Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded.
COMMENT
1. Mistake of fact and mistake of law
This Article equates a mistake relating to facts with a mistake relating to law. Identical legal treatment of the two types of mistake seems justified in view of the increasing complexity of modern legal systems. For cross-border trade the difficulties caused by this complexity are exacerbated by the fact that an individual transaction may be affected by foreign and therefore unfamiliar legal systems.
2. Decisive time
This Article indicates that a mistake must involve an erroneous assumption relating to the factual or legal circumstances that exist at the time of the conclusion of the contract.
The purpose of fixing this time element is to distinguish cases where the rules on mistake with their particular remedies apply from those relating to non-performance. Indeed, a typical case of mistake may, depending on the point of view taken, often just as well be seen as one involving an obstacle which prevents or impedes the performance of the contract. If a party has entered into a contract under a misconception as to the factual or legal context and therefore misjudged its prospects under that contract, the rules on mistake will apply. If, on the other hand, a party has a correct understanding of the surrounding circumstances but makes an error of judgment as to its prospects under the contract, and later refuses to perform, then the case is one of non-performance rather than mistake.
(1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and
(a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or
(b) the other party had not at the time of avoidance reasonably acted in reliance on the contract.
(2) However, a party may not avoid the contract if
(a) it was grossly negligent in committing the mistake; or
(b) the mistake relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party.
COMMENT
This Article states the conditions necessary for a mistake to be relevant with a view to avoidance of the contract. The introductory part of paragraph (1) determines the conditions under which a mistake is sufficiently serious to be taken into account; sub-paragraphs (a) and (b) of paragraph (1) add the conditions regarding the party other than the mistaken party; paragraph (2) deals with the conditions regarding the mistaken party.
1. Serious mistake
To be relevant, a mistake must be serious. Its weight and import¬ance are to be assessed by reference to a combined objective/subjective standard, namely what “a reasonable person in the same situation as the party in error” would have done if it had known the true circumstances at the time of the conclusion of the contract. If it would not have contracted at all, or would have done so only on materially different terms, then, and only then, is the mistake considered to be serious.
In this context the introductory part of paragraph (1) relies on an open-ended formula, rather than indicating specific essential elements of the contract to which the mistake must relate. This flexible approach allows full account to be taken of the intentions of the parties and the circumstances of the case. In ascertaining the parties’ intentions, the rules of interpretation laid down in Chapter 4 must be applied. General commercial standards and relevant usages will be particularly important.
Normally in commercial transactions certain mistakes, such as those concerning the value of goods or services or mere expectations or motivations of the mistaken party, are not considered to be relevant. The same is true of mistakes as to the identity of the other party or its personal qualities, although special circumstances may sometimes render such mistakes relevant (e.g. when services to be rendered require certain personal qualifications or when a loan is based upon the credit-worthiness of the borrower).
The fact that a reasonable person would consider the circumstances erroneously assumed to be essential is however not sufficient, since additional requirements concerning both the mistaken and the other party must be met if a mistake is to become relevant.
2. Conditions concerning the party other than the mistaken party
A mistaken party may avoid the contract only if the other party satisfies one of four conditions laid down in paragraph (1).
The first three conditions indicated in sub-paragraph (a) have in common the fact that the other party does not deserve protection because of its involvement in one way or another with the mistaken party’s error.
The first condition is that both parties laboured under the same mistake.
Illustration
1. A and B, when concluding a contract for the sale of a sports car, were not and could not have been aware of the fact that the car had in the meantime been stolen. Avoidance of the contract is admissible.
However, if the parties erroneously believe the object of the contract to be in existence at the time of the conclusion of the contract, while in reality it had already been destroyed, Article 3.1.3 has to be taken into account.
The second condition is that the error of the mistaken party is caused by the other party. This is the case whenever the error can be traced to specific representations made by the latter party, be they express or implied, negligent or innocent, or to conduct which in the circumstances amounts to a representation. Even silence may cause an error. A mere “puff” in advertising or in negotiations will normally be tolerated.
If the error was caused intentionally, Article 3.2.5 applies.
The third condition is that the other party knew or ought to have known of the error of the mistaken party and that it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error. What the other party ought to have known is what should have been known to a reasonable person in the same situation as that party. In order to avoid the contract the mistaken party must also show that the other party was under a duty to inform it of its error.
The fourth condition is laid down in sub-paragraph (b) and is that the party other than the mistaken party had not, up to the time of avoidance, reasonably acted in reliance on the contract. For the time of avoidance, see Articles 3.2.12 and 1.10.
3. Conditions concerning the mistaken party
Paragraph (2) of this Article mentions two cases in which the mistaken party may not avoid the contract.
The first of these, dealt with in sub-paragraph (a), is that the error is due to the gross negligence of the mistaken party. In such a situation it would be unfair to the other party to allow the mistaken party to avoid the contract.
Sub-paragraph (b) contemplates the situation where the mistaken party either has assumed the risk of mistake or where this risk should in the circumstances be borne by it. An assumption of the risk of mistake is a frequent feature of speculative contracts. A party may conclude a contract in the hope that its assumption of the existence of certain facts will prove to be correct, but may nevertheless undertake to assume the risk of this not being so. In such circumstances it will not be entitled to avoid the contract for its mistake.
Illustration
2. A sells to B a picture “attributed” to the relatively unknown painter C at a fair price for such paintings. It is subsequently discovered that the work was painted by the famous artist D. A cannot avoid its contract with B on the ground of its mistake, since the fact that the picture was only “attributed” to C implied the risk that it might have been painted by a more famous artist.
Sometimes both parties assume a risk. However, speculative contracts involving conflicting expectations of future developments, e.g. those concerning prices and exchange rates, may not be avoided on the ground of mistake, since the mistake would not be one as to facts existing at the time of the conclusion of the contract.
An error occurring in the expression or transmission of a declaration is considered to be a mistake of the person from whom the declaration emanated.
COMMENT
This Article equates an error in the expression or transmission of a declaration with an ordinary mistake of the person making the declaration or sending it and thus the rules of Article 3.1.4, Article 3.2.2 and Articles 3.2.9 to 3.2.16 apply also to these kinds of error.
1. Relevant mistake
If an error in expression or transmission is of sufficient magnitude (especially if it has resulted in the misstatement of figures), the receiver will be, or ought to be, aware of the error. Since nothing in the Principles prevents the receiver/offeree from accepting the erroneously expressed or transmitted offer, it is for the sender/offeror to invoke the error and to avoid the contract provided that the conditions of Article 3.2.2 are met, in particular that it was contrary to reasonable commercial standards of fair dealing for the receiver/offeree not to inform the sender/offeror of the error.
In some cases the risk of the error may have been assumed by, or may have to be imposed upon, the sender if it uses a method of transmission which it knows or ought to know to be unsafe either in general or in the special circumstances of the case.
2. Mistakes on the part of the receiver
Transmission ends as soon as the message reaches the receiver (see Article 1.10).
If the message is correctly transmitted, but the receiver misunderstands its content, the case falls outside the scope of this Article.
If the message is correctly transmitted to the receiver’s machine which, however, due to a technical fault, prints out a mutilated text, the case is again outside the scope of this Article. The same is true if, at the receiver’s request, a message is given orally to the receiver’s messenger who misunderstands it or transmits it wrongly.
In the two above-mentioned situations the receiver may however be entitled to invoke its own mistake in accordance with Article 3.2.2, if it replies to the sender and bases its reply upon its own misunderstanding of the sender’s message and if all the conditions of Article 3.2.2 are met.
A party is not entitled to avoid the contract on the ground of mistake if the circumstances on which that party relies afford, or could have afforded, a remedy for non-performance.
COMMENT
1. Remedies for non-performance preferred
This Article is intended to resolve the conflict which may arise between the remedy of avoidance for mistake and the remedies for non-performance. In the event of such a conflict, preference is given to the remedies for non-performance since they seem to be better suited and are more flexible than the radical solution of avoidance.
2. Actual and potential conflicts
An actual conflict between the remedies for mistake and those for non-performance arises whenever the two sets of remedies are invoked in relation to what are essentially the same facts.
Illustration
A, a farmer, who finds a rusty cup on the land sells it to B, an art dealer, for EUR 10,000. The high price is based upon the assumption of both parties that the cup is made of silver (other silver objects had previously been found on the land). It subsequently turns out that the object in question is an ordinary iron cup worth only EUR 1,000. B refuses to accept the cup and to pay for it on the ground that it lacks the assumed quality. B also avoids the contract on the ground of mistake as to the quality of the cup. B is entitled only to the remedies for non-performance.
It may be that the conflict between the two sets of remedies is only potential, since the mistaken party could have relied upon a remedy for non-performance, but is actually precluded from doing so by special circumstances, for example because a statutory limitation period has lapsed. Even in such a case this Article applies with the consequence that the remedy of avoidance for mistake is excluded.
A party may avoid the contract when it has been led to conclude the contract by the other party’s fraudulent representation, including language or practices, or fraudulent non-disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the latter party should have disclosed.
COMMENT
1. Fraud and mistake
Avoidance of a contract by a party on the ground of fraud bears some resemblance to avoidance for a certain type of mistake. Fraud may be regarded as a special case of mistake caused by the other party. Fraud, like mistake, may involve either representations, whether express or implied, of false facts or non-disclosure of true facts.
2. Notion of fraud
The decisive distinction between fraud and mistake lies in the nature and purpose of the defrauding party’s representations or non-disclosure. What entitles the defrauded party to avoid the contract is the “fraudulent” representation or non-disclosure of relevant facts. Such conduct is fraudulent if it is intended to lead the other party into error and thereby to gain an advantage to the detriment of the other party. The reprehensible nature of fraud is such that it is a sufficient ground for avoidance without the need for the presence of the additional conditions laid down in Article 3.2.2 for the mistake to become relevant.
A mere “puff” in advertising or negotiations does not suffice.
A party may avoid the contract when it has been led to conclude the contract by the other party’s unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract.
COMMENT
This Article permits the avoidance of a contract on the ground of threat.
1. Threat must be imminent and serious
Threat of itself is not sufficient. It must be of so imminent and serious a character that the threatened person has no reasonable alternative but to conclude the contract on the terms proposed by the other party. The imminence and seriousness of the threat must be evaluated by an objective standard, taking into account the circumstances of the individual case.
2. Unjustified threat
The threat must in addition be unjustified. The second sentence of this Article sets out, by way of illustration, two examples of an unjustified threat. The first envisages a case where the act or omission with which the contracting party has been threatened is wrongful in itself (e.g. a physical attack). The second refers to a situation where the threatened act or omission is in itself lawful, but the purpose to be achieved is wrongful (e.g. the bringing of a court action for the sole purpose of inducing the other party to conclude the contract on the terms proposed).
Illustration
1. A, who is in default with the repayment of a loan, is threatened by B, the lender, with proceedings for the recovery of the money. The only purpose of this threat is to obtain on particularly advantageous terms a lease of A’s warehouse. A signs the lease, but is entitled to avoid the contract.
3. Threat affecting reputation or economic interests
For the purpose of the application of this Article, threat need not necessarily be made against a person or property, but may also affect reputation or purely economic interests.
Illustration
2. Faced with a threat by the players of a basketball team to go on strike unless they receive a much higher bonus than had already been agreed for winning the four remaining matches of the season, the owner of the team agrees to pay the requested bonus. The owner is entitled to avoid the new contract with the players, since the strike would have led automatically to the team being relegated to a minor league and therefore represented a serious and imminent threat to both the reputation and the financial position of the club.
(1) A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to
(a) the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent needs, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and
(b) the nature and purpose of the contract.
(2) Upon the request of the party entitled to avoidance, a court may adapt the contract or term in order to make it accord with reasonable commercial standards of fair dealing.
(3) A court may also adapt the contract or term upon the request of the party receiving notice of avoidance, provided that that party informs the other party of its request promptly after receiving such notice and before the other party has reasonably acted in reliance on it. The provisions of Article 3.2.10(2) apply accordingly.
COMMENT
1. Excessive advantage
This provision permits a party to avoid a contract in cases where there is gross disparity between the obligations of the parties, which gives one party an unjustifiably excessive advantage.
The excessive advantage must exist at the time of the conclusion of the contract. A contract which, although not grossly unfair when entered into, becomes so later may be adapted or terminated under the rules on hardship contained in Chapter 6, Section 2.
As the term “excessive” advantage denotes, even a considerable disparity in the value and the price or some other element which upsets the equilibrium of performance and counter-performance is not sufficient to permit the avoidance or the adaptation of the contract under this Article. What is required is that the disequilibrium is in the circumstances so great as to shock the conscience of a reasonable person.
2. Unjustifiable advantage
Not only must the advantage be excessive, it must also be unjustifiable. Whether this requirement is met will depend upon an evaluation of all the relevant circumstances of the case. Paragraph (1) of this Article refers in particular to two factors which deserve special attention in this connection.
a. Unequal bargaining position
The first factor is that one party has taken unfair advantage of the other party’s dependence, economic distress or urgent needs, or its improvidence, ignorance, inexperience, or lack of bargaining skill (sub-paragraph (a)). As to the dependence of one party vis-à-vis the other, superior bargaining power due to market conditions alone is not sufficient.
Illustration
A, the owner of an automobile factory, sells an outdated assembly line to B, a Governmental agency from a country eager to set up its own automobile industry. Although A makes no representations as to the efficiency of the assembly line, it succeeds in fixing a price which is manifestly excessive. B, after discovering that it has paid an amount which corresponds to that of a much more modern assembly line, is entitled to avoid the contract.
b. Nature and purpose of the contract
The second factor to which special regard must be had is the nature and purpose of the contract (sub-paragraph (b)). There are situations where an excessive advantage is unjustifiable even if the party who will benefit from it has not abused the other party’s weak bargaining position.
Whether this is the case will often depend upon the nature and purpose of the contract. Thus, a contract term providing for an extremely short period for giving notice of defects in goods or services to be supplied may or may not be excessively advantageous to the seller or supplier, depending on the character of the goods or services in question. Equally, an agent’s fee expressed in terms of a fixed percentage of the price of the goods or services to be sold or rendered, although justified in the event of the agent’s contribution to the conclusion of the transaction being substantial and/or the value of the goods or services concerned not being very high, may well turn out to confer an excessive advantage on the agent if the latter’s contribution is almost negligible and/or the value of the goods or services are extraordinarily high.
c. Other factors
Other factors may need to be taken into consideration, for example the ethics prevailing in the business or trade.
3. Avoidance or adaptation
The avoidance of the contract or of any of its individual terms under this Article is subject to the general rules laid down in Articles 3.2.11 to 3.2.16.
However, according to paragraph (2) of this Article, at the request of the party who is entitled to avoidance, the court may adapt the contract in order to bring it into accord with reasonable commercial standards of fair dealing. Similarly, according to paragraph (3) the party receiving notice of avoidance may also request such adaptation provided it informs the avoiding party of its request promptly after receiving the notice of avoidance, and before the avoiding party has reasonably acted in reliance on that notice.
After such a request by the other party, the party entitled to avoidance looses its right to avoid the contract and any earlier notice of avoidance becomes ineffective (see Article 3.2.10(2).
If the parties are in disagreement as to the procedure to be adopted, it will be for the court to decide whether the contract is to be avoided or adapted and, if adapted, on which terms.
(1) Where fraud, threat, gross disparity or a party’s mistake is imputable to, or is known or ought to be known by, a third person for whose acts the other party is responsible, the contract may be avoided under the same conditions as if the behaviour or knowledge had been that of the party itself.
(2) Where fraud, threat or gross disparity is imputable to a third person for whose acts the other party is not responsible, the contract may be avoided if that party knew or ought to have known of the fraud, threat or disparity, or has not at the time of avoidance reasonably acted in reliance on the contract.
COMMENT
This Article deals with situations, frequent in practice, in which a third person has been involved or has interfered in the negotiation process, and the ground for avoidance is in one way or another imputable to that person.
1. Third person for whom a party is responsible
Paragraph (1) is concerned with cases in which fraud, threat, gross disparity or a party’s mistake is caused by a third person for whose acts the other party is responsible, or cases in which, without causing the mistake, the third person knew or ought to have known of it. A party is responsible for the acts of a third person in a variety of situations ranging from those in which that person is an agent of the party in question to those where the third person acts for the benefit of that party on its own initiative. In all such cases it seems justified to impute to that party the third person’s acts or its knowledge, whether actual or constructive, of certain circumstances, and this irrespective of whether the party in question knew of the third person’s acts.
2. Third person for whom a party is not responsible
Paragraph (2) deals with cases where a party is defrauded, threatened or otherwise unduly influenced by a third person for whom the other party is not responsible. Such acts may be imputed to the latter party only if it knew or ought to have known of them.
There is however one exception to this rule: the defrauded, threatened or otherwise unduly influenced party is entitled to avoid the contract, even if the other party did not know of the third person’s acts, whenever the other party has not reasonably acted in reliance on the contract before the time of avoidance. This exception is justified because in this situation the other party is not in need of protection.
If the party entitled to avoid the contract expressly or impliedly confirms the contract after the period of time for giving notice of avoidance has begun to run, avoidance of the contract is excluded.
COMMENT
This Article lays down the rule according to which the party entitled to avoid the contract may either expressly or impliedly confirm the contract.
For there to be an implied confirmation it is not sufficient, for example, for the party entitled to avoid the contract to bring a claim against the other party based on the latter’s non-performance. A confirmation can only be assumed if the other party acknowledges the claim or if a court action has been successful.
There is also confirmation if the party entitled to avoidance continues to perform the contract without reserving its right to avoid the contract.
(1) If a party is entitled to avoid the contract for mistake but the other party declares itself willing to perform or performs the contract as it was understood by the party entitled to avoidance, the contract is considered to have been concluded as the latter party understood it. The other party must make such a declaration or render such performance promptly after having been informed of the manner in which the party entitled to avoidance had understood the contract and before that party has reasonably acted in reliance on a notice of avoidance.
(2) After such a declaration or performance the right to avoidance is lost and any earlier notice of avoidance is ineffective.
COMMENT
1. Performance of the contract as understood by the mistaken party
According to this Article a mistaken party may be prevented from avoiding the contract if the other party declares itself willing to perform or actually performs the contract as it was understood by the mistaken party. The interest of the other party in so doing may lie in the benefit to be derived from the contract, even in its adapted form.
Such regard for the interests of the other party is only justified in the case of mistake and not in other cases of defective consent (threat and fraud) where it would be extremely difficult to expect the parties to keep the contract alive.
2. Decision to be made promptly
The other party has to declare its decision to perform or actually to perform the contract in its adapted form promptly after having been informed of the manner in which the mistaken party had understood the contract. How the other party is to receive the information about the erroneous understanding of the terms of the contract will depend on the circumstances of the case.
3. Loss of right to avoid
Paragraph (2) expressly states that after the other party’s declaration or performance the right of the mistaken party to avoid the contract is lost and that any earlier notice of avoidance becomes ineffective.
Conversely, the other party is no longer entitled to adapt the contract if the mistaken party has not only given notice of avoidance but has also reasonably acted in reliance on that notice.
4. Damages
The adaptation of the contract by the other party does not preclude the mistaken party from claiming damages in accordance with Article 3.2.16 if it has suffered loss which is not compensated by the adaptation of the contract.
The right of a party to avoid the contract is exercised by notice to the other party.
COMMENT
1. The requirement of notice
This Article states the principle that the right of a party to avoid the contract is exercised by notice to the other party without the need for any intervention by a court.
2. Form and content of notice
No provision is made in this Article for any specific requirement as to the form or content of the notice of avoidance. It follows that, in accordance with the general rule laid down in Article 1.10(1), the notice may be given by any means appropriate to the circumstances. As to the content of the notice, it is not necessary that the term “avoidance” actually be used, or that the reasons for avoiding the contract be stated expressly. However, for the sake of clarity a party would be well advised to give some reasons for the avoidance in its notice, although in cases of fraud or gross disparity the avoiding party may assume that those reasons are already known to the other party.
Illustration
A, B’s employer, threatens B with dismissal if B does not sell A a Louis XVI chest of drawers. B ultimately agrees to the sale. Two days later A receives a letter from B announcing B’s resignation and stating that B has sold the chest of drawers to C. B’s letter is sufficient notice of avoidance of the contract of sale with A.
3. Notice must be received
The notice of avoidance becomes effective when it reaches the other party (see Article 1.10(2)).
(1) Notice of avoidance shall be given within a reasonable time, having regard to the circumstances, after the avoiding party knew or could not have been unaware of the relevant facts or became capable of acting freely.
(2) Where an individual term of the contract may be avoided by a party under Article 3.2.7, the period of time for giving notice of avoidance begins to run when that term is asserted by the other party.
COMMENT
According to paragraph (1) of this Article notice of avoidance must be given within a reasonable time after the avoiding party became aware or could not have been unaware of the relevant facts or became capable of acting freely. More precisely, the mistaken or defrauded party must give notice of avoidance within a reasonable time after it became aware or could no longer be unaware of the mistake or fraud. The same applies in cases of gross disparity which result from an abuse of the innocent party’s ignorance, improvidence or inexperience. In cases of threat or abuse of the innocent party’s dependence, economic distress or urgent needs the period runs from the time the threatened or abused party becomes capable of acting freely.
In case of avoidance of an individual term of the contract in accordance with Article 3.2.7, paragraph (2) of this Article states that the period of time for giving notice begins to run when that term is asserted by the party.
Where a ground of avoidance affects only individual terms of the contract, the effect of avoidance is limited to those terms unless, having regard to the circumstances, it is unreasonable to uphold the remaining contract.
COMMENT
This Article deals with situations where the grounds of avoidance affect only individual terms of the contract. In such cases the effects of avoidance will be limited to the terms affected unless it would in the circumstances be unreasonable to uphold the remaining contract. This will generally depend upon whether or not a party would have entered into the contract had it envisaged that the terms in question would have been affected by grounds of avoidance.
Illustrations
1. A, a contractor, agrees to build two houses on plots of land X and Y for B, one of which B intends to live in and the other to let. B was mistaken in assuming that it had a licence to build on both plots, since in fact the licence covered only plot X. Unless the circumstances indicate otherwise, notwithstanding the avoidance of the contract concerning the building of the house on plot Y, it would be reasonable to uphold the remaining contract concerning the building of the house on plot X.
2. The situation is the same as in Illustration 1, except that a school was to be built on plot X and living quarters for the students on plot Y. Unless the circumstances indicate otherwise, after the avoidance of the contract concerning the building of the living quarters on plot Y it would not be reasonable to uphold the remaining contract for the building of the school on plot X.
Avoidance takes effect retroactively.
COMMENT
This Article states the rule that avoidance takes effect retroactively. In other words, the contract is considered never to have existed. In the case of a partial avoidance under Article 3.2.13 the rule applies only to the avoided part of the contract.
There are however individual terms of the contract which may survive even in cases of total avoidance. Arbitration, jurisdiction and choice-of-law clauses are considered to be different from the other terms of the contract and may be upheld notwithstanding the avoidance of the contract in whole or in part. Whether in fact such clauses remain operative is to be determined by the applicable domestic law.
(1) On avoidance either party may claim restitution of whatever it has supplied under the contract, or the part of it avoided, provided that the party concurrently makes restitution of whatever it has received under the contract, or the part of it avoided.
(2) If restitution in kind is not possible or appropriate, an allowance has to be made in money whenever reasonable.
(3) The recipient of the performance does not have to make an allowance in money if the impossibility to make restitution in kind is attributable to the other party.
(4) Compensation may be claimed for expenses reasonably required to preserve or maintain the performance received.
COMMENT
1. Right of parties to restitution on avoidance
According to paragraph (1) of this Article either party may claim restitution of what the party has supplied under the contract or the part of it avoided. The only condition is that each party makes restitution of whatever the party has received under the contract or the part of it avoided.
Illustration
1. In the process of a takeover of a company, the controlling shareholder A agrees to sell and transfer to B shares for GBP 100,000. After discovering that A had fraudulently misstated the profits the company was earning, B avoids the contract. B can claim back the purchase price of GBP 100,000. At the same time, B has to return the shares received from A.
As regards the costs involved in making restitution, Article 6.1.11 applies.
2. Restitution in kind not possible or appropriate
Restitution must normally be in kind. There are, however, instances where instead of restitution in kind, an allowance in money has to be made. This is the case, first of all, where restitution in kind is not possible. The allowance will normally amount to the value of the performance received.
Illustration
2. A commissions B to paint A’s factory. B had fraudulently induced A to conclude the contract at a price that is much higher than the market price. After having discovered the fraud, A avoids the contract. A can reclaim the purchase price from B while A is itself under a duty to pay for the value of having had its factory painted.
An allowance is further envisaged by paragraph (2) of this Article whenever restitution in kind would not be appropriate. This is so in particular when returning the performance in kind would cause unreasonable effort or expense. The standard, in that respect, is the same as under Article 7.2.2(b).
Illustration
3. Antiquarian A fraudulently induces antiquarian B to buy a collection of gold coins. The gold coins are reloaded onto one of B’s ships. In a heavy storm the ship sinks. B subsequently discovers the fraud and avoids the contract. B can recover the price that it has paid, while itself having to make an allowance representing the value of the gold coins. This is in view of the fact that recovery of the gold coins from the sunken ship would involve expenses vastly exceeding their value.
The purpose of specifying that an allowance has to be made in money “whenever reasonable” is to make it clear that an allowance only has to be made if, and to the extent that, the performance received constitutes a benefit for the recipient.
Illustration
4. A has undertaken to decorate the entrance hall of B’s business centre. After A has completed about half of the decorations B discovers that A is not the well-known decorator A has pretended to be. B avoids the contract. Since the decorations so far made cannot be returned and if they have no value for B, A is not entitled to any allowance for the work done.
3. The allocation of risk
The rule contained in paragraph (2) implies an allocation of risk: it imposes a liability on the recipient of the performance to make good the value of that performance if it is unable to make restitution in kind. The rule in paragraph (2) applies irrespective of whether the recipient was responsible for the deterioration or destruction of what it had received. This allocation of the risk of deterioration or destruction is justified, in particular, because the risk should lie with the person in control of the performance. On the contrary, there is no liability to make good the value if the deterioration or destruction is attributable to the other party, either because it was due to the other party’s fault, or because it was due to a defect inherent in the performance. Hence the rule in paragraph (3).
Illustration
5. Art dealer A buys from art dealer B a painting which both of them believe to be a genuine Constable. Subsequently doubts arise about the authenticity of the painting. B undertakes to obtain an expert opinion by the well-known expert C. C confirms that the painting actually is from a much less well-known painter living at the time of Constable. Due to B’s negligence, the painting is destroyed on the way back from C to A. A avoids the contract on the ground of a relevant mistake under Article 3.2.2. A can claim back the purchase price but does not have to make an allowance for the value of the painting.
The recipient’s liability to pay the value of the performance received is not excluded in cases where the deterioration or destruction would also have occurred had the performance not been rendered.
Illustration
6. Company A sells and transfers earth-moving equipment to company B. The equipment is subsequently destroyed by a hurricane that floods the properties of both A and B. B avoids the contract because of a relevant mistake under Article 3.2.2. B can reclaim the purchase price but, at the same time, B has to make an allowance for the value of the earth-moving equipment.
Nor is the recipient’s liability to make good the value of the performance excluded in cases where it has been led to conclude the contract by the other party’s fraudulent representation.
Illustration
7. Antique dealer A has fraudulently induced garage owner B to swap A’s ramshackle car against a valuable ancient Greek vase belonging to B. The car is accidentally destroyed while standing in B’s garage. If B avoids the contract under Article 3.2.5, B can claim the vase back but has to make good the value of the car.
While Article 3.2.5 is intended to make sure that B is not bound by the contract that it has entered into (hence the right of avoidance) and that B is not saddled with the consequences of a bad bargain that A has induced B to make (hence the right to restitution), Article 3.2.5. does not protect B against accidents.
The question of the recipient’s liability to pay the value of the performance only arises in cases where the deterioration or destruction occurs before avoidance of the contract. If what has been performed deteriorates or is destroyed after avoidance of the contract, the recipient of the performance is under a duty to return what the recipient has received. Any non-performance of that duty gives the other party a right to claim damages according to Article 7.4.1, unless the non-performance is excused under Article 7.1.7.
Illustration
8. Art dealer A buys from art dealer B a painting which both parties believe to be a genuine Constable. After it has become apparent that the painting actually is from a much less well-known painter living at the time of Constable, A avoids the contract on the ground of a relevant mistake under Article 3.2.2. As a result, A can reclaim the purchase price but is under a duty to return the painting. Before A can return the painting it is stolen by burglars. Whether B can claim damages depends on whether the burglary can be regarded as force majeure (see Article 7.1.7).
4. Compensation for expenses
If the recipient of a performance has incurred expenses for the preservation or maintenance of the object of the performance, it is reasonable to allow the recipient to claim compensation for these expenses in cases where the contract has been avoided and where, therefore, the parties have to return what they have received.
Illustration
9. Company A has sold and delivered a race horse to company B. After some time B realizes that A has fraudulently concealed from him the true parentage of that horse. B avoids the contract. B can claim compensation for the costs incurred in feeding and caring for the horse.
This rule applies only to reasonable expenses. What is reasonable depends on the circumstances of the case. In Illustration 9 it would matter whether the horse had been sold as a race horse or as an ordinary farm horse.
Compensation cannot be claimed for expenses which are not required to preserve or maintain the performance received, even if they are reasonable.
Illustration
10. Company A has sold and delivered a software package to company B which both parties believe to possess a certain functionality. When B discovers that this is not the case, B asks C to check whether that functionality can still be implemented. Since that turns out not to be possible, B avoids the contract for relevant mistake under Article 3.2.2. B cannot recover from A the fee paid to C as expenses under paragraph (4).
5. Benefits
The Principles do not take a position concerning benefits that have been derived from the performance, or interest that has been earned. In commercial practice it will often be difficult to establish the value of the benefits received by the parties as a result of the performance. Furthermore, often both parties will have received such benefits.
Irrespective of whether or not the contract has been avoided, the party who knew or ought to have known of the ground for avoidance is liable for damages so as to put the other party in the same position in which it would have been if it had not concluded the contract.
COMMENT
1. Damages if ground for avoidance known to the other party
This Article provides that a party which knew or ought to have known of a ground for avoidance is liable for damages to the other party. The right to damages arises irrespective of whether or not the contract has been avoided.
2. The measure of damages
Unlike the damages in case of non-performance under Chapter 7, Section 4, the damages contemplated by this Article are intended simply to put the other party in the position it would have been in if it had not concluded the contract.
Illustration
Company A sells software to company B and could not have been unaware of B’s mistake as to its appropriateness for the use intended by B. Irrespective of whether or not B avoids the contract, A is liable to B for all the expenses incurred by B in training its personnel in the use of the software, but not for the loss suffered by B as a consequence of the impossibility to use the software for the intended purpose.
The provisions of this Chapter apply with appropriate adaptations to any communication of intention addressed by one party to the other.
COMMENT
This Article takes account of the fact that, apart from the contract itself, the parties, either before or after the conclusion of the contract, often exchange a number of communications of intention which may likewise be affected by invalidity.
In a commercial setting, the most important example of unilateral communications of intention that are external, but preparatory, to a contract are bids for investment, works, delivery of goods or provision of services. Communications of intention made after the conclusion of a contract take a variety of forms, such as notices, declarations, demands and requests. In particular, waivers and declarations by which a party assumes an obligation may be affected by a defect of consent.
Professor Iacopo Donati is the UNIDROIT/Bank of Italy Chair Holder and is mainly responsible for assisting in the Bank Insolvency project. He is Professor of Corporate and Insolvency Law at the University of Siena, and coordinates the research project ‘Pro.Re.Ba.’ (Proportionating rules on bank crisis prevention and management to the case of retail banks), which has received funding from the Italian Ministry of University. He has previously taught corporate law at the University of Venice ‘Ca’ Foscari’, at the University of Florence and at the University of Rome ‘Tor Vergata’.
Professor Donati is the author of several publications on corporate law, restructuring, insolvency law, and bank crisis management. On the same topics, he has been invited as a speaker to various international and national conferences and participated in some high-impact international, European, and national research projects. Professor Donati’s education includes a Ph.D. in Corporate Law (University of Rome ‘La Sapienza’), an LLM in Corporate Governance (Stanford Law School), and a Law Degree with honors (University of Florence). He is qualified as an attorney in Italy and in the State of New York (USA).
Ms Olga Fonotova is an Associate Professor of the Faculty of Law (Department of Legal Regulation of Business) at the Russian National Research University “Higher School of Economics” in Moscow. She holds a PhD degree cum laude in private law / private international law from the Lomonosov Moscow State University (2006). Her academic and teaching interests cover private international law, international and national commercial law, with a focus on unified and non-state legal regulation of cross-border commerce.
Olga is a Russian law qualified practicing lawyer in the sphere of national and international commercial and corporate law with 20+ years’ experience in leading law firms. As part of her legal practice, she has advised multinational corporations on the setting up of multi-jurisdictional commercial relations, on the formation / termination of international joint ventures, restructuring of assets, and financing / refinancing of projects. For her work on commercial and corporate legal matters she was included in the international rating of leading lawyers “The Best Lawyers® in Russia” (2018 – 2022).
She is a UNIDROIT alumna (2011) and a Correspondent of UNIDROIT in Russia (2023 – 2025). From 2016 to 2021 Olga was a member of the ICC Commission on Commercial Law and Practice (ICC CLP) and a member of the Association of European Business (AEB) in Moscow.
Allan M. Mukuki, PhD Candidate (Navarra, Spain), LLM (Groningen, Netherlands), PGDip (KSL), LLB (Hons) (UoN), ACIArb (London), Advocate of the High Court of Kenya.
Allan Mukuki is an Advocate of the High Court of Kenya as well as a Commissioner for Oaths. He is presently a PhD Candidate at the University of Navarra in Spain. He is also a holder of an LL.M in International Law and the Law of International Organizations, from the University of Groningen in the Netherlands. He has an LL. B (Hons) from the University of Nairobi, he is a Member of the Cha
rtered Institute of Arbitrators (London). He further holds a post-graduate diploma in law from the Kenya School of Law. Allan is also a scholar from the Hague Academy of International Law.
Some of his many roles in the legal profession include Director of International Partnerships; a Doctoral Fellow; member of the Management Committee and moot court coordinator, all for Strathmore Law School; Research Fellow for the African Region (Kenya), for the European Research Council Grant Project on the interpretation of customary international law; and Acting Director for the Strathmore Institute of Advanced Studies in International Criminal Justice (SIASIC)
Allan has previously worked at A.F Gross Advocate; in various legal institutes; in governmental agencies and in the Judiciary of Kenya. He was also a Legal researcher in the Office of the Solicitor General, Kenya, for the Maritime Delimitation in the Indian Ocean (Somalia v. Kenya), a case that was before the International Court of Justice. His main areas of specialization include Public International Law, The Law of International Organizations, International Humanitarian Law, International and Regional (EAC) Refugee Law and Legal Policy Development.
Further, Allan has been involved in various national and international legal consultancies and projects; he has published several peer reviewed legal articles, a legal monograph and presented several legal papers in international conferences around the world. He has also developed several policy documents for Strathmore University as well as (currently operational) manuals and laws for the operation of the Judiciary as well as governmental agencies and regional agencies such as IGAD.
ANDREA SANTACOLOMA
Director
PROFESSIONAL PRACTICE
Andrea Santacoloma is a Panamanian lawyer that focuses her practice on international commercial arbitration.
Prior to joining Adell & Merizalde, Andrea was the Deputy Director for Latin America of the ICC International Court of Arbitration for 5 years. In this role, she gained vast experience in the internal functioning of the ICC’s Secretariat and Court and saw first-hand the work of hundreds of arbitrators and ICC Court Members in the region. Andrea was also in charge of identifying new opportunities and potential users of the ICC Dispute Resolution Services (ICC DRS) in Latin America, in liaison with the ICC National Committees and other institutions in the region. She also worked as a lawyer advising local and international clients on business and corporate law and M&A in 3 Panamanian law firms.
She is currently the Executive Director of the Latin American Arbitration Association (ALARB), one of Latin America’s leading associations gathering practitioners and arbitrators, which seeks to encourage the use of arbitration and foster initiatives for the development of international arbitration in the region.
In July 2022, the G
overning Council of the International Institute for the Unification of Private Law (UNIDROIT) appointed Andrea as a Correspondent for Latin America. Namely, Andrea was appointed as a Correspondent for the Republic of Panama for the period 2022-2025.
EDUCATION
• American University Washington College of Law, LL.M. in International Arbitration and Business Law
• International Training Centre of the International Labor Organization (ILO) jointly with the United Nations Commission on International Trade Law (UNCITRAL), Università degli Studi di Torino, and University Institute of European Studies (IUSE), LL.M. in International Trade Law & Dispute Resolution
• Universidad Católica Santa María La Antigua, LL.M. in Corporate Law
• Universidad Católica Santa María La Antigua, Degree in Law and Political Science
• Centro de Estudios Regionales de Panamá, Diploma in Entrepreneurship and Management of Small and Medium Enterprises
Bar admissions
Republic of Panama
Languages
Spanish, English, Italian (intermediate)
asantacoloma@adellmerizalde.com
+507 370 4155
NAME: PROF. DR. HERNANY VEYTIA (LL.M. YALE)
AFFILIATION DIRECTOR BNM-CAMBRIDGE STUDY CENTRE ON SUSTAINABLE INVESTMENTS
PRESENTATION
Professor of law, international strategic consultant, arbitrator, and entrepreneur. Hernany Veytia is very comfortable with complex, high-profile and confidential transactions. Her consulting experience as partner of BNM and Deloitte enables her to focus on and add value to the sustainable and commercial aspects of each deal. Frequently she leads transdisciplinary teams to deliver fact findings and legal opinions, feasibility studies and turn-key projects for banks, governments, international organisations, and corporations willing to expand or withdraw operations in other jurisdictions.
In Prof Veytia’s experience UNIDROIT works have been very useful to understand not only the foreign law, but also to recognise the cultural, political, and economic factors at play, and the way national and international regulators operate-and cooperate. In her opinion, UNIDROIT instruments have been of utmost importance for the legal strategies she designed for:
• DANPREIT (Dispute Analytics Platform for Real Estate Investment Trusts in the Agriculture, Construction and Mining industries).
• TELEKAIROS, innovative methodology that incorporates the use of space assets.
• Corporate art collections, restitutions, including donations, sponsorships, and loans to museums.
• Contracts used by a German waterworks company willing to grow in all the Caribbean and Central American countries.
• Liquidation of commercial and investment banks
• IPOs and reverse mergers for companies in the extraction industries (Canadian stock exchange), ILS listed in Bermuda and African sovereign funds listed in London.
• Franchising and other commercial contracts in the food & drinks, health, aero-space, and automotive industries.
In the last three decades Prof. Veytia has lived, and successfully completed investments and disinvestments in more than forty countries in the five Continents. She is frequently appointed as arbitrator and invited as speaker on risk transfers at international industry conferences in fields of her expertise: energy (both renewable and traditional), artificial intelligence, infrastructure, mining, real estate, agriculture, rail, space, automotive, and franchising. She sits in the board of directors of companies in Europe including the United Kingdom.
Anna Veneziano is the Deputy Secretary General of the International Institute for the Unification of Private Law (UNIDROIT). She is a Professor of Comparative Law at the University of Teramo, Italy, where she was formerly the Director of the Department of Private Law. She has also formerly been a tenured Professor of European Property Law at the University of Amsterdam (UvA). Her education includes a Law Degree with honours from the University of Rome La Sapienza, an LL.M degree from the Yale Law School funded by a Fulbright scholarship, and a PhD degree from the University of Florence (Italy).
Her main research and publication areas are on secured transactions as well as international, comparative, and European contract and sales law. Before joining UNIDROIT she was a member of the Italian delegation with respect to the Cape Town Convention on International Interests on Mobile Equipment and its Aircraft Protocol as well as its Space Protocol. She was also a member of the Study Group on a European Civil Code and of the Compilation and Redaction Group on a Draft Common Frame of Reference on European Private Law (DCFR), and of the restricted Expert Group set up by the European Commission on a common European law on sales.
P
rofessor Ignacio Tirado was appointed Secretary-General by the Governing Council at its 97th session, and officially took office on 27 August 2018. A national of Spain, Professor Tirado (Commercial, Corporate and Insolvency Law, Universidad Autónoma of Madrid, Spain) holds a PhD from the Universities of Bologna and Autónoma de Madrid and an LLM from the University of London. Professor Tirado has been a Senior Legal Consultant at the World Bank’s Legal Vice-Presidency and Financial Sector Practice for more than nine years, having also consulted for the IMF on insolvency related matters as well as for the Asian Development Bank on commercial legal reform.
Amongst other accolades to his professional experience, Professor Tirado is a founding member of the European Banking Institute, an International Fellow of the American College of Bankruptcy and has been Director and Academic Co-Chair of the International Insolvency Institute.
A Swedish national, Ms Lena Peters grew up in Italy where she attended an English school. In 1978 she took her Juris Kandidatexamen at Stockholm University followed by a Master of Laws from King’s College, London (1979). Since 1985 she has been with UNIDROIT, first as Research Officer, lastly as Principal Legal Officer, her main duties being Secretary to the Working Group for the Preparation of Principles of International Commercial Contracts, Secretary to the Study Group on Franchising, Secretary to the Committee of Governmental Experts on Franchising.She also collaborated on the project for the preparation of the ELI-Unidroit Model European Rules of Civil Procedure. She is currently Managing Editor of the Uniform Law Review and responsible for publications at UNIDROIT.
Marina Schneider is Principal Legal Officer and Treaty Depositary at UNIDROIT. She studied law at the University of Strasbourg (France) and Paris I – Panthéon Sorbonne. She joined the UNIDROIT in 1987 and was involved in the elaboration and French versions of most UNIDROIT instruments since. She is in charge of the 1995 UNIDROIT Convention on Stolen or Illegally Exported Cultural Objects and of the UNESCO-UNIDROIT Model Provisions on State Ownership of Undiscovered Cultural Objects. She is the author of the Explanatory Report of the 1995 Convention and many articles on the Convention and other international instruments in the field. Ms Schneider is also responsible for the project on private collections and for the UNIDROIT Convention Academic Project (UCAP). She is member of the Board of the International Society for Research on Art and Cultural Heritage Law (ISCHAL).
Professor of Commercial Law, Carlos III University of Madrid. Currently, Sir Roy Goode Scholar at UNIDROIT, Rome, 2021-2022. Chair of Excellence 2017-2018 at University of Oxford (Uc3m- Santander Program), affiliated to Harris Manchester College. Previously Distinguished Visiting Professor and fellow of a number of Academic Institutions. Arbitrator of Madrid Court of Arbitration. Member of ELI (European Law Institute) Council and Executive Committee. Member of the Expert Group of the European Commission on Liability and New Technologies and member of the Expert Group of the European Observatory of Platform Economy; the International Academy of Commercial and Consumer Law; the expert group of the Inclusive Global Legal Innovation Platform for Online Dispute Resolution – UNCITRAL and Hong Kong Department of Justice. Expert of the UNIDROIT Study Group on the MAC Protocol of the Cape Town Convention on International Interests. Delegate of Spain to UNIDROIT for the adoption of the Protocol, delegate of Spain in Working Group VI of UNCITRAL on secured transactions and in Working Group IV on Electronic Commerce. Member of UNIDROIT Working Groups on Enforcement and Warehouse Receipts.
William Brydie-Watson is an Australian lawyer who specialises in secured transactions law and private international law. Before joining UNIDROIT, William was a government lawyer in the Private International Law and International Arbitration section of the Australian Attorney-General’s Department, where he worked primarily on treaty negotiation and the implementation of private international law treaties in Australia. At UNIDROIT, he is primarily responsible for the implementation of the Mining, Agriculture and Construction (MAC Protocol) to the 2001 Cape Town Convention on International Interests in Mobile Equipment and the development of a Model Law on Factoring. William also serves as UNIDROIT’s liaison with the Asia Pacific Economic Cooperation (APEC) forum and as manager of the Institute’s Scholarship and Internship Programme. Admitted to practice in New South Wales and the High Court of Australia, he has a Bachelor of Arts (honours), a Bachelor of Laws and a Master of Laws from the Australian National University. William also lectures on International Secured Transactions Law at the Eotvos Lorand Faculty of Law in Budapest.
