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PORTADAN58-PRINCIPAL

ENSXXI Nº 58
NOVIEMBRE - DICIEMBRE 2014

PROFESSOR HUGH BEALE QC (Hon), FBA
Professor of law at the University of Warwick

El 9 de octubre de 2014, el profesor Hugh Beale (miembro del Queens Council y de la British Academy) pronunció una conferencia ante la Academia sobre el tema: "Contratos no comerciales: la protección de las partes no es una jurisdicción si notarios". Hugh Beale enseña derecho en la Universidad de Warwick, y en la actualidad es asimismo profesor visitante en el Harris Manchester College de la Universidad de Oxford, donde disfruta de una beca de investigación.
The address explored the apparent differences between Spanish law and the law of England and Wales, over how non-business parties, other than consumers in the normal sense, are protected from contracts that are unfair or that they do not understand. Professor Beale pointed out that one of principal tasks of the Notary in Spain appears to be to ensure that that parties understand the contract or other transaction that they are entering. There is no English equivalent. The role of the English Notary Public is primarily only to ensure the genuineness of the party’s signature. If the party to a proposed transaction employs a solicitor, the solicitor will give advice; and for certain types of transactions, in particular those involving immoveable property, it is usual for each party to employ a solicitor. But it is common for those entering other kinds of contract or other transactions not to consult a solicitor.

So compared to Spain, there must be a greater risk that parties in England enter transactions that they do not fully understand, or when they have not ensured that they have adequate information or have properly evaluated the risks. So, if we do not have notaries to advise a party that the transaction is unwise or risky beforehand,  one might expect the rules in English law governing a party’s right to avoid the contract after it was made would be relatively generous – perhaps more generous than in Spain. But in fact this is not so. Private parties are of course protected when they are acting as consumers  - e.g. buying goods or services from a trader, or being given credit by a bank or other financial organization. However, there are many contracts for which there are no special rules of consumer protection, and then a party who wishes to avoid a contract which they did not understand at the time, or which they now think is unfair, must fall back on the general law of contract. In these cases, English contract law for a long time gave little help. The grounds on which a contract may be avoided because of a defect of consent are significantly more limited than is the case in most civil law systems.

"The address explored the apparent differences between Spanish law and the law of England and Wales, over how non-business parties, other than consumers in the normal sense, are protected from contracts that are unfair or that they do not understand"

We will see that in one case, however, the courts have devised a solution to a particularly pressing social problem – and, interestingly, the solution found by the courts comes quite close to the Spanish approach of trying to ensure that the party understands what he or she is doing before the transaction is entered.
English law has no equivalent of the “general clause” found in many civil codes, such a requirement that contracts be made or performed in good faith. Nor does it have a general principle that a contract may be avoided if a party’s consent was not free and fully informed. Rather, English law relies on a number of specific rules which are quite narrow in scope and which depend not on the lack of consent of the party now seeking to avoid the contract (“the claimant”) but on improper behaviour by the other party (“the defendant”).
Thus if a claimant is induced to agree to a contract by what we call “duress” – by being threatened with harm if he or she does not agree - the contract may be avoided if the claimant had no realistic alternative. But this applies only if the act threatened by the defendant would itself be wrongful. English law does not recognise what in French law is called “duress by circumstances”, where one party takes advantage of another’s desperate need to demand a high price.
A transaction may also be avoided on the ground of “undue influence” if there was a relationship of trust and confidence between the parties and the transaction resulted from  the defendant’s abuse of the relationship – perhaps the defendant applied emotional pressure, or perhaps the claimant simply trusted the defendant to make the right decision for the claimant and the defendant abused that trust. If there is suspect transaction – one that “requires explanation” – it will be up to the defendant to show that the claimant was not acting under the defendant’s influence but of the claimant’s own free will. But undue influence is limited  because it applies only where there is a relationship of trust and confidence.
A contract or other transaction (such as a gift, which does not amount to a contract in English law) may of course be avoided if it was induced by fraud. But the English notion of fraud is narrow. It requires a positive misstatement of fact or law. Merely keeping quiet – not pointing out some essential fact that you know the other party is ignorant of, when you know they would not contract if they knew the truth – is not fraud in English law. We do not recognise “fraud by silence.”
Lastly, English law seldom gives a remedy when one party has entered the contract under a mistake. The claimant’s mistake as to the terms of the contract (the so-called “mistake in declaration” is only a ground for relief if the defendant knew of the claimant’s mistake. A mistake as to the nature or substance of the subject-matter of the contract, or to the surrounding facts, is a ground for relief only if the mistake was caused by incorrect information given by the defendant (when the case is called one of “misrepresentation”.)
English law has a doctrine known as “unconscionable dealing”. However, in England. It applies only if the claimant has what is called “a bargaining impairment” relative to the  defendant - the typical statement in the older cases is that the claimant must be “a poor and ignorant person”. The doctrine is little used and in effect is underdeveloped.

"Compared to Spain, there must be a greater risk that parties in England enter transactions that they do not fully understand, or when they have not ensured that they have adequate information or have properly evaluated the risks"

Why are the grounds for avoidance so limited in English law? In a case law system like the English one, courts are likely to develop the law that seems appropriate for the cases that come before them. In England, the law is made by our “senior” courts – the High Court, the Court of Appeal and the Supreme Court that replaced the House of Lords a few years ago. The overwhelming majority of contract cases that come before those courts are what I call “heavy commercial cases”. They involve contracts between sizeable businesses,  who are often making such contracts on a very frequent basis and who are therefore sophisticated. Moreover, the contracts tend to either on standard forms that were drafted by experts – often acting with legal advice – or high-value contracts where legal advice will often be obtained by both sides before the contract is made. These parties are not really in need of protection. So English contract law in general remains resolutely “individualistic” - in other words, parties are expected to look after themselves.
The one case in which the English courts have acted to deal with a very specific problem involves fraud, misrepresentation, duress or undue influence by a third person. Normally the fact that the contract was the result of some misrepresentation, duress or undue influence by a third person, who is not a party to the contract, is irrelevant. If the contract between A and B resulted from some fraud on B practised by C, fraud by It is only relevant to the  contract if A had notice of the fraud. It may be actual knowledge, or “constructive notice” when A is treated as knowing because he should have known of the fraud or other improper behaviour by C.
The problem came about through, in the typical case, a wife guaranteeing her husband’s business debts. In the UK there is great encouragement to start up small businesses; but banks will usually only lend to start-up business if the borrowers can provide some security. At the same time, the price of houses had risen dramatically, so that many home-owners had some real “equity” – value over and above what they had borrowed to buy the property. This could be used a security. But most homes in the UK are now put into the joint names of husband and wife. So the wife would have to agree to the guarantee, and to mortgage her share of the home to the bank. What if the husband tell lies to get the wife to sign, or exercises undue influence – or even duress  - over the wife?

"Why are the grounds for avoidance so limited in English law? In a case law system like the English one, courts are likely to develop the law that seems appropriate for the cases that come before them"

In two cases - Barclays Bank v O’Brien and Royal Bank of Scotland v Etridge - the House of Lords developed an innovative approach. In any case where there is a non-commercial relationship between the lender and the surety, and the arrangement – for example, the loan that was guaranteed by a wife – is not on the face of it to the surety’s advantage, there is a risk that the debtor has procured the surety’s consent by fraud, misrepresentation, undue influence of duress. That risk will exist unless on its face the loan is for the benefit of both debtor and surety (for example, if the loan was to both husband and wife jointly.) The bank will be treated as having constructive notice of any wrongdoing by the debtor unless the bank can show that it took steps to ensure that the surety’s consent was free and fully informed. The bank should conduct a personal interview with the wife, without her husband being present, advise her of the risks and advise her to get  to independent advice; or it should get a letter from a solicitor confirming that the solicitor has independently advised the wife.  The solicitor must explain the nature of the guarantee and the risk; explain the purpose, amount and terms of loan; make sure the surety knows the extent of W’s liability (and “all-money” guarantees should not be used: the guarantee must be capped at a fixed amount). If necessary the solicitor must  ask the bank for information, e.g. about the state of the business. Then the surety (typically, as I say, the wife) must be told that she does not have to agree: it is her choice. Finally, she should be asked if she wishes to proceed. If the bank has not got such a letter or itself advised the surety, the surety can avoid the guarantee and the mortgage.
How many problems will this procedure solve? It should ensure the surety  understands the transaction, and has as much information as the bank has. It is more doubtful if it will really ensure she is acting freely. Solicitors may not be able to spot when there is a background of threatened domestic violence. It will not get over the problem that in many cases the wife will feel that she has little choice, because is she doesn’t support the husband in his business venture, she may damage the relationship irreparably.
However, if the new procedure ensures that the surety understands the transaction, English law will have reached the same result that, in Spain, is ensured by a notary giving advice to the wife. If there were Notaries in England, probably the problem would never have arisen.

Abstract

On 9 October 2014 Professor Hugh Beale QC (Hon), FBA, gave an address to the Academy on the topic, “Contracts between non-business parties: party protection in a jurisdiction without notaries”. Hugh Beale is a professor of law at the University of Warwick; he also holds a Visiting Professorship, and is a Senior Research Fellow at Harris Manchester College, in the University of Oxford.
The address explored the apparent differences between Spanish law and the law of England and Wales, over how non-business parties, other than consumers in the normal sense, are protected from contracts that are unfair or that they do not understand. Professor Beale pointed out that one of principal tasks of the Notary in Spain appears to be to ensure that that parties understand the contract or other transaction that they are entering. There is no English equivalent. The role of the English Notary Public is primarily only to ensure the genuineness of the party’s signature. If the party to a proposed transaction employs a solicitor, the solicitor will give advice; and for certain types of transactions, in particular those involving immoveable property, it is usual for each party to employ a solicitor. But it is common for those entering other kinds of contract or other transactions not to consult a solicitor.

Resumen

El 9 de octubre de 2014, el profesor Hugh Beale  (miembro del Queens Council y de la British Academy) pronunció una conferencia ante la Academia sobre el tema: «Contratos no comerciales: la protección de las partes en una jurisdicción sin notarios». Hugh Beale enseña derecho en la Universidad de Warwick, y en la actualidad es asimismo profesor visitante en el Harris Manchester College de la Universidad de Oxford, donde disfruta de una beca de investigación.
En la conferencia analizaba las diferencias entre el derecho español, el inglés y el galés en relación a la protección de la que gozan, no ya los consumidores (en el sentido general del término), sino las partes que firman acuerdos no comerciales, cuando el contrato es injusto o no comprenden lo que firman. El profesor Beale señalaba que una de las funciones principales de los notarios en España es garantizar que las partes entiendan correctamente el contrato o cualquier otra transacción que decidan realizar. En Inglaterra no existe una figura equivalente. La función básica del notario público inglés es dar fe de la autenticidad de las firmas de las partes. Si la parte contratante de una transacción emplea a un abogado, será a éste a quien pida consejo. En ciertos tipos de transacciones, sobre todo cuando están en juego bienes inmuebles, lo normal es que cada parte contrate a un abogado. Pero en otro tipo de contratos las partes no suelen consultar con juristas.