for product liability law or the customer’s insurance or both. I should not be held responsible by the law on the sale of goods. I would rather take my chances outside the CESL.”

Of course it might be pointed out that there could be a right of redress against sellers further up the chain of contracts but this will not convince me to opt in. There might be no right of redress (notwithstanding the good intentions of art. 4 of the 1999 Consumer Rights Directive). In some cases an exclusion of liability for consequential loss in my contract with my supplier will be enough to deny me a remedy. And there could be other problems. See the excellent article by Martin Illmer and Juan Carlos M. Dastis in the latest issue of the European Review of Contract Law at pp. 019-142. And even if there is a theoretical right of redress I will be involved in hassle and expense and might find in the end that the theoretical right is of little use. Nor will I be persuaded to opt in by assurances that this question of redress is under consideration and that there might eventually be better provision for it in EU law.

So a “tweak” at the very least could be useful. Unfortunately Reinhard did not provide an alternative text in his lecture. One possibility would be to introduce the notion of what is foreseeable as likely to happen in the ordinary course of events. The UK Sale of Goods Act refers, for example, to the loss “directly or naturally resulting, in the ordinary course of events” from the breach of contract. It is true that the English courts have sometimes applied that provision in a strange way but words of that kind in the CESL would be self-standing and would fall to be interpreted without reference to national laws (art. 4). The burning down of a chateau is not something which happens in the ordinary course of events.

Bill Wilson, in his article on “Foresight and negligence” in 1959 Scots Law Times (News) 89, used the notion of the extraordinary result. He concluded his survey of then-recent cases by saying this (at p. 93). “Discussions of this type illustrate the unreality of the whole conception of foresight. The operation is always performed ex post facto … it is not foresight, but hindsight, which is involved. [The courts] take the actual happening after the event and ask “Is that an extraordinary result?” “

This is a serious issue. The success of the CESL could depend on it. But it was always impossible to be serious for very long in Bill Wilson’s company. In an absurd example competition with Reinhard he would do well. Admittedly Reinhard got off to a good start with stories of tailors failing to provide travelling clothes and ball boys working overtime at bowling alleys (neither situation very closely related to the currently proposed application of the CESL) but consider the example which Bill used in his “Note on Causation” 1976 SLT (News) 193 at p. 195 to help to isolate the true nature of the issue in McGhee v National Coal Board 1973 S.C. (HL) 37.

“Ivan is a Russian exile living in the desert. He is evil, deliberately fires at tank drivers and is an excellent shot. He has, however, some sporting instinct and has devised an elaborate scheme to reduce the death rate among drivers. Each morning his valet lays out 36 rifles for him. Each is numbered. Only 18 of them are loaded but Ivan does not know which. Ivan decides which rifle to use for his one shot of the day by means of a perfectly balanced roulette wheel without a zero. Suppose Ivan shoots Sam and suppose further that Sam suggests that Ivan should have taken a precaution – he should have instructed his valet to load only nine rifles instead of 18. It could be said that the taking of the precaution would have materially reduced the risk of injury to Sam.”

Bill did concede that this situation was “highly unlikely” ever to arise.

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Tort law defences

At a seminar last night, under the auspices of the Edinburgh Centre for Private Law, James Goudkamp (Oxford) spoke about his new book with the above title and Eric Descheemaeker (Edinburgh) responded.

James Goudkamp’s  main arguments were (1) that a defence could be defined as a rule that prevented liability from arising even though all of the elements of the claimant’s action were present (2) that there was value in maintaining a distinction between torts and defences (3) that it was easy to misapply the distinction (4) that all defences could be reduced to two categories – justifications and public policy defences (5) that this approach had important practical implications – e.g. for burden of proof and the relevance of the defendant’s knowledge (6) and that this approach was better in several respects than various alternative approaches. He also argued that English tort law should recognise “denial of responsibility defences” such as infancy or insanity, which it did not currently do. He noted, interestingly, that whereas the basic elements of tort claims had been developed by the courts defences had often been introduced by the legislature. Finally he expressed the view that, although his books focussed on torts and English case law, the basic analysis of the nature and role of defences was not jurisdiction specific or tort law specific.

In reply Eric Descheemaeker welcomed this much-needed analysis of the concept of the defence in the non-criminal law. He argued, however, that the rigid distinction between torts and defences was difficult to maintain, caused difficulties and was not necessary for the main thesis of the book. He thought that it was better to say that there was no tort if a defence was applicable. He also argued, via an interesting excursion into Roman law, that it was unsatisfactory to stop at defences. There could be replies to defences – e.g. claim “assault”: defence “self-defence”: reply “excessive force”. Indeed in some cases there could be replies to replies to defences and so on. If the response was that the reply could be rolled up in the formulation of the defence then why not apply this approach also at level one?

My initial reaction, which I expressed in a poor way at the seminar, was that both speakers were making good points and that there must be a way of reconciling their points of view. Another intervener, whose name I did not catch but whose contributions impressed me, thought that the two views were irreconcilable and indeed that there was a fundamental illogicality in trying to distinguish between torts and defences. If there was a defence there was no tort.

As so often happens, it was only on the bus home that I formulated more precisely what I should have said at the seminar. The answer depends on the question being asked. If the question is “Is X liable to make reparation to Y?” then, of course, the answer has to be “Not if X has a defence”. If the question is “Is X guilty?” (of a wrongdoing of some kind) then the answer will sometimes, but not always, be “Not if X has a defence”. To modern ears “Not guilty by reason of insanity” sounds better than “Guilty but insane”. On the other hand even the most modern ears could probably accept “Guilty but the claimant is time-barred” or “Guilty but the claimant has waived all claims”.

The most relevant question in relation to a book of this kind, which attempts to establish a taxonomy, is probably “How can the law best be set out?” and the answer, I would submit, is that it is highly convenient for that purpose to distinguish between the main elements of a claim and defences. This can be done in various ways. The Draft Criminal Code for Scotland, for example, provides at an early stage (s.3) that any provision creating an offence or to the effect that a person is to be guilty of an offence is to be interpreted, unless it provides otherwise, as being subject to any provision providing for an applicable defence. Later there is a whole section of the general part dealing with defences. Clearly this sort of technique makes for a more readable and accessible law than trying to negate every defence in every provision creating an offence.

Similarly in the Draft Common Frame of Reference (DCFR) the basic rule on non-contractual liability for damage caused to another is set out without express reference to defences. Article VI.- 1:101 (1) provides that “A person who suffers legally relevant damage has a right to reparation from a person who caused the damage intentionally or negligently or who is otherwise accountable for the causation of the damage” . But this is qualified by saying that the basic rule applies only in accordance with the following provisions of the Book. These following provisions include a whole chapter on defences, subdivided into various types. For example, article VI. – 5:201 provides that “A person has a defence if legally relevant damage is caused with authority conferred by law”. Any apparent logical contradiction in saying that a person is liable but not liable is resolved by one of the most generally applicable provisions in the whole text – namely, that a special rule prevails over a general rule in any case of conflict (art. I.-1:102(5)). Here the defence is the special rule and prevails.

So I remain of the view that both speakers were right. James was right to stress that it is useful to distinguish out defences and to try to classify and analyse them. Eric was right to say that we have to be careful about what we are distinguishing defences from. It will not always be appealing to distinguish between the tort or delict and the defence. Sometimes it will be better to use a version of the formula “X is liable (or commits an offence or whatever) if (a) the following elements are present and (b) X has no defence”.

The DCFR, incidentally, defines a defence to a claim as “a legal objection or a factual argument, other than a mere denial of an element which the claimant has to prove which, if well-founded, defeats the claim in whole or in part”. This is similar to the definition proposed by James Goudkamp. However, the DCFR is structured in such a way as to avoid saying that there is a tort or delict even if there is a defence.

 

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Termination for non-conformity under the proposed Common European Sales Law (CESL)

The amendments to the CESL approved by the Legal Affairs Committee of the European Parliament at its last meeting include important changes to the buyer’s right to terminate for non-conformity.

Under the original proposal a consumer buyer’s right to terminate the contractual relationship and get the price back was not subject to any cut-off other than that provided by the rules on prescription. So in certain cases a consumer buyer could have exercised this right, by simply giving notice to the seller, up to ten years after the date of delivery of the goods. However, this long-term right was balanced by a requirement that the buyer pay for the use of the goods in certain limited circumstances where it would have been inequitable to allow the buyer the free use of the goods.

Non-consumer buyers were not treated so generously. A non-consumer buyer lost the right to terminate if notice of termination was not given within a reasonable time after the buyer became, or could be expected to have become, aware of the non-conformity.

The solution for consumer-buyers was severely criticised and indeed could have made many businesses unwilling to opt into the CESL. Although the balancing of a long-term right to reject with a limited requirement to pay for use might be regarded as fair enough in principle it would have been unappealing in practice, particularly as it would often have been far from easy to determine when a payment for use would have been required and what an appropriate payment would have been. The solution for business buyers was criticised on the less serious ground that “a reasonable time” was vague and could be productive of disputes.

The Legal Affairs Committee has addressed both criticisms. Its new article 119 (Loss of the right to terminate) would read as follows.

 

1. The buyer loses the right to terminate under this Section if notice of termination is not given within two months from when the right arose or the buyer became, or, if the buyer is a trader that buyer could be expected to have become, aware of the non-performance, whichever is later.
2. Paragraph 1 does not apply where no performance at all has been rendered.

 

This is a good solution. It will be noted that in the case of a consumer buyer time runs only from the date when the non-conformity was actually discovered. So a consumer who buys a Christmas present in November and keeps it in its packaging until Christmas day, only to discover a defect then, has until the end of 26th February (see article 11 on  “Computation of time”) to give notice to the seller that he or she wants the price back. This seems an adequate period.

A limited obligation to pay for use is retained (article 174) but will obviously become much less important. It should not affect honest buyers who stop using the goods after discovering the defect but will remain available for cases where people try to abuse the system in order to get free use of goods.

What if the goods are accidentally damaged before being returned by the buyer? Under the original proposal it seemed that the buyer could get the full price back on returning even the severely damaged goods. This was unreasonable. The risk of such damage should be on the buyer who is in a better position to control the risks and take out appropriate insurance. It was also anomalous that the buyer would have to pay the value of the goods if they were completely destroyed (article 173) but not the diminution in value if they were severely damaged. The Committee has corrected this anomaly by providing that the buyer would be liable for the diminution in value to the extent that it exceeds depreciation through regular use.

Under another amendment approved by the Committee payments for use or diminution in value would always be capped at the price paid for the goods. This also seems right. Without this cap a seller could sometimes be better off having supplied defective goods than if conforming goods had been supplied.

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New rules on good faith and fair dealing in the proposal for a Common European Sales Law

The Report adopted by the Legal Affairs Committee of the European Parliament on the Common European Sales Law (CESL) on 17th September is now on the committee’s website. So it is now possible to see what happened on the controversial question of good faith and fair dealing.

The first change is in the definition. In the Commission’s proposal this read:

 ‘good faith and fair dealing’ means a standard of conduct characterised by honesty, openness and consideration for the interests of the other party to the transaction or relationship in question.

As amended by the Legal Affairs Committee the definition would now read: 

‘good faith and fair dealing’ means a standard of conduct characterised by honesty, openness and, in so far as may be appropriate, reasonable consideration for the interests of the other party to the transaction or relationship in question.

 So the changes are the addition of “in so far as may be appropriate” and “reasonable”. These are welcome clarifications. The new words qualify only the “consideration” element and not the honesty and openness elements. They make clear what has always been the intention: the general duty of good faith and fair dealing does not convert a contracting party into a fiduciary. A contracting party is always entitled to have regard to its own interests.

The next change is in the consequences of a breach of the general duty of good faith and fair dealing. The Commission’s proposal said that:

Breach of this duty may preclude the party in breach from exercising or relying on a right, remedy or defence which that party would otherwise have, or may make the party liable for any loss thereby caused to the other party.

 As amended by the Legal Affairs Committee this would now read:

 Breach of this duty may preclude the party in breach from exercising or relying on a right, remedy or defence which that party would otherwise have, but shall not give rise directly to remedies for non-performance of an obligation.

So breach of the general duty would not now give rise directly to a claim for damages for loss caused by it. This is a return to the policy of the Draft Common Frame of Reference (see DCFR art. III.-1:103). It is to be hoped that it will allay the fears of some opponents of the idea of a general duty of good faith and fair dealing. Supporters who might think that a party who suffers loss as a result of a breach of the duty will now be left without a remedy can take some consolation from the word “directly”. If an obligation of good faith and fair dealing is an implied term of a contract then a non-performance of that obligation may well give rise to a claim for damages. And, of course, specific rules based on the notion of good faith and fair dealing may well include provision for damages. Recital 31 explains this as follows.

The general principle of good faith and fair dealing should set a standard of conduct which ensures an honest, transparent and fair relationship. While it precludes a party from exercising or relying on a right, remedy or defence which that party would otherwise have, the principle as such should not give rise to any general right to damages. Rules of the Common European Sales Law constituting specific manifestations of the general principle of good faith and fair dealing, such as avoidance for fraud or the non-performance of an obligation created by an implied term, can give rise to a right to damages, but only in very specific cases.

 The general intention is clear although the drafting of the Recital is suspect. It is not the principle or general duty itself which precludes a party but rather a breach of it.

 These changes seem to represent a reasonable compromise solution to a controversial question and it is to be hoped that they will enable more people to support the Proposal.

 

 

 

 

 

 

 

 

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Proposal for a Common European Sales Law advances

On 17th September the Legal Affairs Committee of the European Parliament approved by a huge majority (19 for, 3 against, 2 abstentions) a report supporting the proposal for a Common European Sales Law (CESL). It therefore took a totally different stance from the bizarre one taken by the divided Internal Market and Consumer Protection Committee (IMCO), which had purported to support the proposal while adopting, by a small majority, amendments which would have wrecked it. (See post on this blog of 12 July 2013).

The Legal Affairs Committee voted on a large number of amendments to the text of the CESL. These would mostly improve it. For example, its structure would be simplified: it would no longer be divided into a Regulation (containing definitions, rules on opting in etc) and an Annex containing the main text of the CESL. Also the law would apply only to cross-border distance sales, its main sphere of application being online sales. The rules on digital content have been considerably refined and the rules on restitution after a contract is avoided or terminated or found to be invalid have been refined still further.  Various matters which had given rise to doubt (for example, the relationship of the CESL to the Rome 1 Regulation; effect of an invalid opt-in; the effect of an opt-in to only parts of the CESL in a business-to-business contract) have been clarified in a sensible way. It has also been made clear that enactment of the CESL would not prevent further revision of the Consumer Rights Directive. Whether this will placate the more entrenched of the consumer rights lobbyists (who may not be representing the true interests of European consumers at all on this issue) remains to be seen.

Some articles and groups of articles have been re-arranged, in a generally helpful way, with little or no change to the content. For example, the rules on the passing of risk have been amalgamated into one article and the rules on interpretation have been re-ordered. Some unnecessary wording has been deleted, one example being article 98 (“Effect on passing of risk”), which merely pointed the reader forward.

Not all is gain. It looks as if some of the adopted amendments talk of a trader as “he” whereas the original text was strictly gender-neutral. Maybe this could be tidied up later. The reason given for some amendments was consistency with the Consumer Rights Directive – but EU legislation will never improve if bad drafting is to be followed endlessly for the sake of consistency.

Some important issues were decided on the basis of compromise amendments. Unfortunately I have not been able to find on the Committee’s website the text of these amendments. I am trying to get hold of them and will report further when I do.

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Restitution or reliance damages?

David Campbell (Leeds) gave an interesting paper on this topic at the Edinburgh conference of the Society of Legal Scholars. He focussed on the following type of case.

A buyer of a quantity of steel, who (unusually) has paid in advance, finds that half of the steel is not conform to contract. The buyer rejects the non-conforming half. The price has gone down between the date of the contract and the date of delivery. What happens?

David said that the obvious, simple, efficient and appealing solution was for the buyer to get the price back. He then considered the different legal remedies available to the buyer. He looked at the question from the point of view of English law but it can be considered in more general terms. There might be three remedies:

1.  recovery of the price (i.e. restitution)

2. reliance damages (i.e. such a sum as would put the buyer in the same position as if the contract for the defective goods had not been concluded – in effect recovery of the price in this instance but under a different name and by a different legal technique)

3. expectation damages (i.e. such a sum as would put the buyer in the same position as if the contractual obligations had been duly performed)

The buyer would not want to claim expectation damages (the normal measure) because that would mean recovering only a sum based on the market price at the time of delivery: the buyer would get back less than the price paid for the defective goods. If the law provided only this remedy then the result would be that the seller would be left with a profit for not performing. There would also be an arbitrary distinction between cases where the price had been paid in advance and cases where it had not. In the latter case the seller could obviously not recover any profit element from the buyer for not performing the contractual obligation. So expectation damages are not appropriate here – at least as an exclusive remedy.

David’s next point was that it was unnecessary to have two overlapping remedies – restitution and reliance damages – to deal with this situation. Up to this point I was in complete agreement. But then he surprised me by arguing that it was the restitution remedy which should be jettisoned. It seemed to me that the more attractive solution was to say that there was no need to resort to reliance damages here. From the buyer’s point of view, of course, it does not matter what legal technique is used to recover a sum equivalent to the price paid or what name is given to the process. However, from the point of view of the structure and coherence of a legal system it does matter.  

The starting point is that the buyer is terminating the contractual relationship in relation to the defective half of the goods. There have to be controls on the right to terminate to prevent a buyer from abusing it where, as in this case, the market price has gone down. These controls should perhaps be more strict in commercial cases, where large sums may be involved and where the temptation to take advantage of fluctuations in market prices might be high, than in consumer cases. So a good law, at least in commercial cases, will require the non-performance to be fundamental. It will also give the seller a right to cure the defective performance if this can be done promptly and without prejudice to the buyer’s legitimate interests. Here, for example, the seller should be able to say “Sorry about that. We have a strict quality control system but part of this consignment must have slipped through the net. We’ll look into this. In the meantime we can deliver conforming goods this afternoon.” If that causes no prejudice to the buyer (apart from preventing the buyer from getting out of the contract and obtaining goods at the lower current price) then it should be allowed. Let us assume, however, that the non-performance is sufficiently serious, that the seller is unable or unwilling to take advantage of a right to cure and that the buyer has effectively terminated the parties’ rights and obligations in relation to the defective goods. A good law now has to say something about the effects of termination. It cannot just leave the matter hanging. And one of the most obvious effects, in a simple case like the one under consideration here, must surely be that there is an obligation on both parties to return what has been received. The goods go back and the price goes back. It would seem distinctly odd and one-sided to say “The seller can get the goods back but the buyer has to root around with its lawyer to find an appropriate claim in damages”.

So quite apart from any difficulties there may be in the doctrine of reliance damages (and they could be significant under some legal systems) there is, I would suggest, a respectable structural case for preferring a restitution-based solution.

A restitution-based solution is the one used in the Principles of European Contract Law (PECL), the Draft Common Frame of Reference (DCFR) and the proposed Common European Sales Law (CESL). Of course, it is qualified and refined for special cases and the buyer can also claim damages for any further loss for which the non-performing seller is liable but in a basic case like the one considered here the solution under these European instruments is simple. There are barriers to the right to terminate, especially in non-consumer cases, to prevent it being abused. If these are surmounted then the mechanism is: – partial termination: goods back: money back.

 

 

 

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