Mistake in the formation of contract under the Swiss-Turkish Law of Obligations

The subject of this study is mistake in the formation of contract under the Swiss-Turkish Law of Obligations. Rules on mistake are reflected in Article 30 ff. of the Turkish Code of Obligations (TCO, and correspondingly Article 23 ff. of the Swiss Code of Obligations, SCO) under the heading of "defects of consent". Mistake (Irrtum), as a civil law institution, has not been examined in any work, monography, or thesis in the Turkish doctrine in a way so as to take account of every aspect and interactions with other legal institutions thus far. Accordingly, the primary objective of this study is to fill the given gap in the doctrine, and thus to improve the legal practice. To this end, the conceptual framework, legal characteristics and basis, theoretical background, relations with other legal institutions and legal consequences of mistake will be analyzed, and in line with this purpose, several criticism and suggestions will be made de lege lata as well as de lege ferenda. Mistake is defined as the lack of true representation of reality regarding certain facts at the time of concluding contract. This definition encompasses all situations where a mistaken party enters into a contract under a wrong representation (misapprehension) or ignorance. Nevertheless, as the nature of mistake suggests, in case mistaken party is aware of her/his mistake at the stage of contract formation or she/he has a suspicion as to whether her/his representation is not accordance with the reality, then this leaves no room for the possibility of "mistake". With respect to mistake, the following examples can be given: A buys a painting in the belief that it has been painted by a renowned painter, yet later on discovers that the painting is fake; or one who buys a precious Chinese vase as a wedding gift for her friends and then finds out that the engagement has already been broken; a landlord, while giving the rental price for his apartment to a tenant, says rashly 500 TL per month, instead of saying 500 Euro per month. At this point, these crucial questions, which are directly linked to structure of mistake, then arise; would it be possible for the mistaken party to bring that contract to an end on the grounds of mistake? If yes, what are the conditions for this? Having regard to whether the historical development of mistake or the related rules in the modern law systems, the answers to questions on what conditions should be fulfilled in order for mistake to affect the validity of the contract and what consequences would then arise depend on the way how the conflict between two basic principles has been reconciled by the legal system. To put it differently, rules on mistake, in its core, reflect the legislator's preference as to how the compromise has been reached between opposite interests of the parties to a contract, which are encapsulated in these two principles: "the individual autonomy" (the principle of will, Willensprinzip, Privatautonomie), which favors the interests of the mistaken party, and "the principle of good faith" (more specifically, the principle of trust, Vertrauensprinzip), which protects the non-mistaken party's interests (and from a broader perspective, it serves to maintain the stability of transactions). All modern law systems have been trying to strike a fair balance between those principles in various ways, and under certain conditions and limitations, granting the mistaken party a relief to release from the contract. Mistake and formation of a contract are substantially connected in some ways, because in order for rules on mistake to apply, first of all, there must be a concluded contract. Hence, the fact that declarations of intention (will) are interpreted as per the principle of trust plays a key role at this point. In particular, a mistake in declaration emerges only if a contract is formed on the basis of normative consensus (i.e. there is a conformity between offer and acceptance in a normative sense). In this regard, in the event of any legal dispute, first, declarations of intention of the parties to a contract should be interpreted and the content of the contract should be established so as to ascertain whether a mistake in declaration exists or not. In the doctrine, this principle is called "priority of interpretation over rescission". Swiss-Turkish law adopts the classical approach regarding the categorization of mistakes. There are two types of mistakes; mistake in motive (Motivirrtum) and mistake in declaration (Erklärungsirrtum). The former occurs when the mistaken party, while intending to enter into contract, assumes that a certain fact, which is essential to that contract, to exist or not to exist. However, as her/his assumption does not correspond to reality, she/he labors under mistake in motive. In this case, there is no discrepancy between the real intention and the declaration of intention of the said party who is mistaken in motive. Rather, the discrepancy arises between the motive of the mistaken party and the reality, and thereby only the formation of intention is vitiated by that defect. In mistake in declaration, the defect comes into existence at the stage of declaration of the intention, and thus it gives rise to the discrepancy between real intention and declaration of the mistaken party. According to TCO art. 30 (SCO art. 23), in order for a mistake to affect the validity of a contract, the mistake is required to be fundamental (wesentlich). Fundamental mistake is a mistake, which the legal system considers it so serious as to result in voidability of the contract. As such, if the conditions for "fundamentality" (Wesentlichkeit) are satisfied, the mistaken party, by exercising the right to rescind, may render the contract retrospectively void (with ex tunc effect) from the beginning. Fundamental mistakes in motives fall into two main categories. Mistakes about the characteristics of the object of the contract or the person related to the contract are termed as "fundamental mistake in characteristics" (Eigenschaftsirrtum). Mistakes about other matters not related to characteristics are named "mistake in basis of contract" (i.e. fundamental mistake in circumstances, Grundlagenirrtum). Whilst the former is contained within the content of the contract, the latter is not deemed to be part thereof. With respect to fundamental mistake in motive, TCO art. 32 (SCO art. 24/1 subpara. 4) lays down the conditions for fundamentality as follows: (i) mistake in motive must be concerned with a certain fact; (ii) that certain fact must be regarded as necessary basis of the contract (subjective fundamentality); in other words, had the mistaken party known that the decisive motive was erroneous, she/he would not have concluded that contract or would not have made it under existing terms; (iii) the subjective fundamentality of the mistake must be discernable to the other party, i.e., there must be the case where the other party knew or could reasonably be expected to have known of the decisive motive; and (iv) according to the prevalent considerations in transactions and the principle of good faith, that certain fact on which the mistaken party has erroneous assumption must be deemed to be basis of the contract. In the doctrine and legal practice, mistakes in motive are referred to as different names taking into consideration the certain common features, such as mistake in calculation, mistake in value, mistake in law and mistake in ability to pay. As for mistake in calculation, the mistaken party, when forming her/his intention (will), commits mistake about arithmetic operations like subtraction, addition, for instance, she/he miscalculates certain cost items. In case of mistake in value, the subjective value ascribed by the mistaken party to the object of the contract does not match up with the real (objective) value of that object. As regards mistake in law, the contract is concluded as a result of misunderstanding or being unaware of a law in force (namely applicable legal rules). In the event of mistake in ability to pay, a creditor makes a contract on the erroneous assumption concerning the solvency of the debtor. It is possible that these mistakes, albeit rare in practice, may be quailified as mistake in basis of contract, provided that the conditions of fundamentality are met. As with mistakes in motive, for mistakes in declaration to lead to voidability of the contract, they must be fundamental. Under TCO art. 31/1 subpara. 1-5 (SCO art. 24/1 subpara. 1-3), some types of mistakes in declaration are enumerated in an exemplary way. Consequently, it is likely that another type of mistake in declaration which is not set out specifically under this article could come into view. Irrespective of any type of mistake in declaration, in order to rescind the contract owing to the mistake in declaration, that mistake must be fundamental from both subjective and objective aspects. Having said that, the types of mistake in declaration laid down in the given article are presumed to be fundamental. Correspondingly, the other party can prove the opposite. On the other side, where any type of mistake in declaration which is not indicated in the given article emerges, the mistaken party seeking to rescind the contract must establish that the mistake in question is fundamental both subjectively and objectively. What is meant by the subjective fundamentality is that the mistaken party, but for the mistake, would not have made the contract or would not have concluded it under same terms. As regards the objective fundamentality, according to the prevalent considerations in transactions and the principle of good faith, the discrepancy between the real intention and the declaration of the mistaken party must be so significant that the rescission of the contract can be considered justifiable. Under certain circumstances, the conditions for application of both mistake and seller's warranty for defective goods (TCO art. 219 ff., SCO art. 197 ff.) may overlap in the same dispute. This is the case, for instance, where the object of the sales contract is specifically assigned, i.e. a specific good, and at the time of the contract formation, the mistaken party's motive pertaining to the characteristics of the good does not correspond to the characteristics which the good bears in fact. In other words, that the delivered good does not comply with the characteristics which are specified by the seller or which are not fit for the ordinary or particular purposes also shows that the buyer is mistaken in characteristics. In situations where the rules on mistake and warranty for defective goods are applicable at the same time, the buyer, at her/his own discretion, may exercise the alternative rights emanating from the breach of warranty or rescind the contract because of the mistake. That is to say, in such cases, the remedies for mistake and for breach of warranty compete with each other. Along with the dominant view in the doctrine, the settled case law of both The Swiss Federal Court and the Turkish Supreme Court adopts this approach as well. It has been debated whether the erroneous motives regarding future facts which materialize after the formation of contract are treated as mistake in basis of contract (i.e. fundamental mistake in motive). According to the view in the doctrine, to which the present author adheres, the sphere of application of rules on mistake comprises merely the certain facts which are existing at the time of the contract formation. In the light of the arguments which we have put forward in the study, this view not only redresses the fair balance between the competing interests of the parties, but also offers more satisfying results in practice. Thereby, issues concerning changes of circumstances which unexpectedly take place after the contract formation should be tackled, on a case-by-case basis, through "disappearance of the basis of the transaction" (TCO art. 138, TCC art. 2, Wegfall der Geschäftsgrundlage) and "condition" (TCO art. 170 ff, SCO art. 151 ff, Bedingung). Pursuant to Swiss-Turkish law, the legal effect of the fundamental mistake is voidability of the contract (Anfechtbarkeit). As such, there are two alternatives for the mistaken party: either (i) to rescind the contract within one year from the time when she/he finds out the mistake or (ii) to confirm the contract (Genehmigung). There are diverse views among authors in respect of how the legal status of the contract during the period in which the contract is not yet rescinded or confirmed should be classified. These could be listed in the following way: "the invalidity theory" (Ungültigkeitstheorie), "the divided invalidity theory" (geteilte Ungültigkeitstheorie) and "the rescission (avoidance) theory" (Anfechtungstheorie). In the light of the arguments which we have presented in this study, the rescission theory appears to be the most tenable and suitable one. Under this theory, in case of fundamental mistake, the contract is valid for both parties from the beginning unless and until it is rescinded. In this case, the validity is deemed not to be conclusive, by contrast, this is the validity which is under the threat of being rescinded; namely, the reversible validity. The mistaken party exercises her/his right to rescind through a unilateral declaration of intention, i.e. declaration of rescission. Once the declaration of rescission is effected by notice to the other party within the limitation period of one year, the contract becomes retrospectively invalid from the beginning. In the event that the mistaken party confirms the contract, the validity of the contract becomes conclusive, which in turn, the possibility of being rescinded on the basis of the same mistake no longer exists. The confirmation of the contract may be performed in two ways. First one is that the mistaken party, within one-year period, declares her/his wish to be bound by the contract expressly or impliedly. Second one is that, whether or not she/he has intention to confirm, she/he fails to rescind the contract within one-year period, and the contract is thus regarded to be confirmed by virtue of law. The right to rescind is, in view of its legal effects, classified as a formative right (right to influence, Gestaltungsrecht). For the declaration of rescission to be effective, it needs not to be made in any particular form, that is to say, the declaration of rescission may take any form to produce legal effects. In addition to this, it may be effected both expressly and impliedly. The mistaken party must use the right to rescind in a manner complying with the principle of good faith (Treu und Glauben, TCO art. 34, SCO art. 25). If she/he fails to do so, then this is regarded as an abuse of right, and thus the declaration of rescission does not create any legal effects. However, according to TCO art. 34/2 (SCO art. 25/2), it is possible that the other party may preclude the contract from being rescinded by exercising his/her right to cure. In order to exercise this right, it suffices for the other party to accept the contract according to the real intention of the mistaken party and to make a declaration to that effect. In cases where the fundamental mistake affects only a particular part of the contract, subject to the conditions set out in TCO art. 27/2 (SCO art. 20/2), the partial rescission comes into question. Accordingly, the effect of the rescission is limited to defective part and the remaining contract is upheld. In cases where there is a continuing contractual relationship between the parties, to exercise the right to rescind leads the contract to be terminated prospectively (with ex nunc effect). This is because, rescinding this sort of contractual relationships retrospectively, in which the stage of performance has already begun, would pose inconvenient consequences, especially having regard to interests of the parties and some complexities resulting from the restitution. Once the contract is rescinded, the relationship between the parties will turn into restitutionary relationship (Rückabwicklungsverhältnis). The final aim of the restitution is to return to the former position as if the contract had not been concluded (i.e. status qua ante), that is to say that parties should be placed in the position which they would have been in had the contract not been concluded. In the restitutionary relationship, in an attempt to return performances which have already been carried out, the parties make a claim against each other on the basis of either unjust enrichment or recovery of property, depending on the circumstances. Swiss-Turkish law adopts fault-based liability of the mistaken party. In this regard, if the mistaken party, who has exercised the right to rescind, falls into mistake as a result of her/his own negligence, that is to say, the mistake which has triggered the rescission of the contract is attributable to the mistaken party, she/he is obliged to pay damages to the other party for any loss arising from the rescission in accordance with TCO art. 35 (SCO art. 26). The mistaken party's obligation to compensate roots in culpa in contrahendo liability. The extent of damages which the mistaken party must pay to the other party is, in principle, to be determined on the basis of the amount of negative damages (reliance interest). Yet, in cases where the equity requires, the judge may award further damages which could exceed the negative damages or even rise to the amount of positive damages (expectation interest) to the other party (TCO art. 35/2, OR art. 26/2). If the other party, at the time of contract formation, knew or could reasonably be expected to have known of the mistake, as a principle, she/he is not entitled to claim any compensation from the mistaken party (TCO art. 35/1 sent. 2, SCO art. 26/1). This rule can only apply to mistakes in motive. Because, in situations where the other party knew or should have known of the mistake in declaration, application of the rules on mistake is excluded by means of the interpretation of the declarations of intention based on the principle of trust as per TCO art. 1 (SCO art. 1). When such is the case, there exists two possibilities: either the contract is not concluded because of nonconformity between the parties' real intentions or the contract is concluded according to the real intention of the mistaken party.