Defects of consent: Brief concept, consequences.

To properly start this article, it’s necessary to make a brief mention of the “defects of consent”. These are facts that could change the consent of the contracting party when appearing. Thus, its appearance could make the contract null or avoidable, depending on the circumstances.

The following terms are what we call defects of consent: error, wilful misconduct and intimidation. However, in our article we are going to focus on the error, and more precisely, on its relationship with the stocks and shares trading of a company that projects a false image of its financial status.

Loyal company image on stocks and share trading.

But what happens when we buy stocks and share from a company and its current status is not what we were promised it would be? Until quite recently, jurisprudence blamed the buyer. This means our Courts considered he should have been better informed, he should have know it was not a good trade. And so it was the buyer the one who had the responsability of analyzing the provided documents and information in a more thorough way.

However, step by step, new jurisprudence has been emerging, and it’s contrary to this previous statements. For example, the Supreme Court Ruling (STS) 366/2013, June 6th, and Provincial Court Ruling (SAP) 284/2014, June 11th. We consider both really interesting and highly informative because they focus on the sellers responsability.

Uncertain and misleading precontractual information (STS 366/2013).

This ruling is very useful in terms of comprehending when it’s considered that the defects of consent have produced in the situations we are analyzing. In this case, a number of stocks were bought. At first, some information was provided through information booklets. Then, a meeting was held, in which a number of tax benefits and financial benefits were mentioned. The information received in this meeting made the buyer decide it was a good trade, and he proceeded with the operation.

After the contract signing, the buyer claims there were many unfair terms on the contract, as well as generic terms that he shouldn’t comply with. But most importantly, it was the seller the one who didn’t comply with his promises in terms of benefits and stimated results. Most of them were related to this precontractual phase.

Thus, our Supreme Court makes a number of statements. First of all, it stablishes when it can be considered that a defect of consent has been produced by saying that giving misleading and false information about the qualities of the product produces in fact a defect of consent by error.

The Supreme Court considers the information provided was deeply related to the subject of the contract. That’s why this information made the buyer enter this contract and gives his consent. This statements made the Supreme Court consider it was the information provided essential for the buyer to enter the contract and that’s why the Court states that without this information that later turned out to be fake, the buyer would never had signed the contract.

This information not only promised uncomplied terms, but also had wrong information that helped project false and misleading financial image of the company.

That’s why the Court states that although the buyer has a duty of being informed, the seller also has the duty to inform. This makes asking the buyer to be specially diligent unreasonable. The buyer can’t be asked to enter a contract while lacking of trust in it.

For all these reasons, our Supreme Court considers that the defect of consent produced by an error on the key circumstances of the contract causes the mentioned contract to be null. The false, misleading and wrong precontractual information given made the buyer sign a contract that he would never had signed if he hadn’t been lied.

Ocultación de información determinante (SAP Orense 284/2014)- Withholding key information (SAP Orense 284/2014).

In this ruling, the sellers were the ones that asked for the buyer to be forced to comply the signed contract. In the contract, the buyer agreed to the acquisition of 560 stocks, meaning the 33,38% of the total stocks of the company.

However, the buyer decided to not comply the contract because of a very concrete circumstance, this being the lack of information and the wrongful information that was provided by the sellers. He stated that the seller never mentioned the real status of the company, making him believe that the actual circumstances of the company were different so he would buy the stocks. Actually, the company was about to make a capital increase to try and decrease its debts. This capital increase would putt he buyer in two different situations: He would see his number of recently bought stocks decrease due to the new issued stocks, or he would have to spend more money in order to mantain the percentage of stocks he owned when he bought the stocks. In addition to the previous, the company ended up entering the bankruptcy procedure.

The Orense AP makes the following statements: Sellers withheld essential information which was relevant for the buyer to decide to enter the contract. The sellers intention was to get rid of these stocks, which got also proved by the rush they had when they asked the buyer to pay the amount agreed days ahead of schedule.

This circumstance, as we have seen, was essential when it comes to the buyer making the choice of wether he should enter the contract or not. In the end, the capital increase didn’t happen, but this fact is irrelevant due to it being fundamental in the decision making momento. Thus, the errorand subsequently the defect of consent are evident. Finally, the AP of Orense declares the mentioned contract null.

Conclusions

We have to mention a number of conclusions. Nowadays, it’s clear that the jurisprudence has changed the way they assign responsability. The buyer doesn’t have the responsability weight anymore.

Short note: What happens with M&A’s Due Dilligence?

In this Due Diligence, as we know, the seller takes full responsability for providing the information asked. Thus, he must not withhold information, lie about it or modify the information about his company so the buyers decide to sign the contract.

In Due Diligence processes, the buyer tries to obtain as much information as possible. With that information, he will decide wether he buys the targetted company or not, and which are the main terms of the transaction. Thus, wrong and misleading information would produce a defect of consent like the ones we’ve seen before.

The consequences of this defect of consent are clear: The contract would be null and the buyer would have the right to ask for a damages compensation. It’s also necessary to clarify that if the contract has a penalty clause, this clause would also be null and cease being valid.

The information provided is essential in stocks and share trading. Everything that’s included in such information will be crucial for the buyer to decide if he wants to sign the deal or not. Thus, our Courts have decided to protect them of certains proceedings, such as withholding information or providing wrong information. Becoming a part of a company whose financial status is different of the status promised is not a buyer responsability anymore. That’s why now it’s being treated as a defect of consent by error. With this defect, the contract is considered null and a damages compensation is appropiate to claim.