Defects of Juristic Act

Mistake Fraud Duress

Mistake

Concept of Mistake

       The concept of mistake in civil law and in common law are somewhat different. Taiwan scholars define mistake as “ A mistake is defined as nonconformity between the declared intention and the real intention of a contracting party.

However, The First Restatement defined mistake as ” a state of mind that is not in accord with the facts ” The Restatement Second defined it as “ a belief that is not in accord with the facts.

” A does not know his girl friend is married and buys an engagement ring for her.

Distinction between motive and intention

 X was aware of the city zoning project and was informed that the limit of construction in Blackacre will be lift. X bought the land from Y and the proposal to lift was denied by the Municipal Planning and Zoning Committee. Can X rescind the contract?

Misunderstanding and Mistake

  Upon the time of acting a declaration of intention, the declarant might misunderstand the situation of the facts or the understanding to the fact of the other party. In China, there was a bird called Bai Tou Wong in some provinces but in some place Bai Tou Wong was a species of cricket. If X would like to buy birds from Y and manifest his intent as buying Bai Tou Wong. Y accepted the deal and just thought Bai Tou Wong were crickets. When Y delivered the crickets, X eventually understood the differences and rejected to accept. Can X rescind his declaration of intention?

Mistake in ROC Civil Code

 The general basis for the ROC law of mistake is provided in the ROC Civil Code Art. 88-91. and 91.  Under the ROC Civil Code there are four kinds of mistake in the declaration of intention, such as  mistake in motive,  mistake in contents of declaration,  mistake in process of declaration, and  mistake in transmission.

Mistake in ROC Civil Code

 ROC Civil Code Art.88

 If a declaration was acting under a mistake as to

the contents of his declaration of intention declaration

; he may to his own fault.

, or

rescind the declaration had known the situation of affairs, he would not make the

; provided that the mistake or the ignorance of the affairs was not due  If a mistake in respect to the qualification of the other party or the nature of a thing is regarded as essential in trade, it shall be deemed a mistake as to the contents of the declaration of intent.

Mistake in ROC Civil Code

 ROC Civil Code Art.89

 If a declaration of intention has been incorrectly transmitted by the person or institution employed for its transmission, it may be revoked under the same conditions as provided in the preceding article.

Mistake in PRC GPCL



Article 59.

A party shall have the right to request a people's court or an arbitration agency to alter or rescind the following civil acts :  (1) those performed by an actor who

seriously misunderstood the contents of the acts

;  (2) those that are obviously unfair.  Rescinded civil acts shall be null and void from the very beginning.

Mistake in PRC Contract Law



PRC Contract Law Art. 54

  

Either of the parties may petition the People's Court or an arbitral tribunal for modification or rescission of a contract if: (i) the contract was concluded due to a material mistake ; (ii) the contract was grossly unconscionable at the time of its conclusion.

If a party induced the other party to enter into a contract against its true intention by fraud or duress, or by taking advantage of the other party's hardship, the aggrieved party is entitled to petition the People's Court or an arbitration institution for amendment or cancellation of the contract.

Where a party petitions for amendment of the contract, the People's Court or arbitration institution may not cancel the contract instead.

Differences among withdrawal, rescission, and revocation

 Withdraw an offer, an acceptance, or a declaration of intention before it takes effect.

 Revoke an offer or a declaration of intention after it was effective.

 Revoke by the party who has a right to revoke.

 Revoke by the court only  Rescind an effective contract or a juristic act.

 Rescind by the party who has a right to rescind.

 Rescind by the court only

UNDROIT Principles



Article 3.14 (Notice of avoidance) The right of a party to

avoid the contract

is exercised by notice to the other party

UNDROIT Principles



Article 3.17 (Retroactive effect of avoidance) (1) Avoidance takes effect retroactively.

(2) On avoidance either party may claim restitution of whatever it has supplied under the contract or the part of it avoided, provided that it concurrently makes restitution of whatever it has received under the contract or the part of it avoided or, if it cannot make restitution in kind, it makes an allowance for what it has received.

Material Mistake

 A significant misconception may be found if a person performing an act misapprehends the nature of the act, the other party, or the kind, quality, specification, quantity and the like of the subject matter, so that the consequences of the act are contrary to its true intention, thereby resulting in substantial loss. (SPC Opinion on Certain Questions Concerning the Implementation of GPCL)

Elements of significant misconception

     A declarant must misapprehends   The content of the act    the nature of the act, the other party, or the kind, quality, specification, quantity and the like of the subject matter.

The concomitant circumstances   Erroneous assumption of the circumstances concomitant with the conclusion of the contract that formed the essential basis of the mutual consent.

Liu Zhihan v. Li Weidong

case (p188) The consequences of the act are contrary to its true intention.

The mistake caused the contract to be concluded. (the relation of cause effect) Resulting in substantial loss.

A mistake that results from the gross negligence of the mistaken party is no ground for avoiding a contract.

UNDROIT Principles



Article 3.4 (Definition of mistake)



Mistake is an erroneous assumption relating to facts or to law existing when the contract was concluded.

UNDROIT Principles

  

Article 3.5 (Relevant mistake) (1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such 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 importance that a reasonable person in the

 

(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 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.

UNDROIT Principles



Article 3.6 (Error in expression or transmission)



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.

Mistake in PRC Civil Law



PRC Contract Law Art. 55



A party's rescission right is extinguished in one of the following situations:



(i) the party entitled to rescission fails to exercise the rescission right within one year after he knows or should have known the cause for the rescission;



(ii) the party entitled to rescission waives the right of rescission by an explicit declaration or through his own conduct after he knows the cause for rescission.

UNDROIT Principles



Article 3.15 (Time limits) (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 3.10, the period of time for giving notice of avoidance begins to run when that term is asserted by the other party.

UNDROIT Principles



Article 3.12 (Confirmation) 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.

UNDROIT Principles



Article 3.13 (Loss of right to avoid) (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.

Mistake in Japan

 Japan Civil Code Art. 95  A declaration of intention shall be

null and void

if made under a mistake with regard to any essential elements of a juristic act; however, if such mistake was caused by

gross negligence

on the part of the declarant, its nullity cannot be asserted by the declarant himself.

”

Duress

UNDROIT Principles



Article 3.9 (Threat) 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.

UNDROIT Principles



Article 3.10 (Gross disparity) (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 (b) the nature and purpose of the contract. standards of fair dealing. accordingly.

, or of its improvidence, ignorance, inexperience or lack of bargaining skill; and (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 (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 3.13(2) apply

UNDROIT Principles



Article 3.11 (Third persons) (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.

Case Study: duress

 On October 1, 1998, Mr. Gale began to work for the Sanitary Department in the City Government of Saxon City. Under the civil service rules, an employee may be discharged without cause or explanation at any time during the first six months of employment after which he attains permanent civil service status. At 1:00 p. m. on March 30, 1999, the last working day of Gale's probation, his supervisor, Ms. Elva, the Assistant Director of the Department, handed him a memorandum, signed by her, which stated that he would be terminated "effective 2:00 p.m. today, Friday, March 30, 1999."

 After reading the memo, and without prompting from Elva, Gale told her that he was seeking another position with the city. He asked if, in order to avoid being fired, which would have precluded him securing another city job, it would be possible for him to resign instead. Elva replied that she had no objection to a resignation but that the decision was entirely up to him. After going out to lunch to "give this some thoughts," Gale returned at 1:50 p.m. with a handwritten resignation, which bore the time "1:55 p. m.," intended specifically to become effective prior to her discharge.

 The note stated: 

As I can no longer comply with the requirements of the position I occupy, I am tendering my resignation, effective immediately.

 Elva accepted the resignation.

 After resignation, Gale made several attempts to obtain other employment from the city and to extend his probationary status with the Department. After all such efforts proved unsuccessful, he first learned the fact, from his lawyer, which Elva, as the assistant director of his department, did not have the authority to discharge a probationer. Under the city code, only the director of a department, with the approval of the City Manager, possesses the power to do so. Thus, Gale believe that, if Elva's memorandum had been the cause of his termination, his resignation would have been ineffective as contrary to the requirements of the city's own regulations and his resignation was the product of duress created by the invalid notice of dismissal.

 Is there any contract between Gale and the City Government as to his resignation? If yes, what did Gale promise to the City Government?

 What does "duress" mean? Under the civil law or common law theory of duress, can Gale successfully rescind or cancel his resignation and restore to the position he would have occupied had it not been tendered that is, as a non-probationary civil service employee with full back pay and emoluments?

Elements of Duress

 There is a threatening conduct.

 The threat throws a scare into the other party (the declarant) and coerces him to make a declaration of intention.

 The threat committed by the threatener is intentional.

 Threat shall be illegal.

 Illegal manner  Illegal (unjustified) purpose  The relation between manner and purpose is unjustified.

Article 58 0f GPCLin PRC

  Civil acts in the following categories shall be

null and void

:  (1) those performed by a person without capacity for civil conduct;   (2) those that according to law may not be independently performed by a person with limited capacity for civil conduct; (3) those performed by a person against his true intentions as a result of cheating,

coercion

or exploitation of his unfavorable position by the other party;     (4) those that performed through malicious collusion are detrimental to the interest of the state, a collective or a third party; (5) those that violate the law or the public interest; (6) economic contracts that violate the state's mandatory plans; and (7) those that performed under the guise of legitimate acts conceal illegitimate purposes. Civil acts that are null and void shall not be legally binding from the very beginning.

Contract Law

§

52(i)

 A contract is invalid in any of the following circumstances:  (i)

One party induced conclusion of the contract through fraud or duress, thereby harming the interests of the state

;     (ii) The parties colluded in bad faith, thereby harming the interests of the state, the collective or any third party; (iii) The parties intended to conceal an illegal purpose under the guise of a legitimate transaction; (iv) The contract harms public interests; (v) The contract violates a mandatory provision of any law or administrative regulation.

Contract Law

§

54II

   Either of the parties may petition the People's Court or an arbitration institution for amendment or cancellation of a contract if:  (i) the contract was concluded due to a material mistake;  (ii) the contract was grossly unconscionable at the time of its conclusion.

If a party induced the other party to enter into a contract against its true intention by

fraud or

duress

, or by taking advantage of the other party's hardship,

the aggrieved party is entitled to petition the People's Court or an arbitration institution for amendment or cancellation of the contract

.

Where a party petitions for amendment of the contract, the People's Court or arbitration institution may not cancel the contract instead.

Fraud

Fraud

 China  Void  GPCL § 58I(iii):  Economic Contract Law § 7I(ii)  Technology Contract Law § 21I(iv)  Foreign Economic Contract Law § 10  Avoidable and Void  Contract Law § 52(i)  Contract Law § 54II

UNDROIT Principles



Article 3.8 (Fraud) 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.

GPCL

§

58I(iii)

  Civil acts in the following categories shall be null and void :   (1) those performed by a person without capacity for civil conduct; (2) those that according to law may not be independently performed by a person with limited capacity for civil conduct;      (3)

those performed by a person against his true intentions as a result of cheating, coercion or exploitation of his unfavourable position by the other party

; (4) those that performed through malicious collusion are detrimental to the interest of the state, a collective or a third party; (5) those that violate the law or the public interest; (6) economic contracts that violate the state's mandatory plans; and (7) those that performed under the guise of legitimate acts conceal illegitimate purposes. Civil acts that are null and void shall not be legally binding from the very beginning.

Economic Contract Law

§

7I(ii)

   The following economic contracts are null and void :   1) contracts that violate the law or administrative regulations; 2)

contracts that are signed through the use of fraud

, duress or similar means;   3) contracts signed by an agent who exceeds the scope of his power of agency or contracts signed by an agent, in the name of his principal, with himself or with another person whom he represents; and 4) economic contracts that violate the interests of the state or the public interest. Economic contracts that are void, from the time they are concluded, have no legally binding force. When a part of an economic contract is confirmed to be void, if the validity of the remainder is not affected, the remainder shall still be valid. A void economic contract shall be confirmed by the people's courts or arbitration agencies.

Technology Contract Law

§

21I(iv)

  The following technology contracts shall be invalid :     (1) Those which violate the law or regulations or which are harmful to the national or common social interest; (2) Those which illegally monopolize or obstruct the progress of technology; (3) Those which violate another's legitimate rights or interests; and (4)

Those concluded by way of deception

or coercion.

An invalid contract shall have no legally binding force from the time it is made. The invalidity of a portion of a contract shall not affect the remainder of the contract which shall retain its validity.

Foreign Economic Contract Law

§

10

 Contracts concluded by means of fraud or under duress are invalid .

Contract Law

§

52(i)

 A contract is invalid in any of the following circumstances:  (i)

One party induced conclusion of the contract through fraud or duress, thereby harming the interests of the state

;     (ii) The parties colluded in bad faith, thereby harming the interests of the state, the collective or any third party; (iii) The parties intended to conceal an illegal purpose under the guise of a legitimate transaction; (iv) The contract harms public interests; (v) The contract violates a mandatory provision of any law or administrative regulation.

Contract Law

§

54II

   Either of the parties may contract if: petition the People's Court or an arbitration institution for amendment or cancellation of a  (i) the contract was concluded due to a material mistake ;  (ii) the contract was grossly unconscionable at the time of its conclusion.

If a party induced the other party to enter into a contract against its true intention by fraud

or duress, or by taking advantage of the other party's hardship,

the aggrieved party is entitled to petition the People's Court or an arbitration institution for amendment or cancellation of the contract

.

Where a party petitions for amendment of the contract, the People's Court or arbitration institution may not cancel the contract instead.

Article92 of ROC Civil Code

  An expression of intent which is procured by fraud or by duress may be revoked by the expresser.If the fraud was done by a third party, the expression may be revoked only under the circumstances that the other party knew, or might know the affairs.

The revocation of an expression of intent on the ground of fraud can not be a valid defense against the bona fide third party.

Article93 of ROC Civil Code

 The right of revocation in the preceding article must be exercised within one year from the date when the fraud was discovered or when the duress ceased.

But it can not be exercised after ten years since the expression of intent.

Article 96 of Japan Civil Code

 A declaration of intention induced by fraud or duress is voidable.

 If a third person has committed fraud inducing a party ’ s declaration of intention to another party, such declaration of intention may be avoid only if such other party had knowledge of the fraud.

 The revocation of a declaration of intention on the ground of fraud can not be set up against a third party who has acted in good faith.