Evasion of Law
by Kurt Siehr
1. Concept
Evasion of law (fraus legis, fraude à la loi, Gesetzesumgehung, frode alle legge, fraude de ley) is committed either if law is used for purposes for which it is not designed (evasion, Gesetzeserschleichung) or if the application of law is avoided by intentionally not fulfilling the necessary requirements for its application (avoidance, Gesetzesvermeidung). Both cases come down to a related question whether a legal norm still applies where the normal requirements of application are, respectively, fulfilled or not fulfilled. The problem of evasion of law is essentially a problem of construction of legal norms (interpretation of statutes) and in most cases a problem of interpretation of mandatory legal provisions.
Most jurisdictions do not have a general prohibition on evasion of law. Such a prohibition is, however, contained in the Spanish Código civil Art 6 No 4. There it reads: ‘Los actos realizados al amparo del texto de una norma que persigan un resultado prohibido por el ordenamiento jurídico, o contrario a él, se considerarán ejecutados en fraude de ley y no impedirán la debida aplicación de la norma que se hubiere tratado de eludir.’ (‘Acts realized under the protection of the text of a norm that seek a result prohibited by the legal order, or which is contrary thereto, shall be considered in fraud of the law [en fraude de ley] and shall not prevent the appropriate application of the law sought to be evaded.’) Most jurisdictions do not contain a general prohibition but provide specific indications when a legal norm or structure of norms otherwise demands application by certain means.
It is notable that evasion of law appears to be a private law concept, because in public law—notwithstanding the rules of tax law and the problem of tax fraud and tax avoidance—there are very few cases of evasion of law. This observation can be explained. The state is subject to the rule of law (Gesetzmässigkeit der Verwaltung), ie public authorities are only permitted to act against the citizen if there is a statute authorizing such an act. The application of law by analogy is prohibited. On the other hand, private citizens frequently seek to abuse public law (especially immigration law) by misusing private law (marriage, adoption, acknowledgment of paternity). In order to prevent this, benefits conferred by the public law should either be made independent of private law actions, or such private law actions should be negated as an evasion of law.
This contrast between private law and public law may also be expressed in the following manner: while in private law judges may amend deficient statutes and laws through expansive interpretation or by creating new rules of case law, public law is strict and courts are not allowed to correct deficient law but instead have to wait until the legislature reacts to such inadequacies.
Evasion of law is a special instance of the much broader concept of abuse of law (abus de droit, Rechtsmissbrauch, abuso del diritto, misbruik van rechten, abuso del derecho). Law is evaded where there is no statute that is fully applicable to the situation, whereas law is abused in cases where there is a fully-fledged statute but it is applied beyond its normal field of application. There are jurisdictions that prohibit such an abuse of law in general (Art 2 Swiss Civil Code: ‘The open misuse of a right finds no protection in the law’) or in specific situations that are often abused (eg § 1353(2) German Bürgerliches Gesetzbuch (BGB): abuse of matrimonial rights) and thereby also prohibit any evasion of law (Hans Merz in Berner Kommentar zum Schweizerischen Zivilrecht (1962), Art 2 Swiss Civil Code (ZGB) margin notes 88 ff). In general it can be said that in many civil law countries the abuse of law is sanctioned as a failure to act in good faith and may even be qualified as tortious behaviour which obliges the tortfeasor as the person abusing the law to pay damages (see § 1295(2) Austrian ABGB).
An individual who attempts to evade the law wants his actions to have legal effect to avoid concluding a sham transaction (simulation, Scheingeschäft, simulazione). A sham transaction only aims to simulate a valid transaction although the valid transaction itself is not intended. It is void (eg § 117(1) BGB, Art 138 Greek Civil Code; Art 1414(1) Italian Codice civile; § 916(1) s 1 ABGB).
Legal transactions that evade the law are null and void, see eg § 134 BGB; Art 1344 Codice civile on contracts that are concluded in frode alla legge.
2. National substantive law
Almost every jurisdiction prohibits an abuse of law (abuse of law, Rechtsmissbrauch, fraude à la loi, frode alla legge, misbruik van rechten, fraude de ley) and thereby also forbids evasion of law. Some jurisdictions formulate general rules on this and provide: ‘The open misuse of a right finds no protection in the law’ (Art 2(2) Swiss Civil Code; similarly, Art 6(4) Spanish Código civil). There are other jurisdictions, however, that are satisfied with designating certain special cases of abuse of law: § 1353(2) BGB on abuse of matrimonial rights; § 306a, § 312f s 2, § 487 s 2, § 506 s 2 and § 655e(1) s 2 BGB on the evasion of general terms of contract and of consumer protection provisions; Art 3:13(1) and 3:44(4) Burgerlijk Wetboek (BW) on evasion of rights and abuse of circumstances; Art 1344 Codice civile on contracts evading the law; § 1295(2) ABGB on evasion as delict. In other jurisdictions abuse of law is prohibited as a violation of good faith (§ 242 BGB).
This survey shows that legislatures evidently refrain from dealing with the evasion of law at the beginning of a codification. There is a good reason for this as no one can really define in advance when there is fraud or evasion of law. Therefore many codified systems of law are satisfied with prohibiting the evasion of law in specific situations and to rely in all other situations on a general provision that all legal actors refrain from acting in bad faith. In addition, legislatures do not want to limit rights and to formulate unclear limitations at the very moment such rights are granted. A person who is entitled to a right and is protected by law is allowed to exercise that right and to enforce it. Only in a limited number of situations is one prevented from doing so because exercising the right would be contrary to good faith.
The following are some typical cases of evasion of law and fraud:
In Swiss law title cannot be transferred as security (Sicherungseigentum) because such a transaction seeks to evade the system of pledges for movable property. Transferring the title as security while leaving the item in the possession of the debtor evades the pledge system (where the object is in the possession of the creditor) and therefore violates the law.
In many jurisdictions marriages are concluded with the intention not of enjoying marital life and assuming obligations as a spouse, but rather obtaining certain public law advantages granted to foreigners married to local citizens. Such marriages may be declared null and void (eg § 1314(2) No 5 BGB; Art 105 No 4 Swiss Civil Code).
Divorced spouses choose not to re-marry because they do not want to lose any right against the divorced husband/wife for post-marital support (eg Art 130(2) Swiss Civil Code). But if the divorced spouse lives with a partner continuously for five years and does not marry, the divorced support debtor may stop paying maintenance (eg Swiss Federal Tribunal 20 January 1983, BGE 109 II 188; 7 July 1988, BGE 114 II 295) because the claim for support would be qualified as fraud and is prohibited by law (Art 2(2) Swiss Civil Code).
In common law countries there seems to be no general prohibition against evading the law. The term ‘evasion of the law’ has been applied in cases where the question arose whether a person evaded the law by his actions. In contrast to continental-European civil law countries, common law countries are more cautious in qualifying a transaction as being an evasion of law. This may be explained by the different structure of the common law. The legislature, acting to limit the application of common law, must express itself particularly clearly, and expressly provide that the statute governs even those situations that do not fall within the statutory language. If the legislature does not so provide, common law continues to be applicable.
In the religious law of Judaism and Islam, holy law is applied very strictly according to the wording of the Holy Scriptures. Evasion of law is not covered by the Scriptures; however, it may be decided by construction that the situation is also covered by the holy law. Religious law is rather strict and rigid, therefore state law is necessary and state authorities regulate these situations.
3. Private international law (PIL)
There are very few private international law (PIL) statutes with an expressly formulated prohibition on evasion of law. The most modern version of this kind is Art 18 of the Belgian Code de droit international privé. This article reads: ‘Pour la détermination du droit applicable en une matière où les personnes ne disposent pas librement de leurs droit, il n’est pas tenu compte des faits et des actes constitués dans le seul but d’échapper à l’application du droit désigné par la présente loi.’ (‘For the determination of the applicable law in a matter where parties may not freely dispose of their rights, facts and acts committed with the sole purpose of evading the application of the law designated by the present statute are not taken into account.’) Well known is also Art 21 of the Portuguese Código civil, which reads as follows: ‘Na áplicação das normas de conflitos são irrelevantes as situações de facto ou de direito criadas com o intuito fraudulento de evitar a aplicabilidade da lei que, noutras circunstâncias, seria competente.’ (‘When applying conflicts rules, those factual or legal situations are irrelevant which were created fraudulently in order to evade the law normally applicable under other circumstances.’) The same formula may be found in the PIL of the former Portuguese colonies of Angola (Art 21 Código civil) and Mozambique (Art 21 Código civil). Similar rules on evasion can also be found in francophone Africa (Art 1011 Code des personnes et de la famille of Burkina Faso; Art 829 Code civil de la famille of the Republic of Congo and Art 30 Tunisian Code de droit international privé) and in Latin America (Art 15 No 1 of the Mexican Código civil for the Federal District; Art VI No 22 Código civil of Nicaragua). Most other jurisdictions are satisfied to evaluate individual cases on their merits. These cases are, however, fairly scarce. This is mainly due to three rules. (1) If there are competing heads of jurisdiction, the plaintiff may start proceedings under one of them and thereby choose the PIL rules without being said to have chosen them artificially. (2) The decisions given by the court of jurisdiction will normally be recognized in other countries unless they violate public policy. The application of the correct law applicable under the PIL rules of the recognizing state is no longer a precondition for recognition. (3) Individuals genuinely seeking to manipulate connecting factors must do it correctly and not as a sham. In order to escape having to give a statutory share of one’s estate to certain heirs (Pflichtteil, quotité disponible), one has to change domicile completely and move all domestic assets abroad. If the testator establishes his domicile in a country without statutory shares, his estate is governed by the law of his new domicile and the law of the former domicile is no longer applicable.
4. European law
No instrument of the European Union and no existing draft of a European Civil Code contains a provision prohibiting the evasion of European law. The Principles of European Contract Law (PECL) provide in Art 1:201(1): ‘Each party must act in accordance with good faith and fair dealing’. The same is said by Art 1.7(1) of the UNIDROIT Principles of International Commercial Contracts (PICC). A similar approach is found also in the DCFR Art 1-102(3) (Common Frame of Reference), which states: ‘In [the rules’] interpretation and development regard should be had to the need to promote … (b) good faith and fair dealing.’ The Code européen des contrats (Avant projet), drafted and promoted by the Academy of European Private Lawyers in Pavia, is more precise and mentions the limits of good faith only in some articles. These provisions on good faith can also prohibit evasion of law because such evasion is a violation of good faith and fair dealing.
The European PIL of contractual obligations in the Directive on Consumer Law prohibits the choice of an extra-European law if the consumer transaction has close contacts to the law of a EU Member State and insofar as the choice of law enables the evasion of the mandatory rules of the directive which favour the consumer. Article 6(2) of Dir 93/13 of 5 April 1993 on Unfair Terms in Consumer Contracts provides: ‘Member States shall take the necessary measures to ensure that the consumer does not lose the protection granted by this Directive by virtue of the choice of the law of a non-Member country as the law applicable to the contract if the latter has a close connection with the territory of the Member States.’ An example of this provision being implemented in national law can be found in reg 9 of the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083): ‘These Regulations shall apply notwithstanding any contract term which applies or purports to apply the law of a non-Member State, if the contract has a close connection with the territory of the Member States.’ In the Ingmar case of the ECJ (ECJ Case C-381/98 – Ingmar [2000] ECR I-9305), the court held that a commercial agent has a claim for compensation for his services even if the chosen law of a non-Member country does not recognize this claim and European law does not expressly require such compensation as a mandatory term of contract.
5. Public international law
The prohibition of abuse of law is also known in public international law. In certain judgments of the ICJ and the International Court of Arbitration the term abus de droit, ‘abuse of rights’ has been used (eg Barcelona Traction. [1970] ICJ Rep 3, 17; Trail Smelter Arbitration (1949) 3 RIAA 1903 ff). Finally, the UN Convention on the Law of the Sea (UNCLOS) of 1982 provides in Art 300 that the contracting states are to exercise ‘the rights, jurisdiction and freedoms … in a manner which would not constitute an abuse of rights’, that is, in accordance with the general principles of law recognized by civilized nations (see Art 38(1)(c) Statute of the ICJ), which gives effect to the public international law maxim: sic utere iure tuo ut alienum non laedas.
Literature
Harold Cooke Gutteridge, ‘Abuse of Rights’ 5 Cambridge LJ 22 (1933/35); Gustav Römer, Gesetzesumgehung im deutschen Internationalen Privatrecht (1955); Bernard Audit, La fraude à la loi (1974); Mario Rotondi (ed), L’abus de droit, L’abuso di diritto, The Abuse of Rights, El abuso de derecho, Der Rechtsmissbrauch (1979); BW Napier, ‘Abuse of Rights in British Law’ in Rotondi (ed), L’abus de droit (1979), 265 ff; Okko Behrends, Die fraus legis—Zum Gegensatz von Wortlaut- und Sinngeltung in der römischen Gesetzesinterpretation (1982); Jan Schröder, Gesetzesauslegung und Gesetzesumgehung—Das Umgehungsgeschäft in der rechtswissenschaftlichen Doktrin von der Spätaufklärung bis zum Nationalsozialismus (1985); Klaus Schurig, ‘Die Gesetzesumgehung im Privatrecht. Eine Studie mit kollisionsrechtlichen und rechtsvergleichenden Aspekten’ in Festschrift Murad Ferid (1988); Alberto Sols Lucia, El Fraude a la Ley. Estudio analítico del Art 6.4 del Código civil en la Doctrina y Jurisprudencia (1989); Oliver Heerder, Fraus legis—Eine rechtsvergleichende Untersuchung über den Vorbehalt der Gesetzesumgehung in Deutschland, Österreich, der Schweiz, Frankreich und Belgien unter besonderer Berücksichtigung des Internationalen Privatrechts (1998); Alexandre Kiss, ‘Abuse of Rights’ in Bernhardt (ed), Encyclopaedia of Public International Law; Michael Rütten, Die Gesetzesumgehung im internationalen Privatrecht (2003); Martina Benecke, Gesetzesumgehung im Zivilrecht—Lehre und praktischer Fall im allgemeinen und Internationalen Privatrecht (2004); Kerstin Henningsen, Die Umgehung im deutschen und englischen Privatrecht (2007); Rita de la Feria, ‘Prohibition of Abuse of (Community) Law—The Creation of General Principle of EC Law Through Tax’ 45 CMLR 395 (2008); Rita de la Feria and Stefan Vogenauer (eds), Prohibition of Abuse of Law, a New General Principle of EU Law? (2011).
