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13. INVALIDITY OF CONTRACTS Today we will talk about invalidity and it is the first time we will tackle problems related to mandatory rules. What happens if there is an infringement of a mandatory rule? That’s what we are going to explain in this lesson. In general we can say that the contract is invalid. We will analyze the legal concept of invalidity and its effects. We will talk about two types of invalidity: voidness/nullity and avoidance/rescission. The main difference is given by the fact that the nullity affects cases that are considered more serious in the legal system. In the following slide we can see a better explanation of the two categories. Example: if you have to sell a piece of land you need a written contract, if that is missing we have nullity of the contract. Nullity is something that is meant to protect the general interest, while avoidance is meant to protect private interest of one party. Consequences of nullity: The contract is invalid from the beginning and produces no effects (meaning that there is not a creation of an obligation). It would be as the contract was non existent. Consequences of avoidance: At the beginning (when there is the conclusion of the contract),the contract produces effects, but when the person protected by the legal system exercises the right to avoid the contract then we have the interruption of the effects of the contract and the parties will have to restitute the performances that were made. Example: if I buy a phone, but I was incapable to act because I was completely drunk, the contract may be avoided. What happens? I conclude the contract, I pay the price for the phone and the contract will produce effects (namely I pay money, the other party has to deliver the phone). When I recover, I can sue the seller of the phone in order to get the avoidance of the contract. If I do get it (if I can demonstrate I was incapable de facto), there will be restitution of the performances that were made (I get my money back, the other party gets the phone back). There is also another distinction which is related to the possibility of validating the contract . Once everyone is aware that we have a ground of invalidity, if it is a matter of avoidance it is possible to validate the contract for the party that is entitled to avoid the contract. In the previous example of me and the smartphone, it would be my job to validate the contract through a declaration: I know I was drunk but nevertheless I consider the contract valid. Why do we have this possibility? Because sometimes we need to have certainty about a relationship, so the fact of validating the contract is something that gives certainty to the contract. It is something that is not possible when it comes to nullity because in this case the decision is not left to the parties but it is made by the legal system, so even though the parties are not interested in having the invalidity of the contract, the contract is still invalid. Who takes care of checking if a contract is null? Every third interest party (in the example of donation that lacks the written form, every party that is interested in having this contract null, for examples creditors of the donor) and then also the judge on its own motion, without a request, (if the judge notices during a proceeding that a contract is null, then he declares the nullity of the contract). Nullity Now we look at the cases of nullity (we have to remember the entire list!): 1. Defectiveness of the agreement between the parties 1. It is merely apparent, lacking the parties actual consent; 2. It does not meet the formality requirement, if any (example: sale of land and donations need a written form); 3. Its subject-matter does not exist or is not possible (I promise to sell my smartphone and to deliver it tomorrow but actually yesterday it was destroyed → the subject of the contract is not possible). We will see that in some legal systems the contract is invalid whereas according to other legal systems

the contract is valid but there is a duty to compensate the damage (in some legal system it is not considered a ground of invalidity); 2. Illegality and immorality (illicit contract) a. Infringement of a mandatory rule, which prohibits both parties from entering into a contract; b. The agreement contravenes public policy (=something which indicates the fundamental principles of the legal system), including morality (when you deal with morality you don’t deal with something that is actually against the law but something that is considered immoral by the society). Morality is a ground of invalidity in countries such as Germany and Italy, while for example France has abandoned this practice with the 2016 reform of the Civil Code (the rationale is that we cannot have a common morality for the entire society) Example of an invalid contract for morality in the Italian legal system: contract concluded by a sex worker, in the past also surrogation of motherhood (nowadys it is prohibited by law, but before that it was tackled by morality)

Focus on lack or impossibility of the subject matter Now we are analyzing in depth the lack or impossibility of the subject-matter. There is a divide between civil law and common law jurisdictions. Generally in civil law jurisdictions, the contract is affected by nullity because I am promising something that is impossible or non existent. In common law jurisdictions, the contract is valid but the party that suffers a damage can sue the other party and ask for compensation. Now we have the example of the French legal system (civil law jurisdiction), in art. 1163 what it was said is very clear: the performance must be possible (otherwise the contract is null). Now we have a case, Mc Rae vs Commonwealth Disposals Commission, taken from the Australian legal system (common law). A guy who was the owner of the tanker or who was supposed to be the owner of the tanker decided to sell it to another person. But in reality he thought to be the owner of something that did not exist. There was a promise of something that did not exist. The High Court of Australia sentenced that the contract was valid and that the buyer had to be compensated. Last thing to know about this problem, in Germany (civil law) the same principle that is applied in common law is applied: the lack or impossibility of the subject matter does not imply invalidity of the contract.

Avoidance Now we look at the grounds of avoidance: 1. Incapacity of one of the contracting parties (minors, incapacitated adults, punitive incapacity, incapacity de facto). If we deal with a minor how can we assess if he considers the contract bad for him? The legal representatives can sue the other party of the contract in order to make the contract avoided. 2. Vitiating factors a. Mistake (=errore) b. Deceit or fraud (=dolo) c. Duress (=violenza) These are the three only vitiating factors that haven’t changed since roman law. In civil law, we have fraud and mistake, in common law only fraudulent misrepresentation Focus on mistake Civil law jurisdictions: they tend to favour an intention approach to contract, which leaves more room for its avoidance based on a vitiating factor, in other words the scope of application of this vitiating factor is broader. (Unilateral mistake = a mistake that is in the mind of only one party and that is not induced by the other party).

The mistaken party can claim avoidance only if these two requirements are met: 1. The mistake is material or essential, it must not be based on ancillary terms, but concern a main point of the contract (example: I think I am buying a paricular product but in reality i am buying another product); Rationale behind this requirement → we cannot consider a contract invalid for any stupid reason, the misteke must be essential; 2. The other party knew of the mistake or could have known about it. Rationale behind this requirement → the party that didn’t do the mistake needs to be protected. Common law jurisdictions: they tend to protect the objective meaning of the contract, you look at what can be seen from the outside rather than on what is really understood by the parties. In common law we don’t have the unilateral mistake, if only one party makes a mistake, common law doesn’t care and the contract is still valid. There is the possibility to make the contract avoided if the mistake was created by the other party. It is called fraudulent misrepresentation Focus on fraud A deceit or fraud occurs when one of the contracting parties is intentionally induced into a mistake as to the prospective contract. There are two main types of fraud:  Fraudulent misrepresentation: an active behavior (I create a mistake in the other party with my action) → Civil and common law jurisdictions  Non disclosure of an information → Civil law jurisdictions Difference between fraud in the case of silence and mistake (requirement 2): In the case of fraud there is a voluntary omission of the information, whereas the second requirement for mistake includes also the possibility that you didn’t share a piece of information you could have known about. When you know about something and you don’t tell, there is a partial overlapping between mistake and fraud. The difference is related to the effects, when there is fraud it is possible to ask for damages while it is not possible with mistake. Fraud can also be subdivided into: fraud that causes the claim for avoidance of the contract (if well informed the party would not have concluded the contract) and fraud that causes the claim for damages (in the case that I would have concluded the contract anyways but i would have paid a lower price with the correct information). Now we will dive into the German legal system (civil law) with a case that was very discussed 10 years ago. It is about a clothing brand called Thor Steinar. It is about a tenancy contract between a landlord (owner of a store in a mall) and a tenant that decided to rent the store to sell clothes, among which Thor Steinar (a brand that has a strong political connotation). The landlord asked the immediate termination of the contract on the basis of fraud made by omission as the tenant didn’t declare his intention to sell that brand. Do we have in this case a fraud for non disclosure of information? Yes because the mistaken party would not have concluded the contract if informed. It is true that the situation is quite tricky. It is really hard to say that there is a duty to inform the other party and you have to reconstruct this duty on the basis of a very general clause which is good faith. On the basis of good faith, considering that the brand has a certain bad connotation and could give rise to demonstration against the store, the tenant was supposed to inform the landlord. Why don't we have a mistake in this situation? This case misses one of the two requirements of mistake: it is not material (not essential for the contract), when we deal with a tenancy contract the subject-matter is the renting of a shop. This case highlights the connectìon between good faith and fraud. Focus on duress Duress is something different from mistake and fraud, here we have a defect in consent. We have one party that is perfectly informed about the conditions and is perfectly aware of the fact that it does not want to enter into the contract but he is forced to do so. Example: If you don’t conclude this contract I will kill your brother.

In the French legal system, it is mentioned a particular case of duress and it is the threat of a legal action: if you don’t enter into the contract I will exercise my right for the payment of a previous thing. You are threatening somebody to exercise one of your rights which is actually granted by the legal system. In principle this is not something that constitutes duress except when the threat is made to obtain manifestly excessive advantage from the contract or when the legal process is deflected from the purpose (when you exercise your right not because you are interested in having your money back but because you want to threaten the other person). Finally, we have the case in which the psychological violence is exercised by a third party. No matter if the contracting party knows about the violence or not, you have the right to avoid the contract (it is different about what happens with fraud). Why does duress work in a different way than fraud? The treatment is different because duress is considered something which is more serious, worse than fraud....