Laesio Enormis
1. Legal history
The issue as to whether or not a price can be considered to be ‘just’ (iustum pretium) has occupied both philosophy and legal scholarship since antiquity. Following the terminology developed by the glossator Hugolinus (after 1216), reference is usually made to laesio enormis in cases entailing ‘considerable violations’ of equality in exchange. However, ever since the emergence of the concept, it has rightly been doubted whether the objective determination of a just price, paid in exchange for goods or for services, or the provision of a loan etc, is possible in the first place. Nevertheless, there have always been periods when prices were regulated by the state, either by legislation or by the courts and where such regulation was in conformity with the prevalent sense of justice at the time.
While there had been a prohibition on interest rates of more than 12 per cent per annum for loans during the Roman Republic, classical Roman law, as evidenced by D. 19,2, 22,3, expressly provided that sellers and buyers were entitled to take advantage of each other, as long as they did not commit fraud. It was only by way of two constitutions put into place by the Emperor Diocletian in 285 and 293 AD respectively (and not, as is often assumed, by Justinian) that a limitation on contractually agreed prices was introduced in order to protect farmers against rich and powerful land purchasers. In accordance with these constitutions, a seller of real property was entitled to rescind the contract if the purchaser, under the contract concluded with him, had been obliged to pay only half of what the property was actually worth; the purchaser could then only prevent such rescission by making up the difference between the price paid and the just price. Any inquiry into the frame of mind of the parties involved was thus not necessary. These laws were intended to protect impoverished small-holders who, subject to the pressures of inflation and state taxation, were increasingly forced to sell their land far below its real value to the rich and powerful. Having fallen out of use in subsequent times, it was only Justinian who incorporated the laesio enormis into his Codex of 534 (Corpus Juris Civilis, C.4, 44, 2 and 8).
Based respectively on Christian-Aristotelian and natural law conceptions of justice, both medieval canonists and later also natural law scholars recognized the notion of iustum pretium, not only in order to assist impoverished sellers but also disadvantaged purchasers. However, as regards the details of the laesio enormis doctrine, much remained controversial. Thus, for example, there was the issue why the seller should already have a claim to rescind a contract if he had received a price less than half of an object’s true value (ie 50 per cent), whereas the buyer had to have paid a price of more than double the true value (ie 200 per cent)—and not merely of 150 per cent of the true value—before being able to rescind the contract. It further remained unclear whether buyers had to make up the difference between the price paid and the full value of the object concerned or only up to an amount that still satisfied the iustum pretium requirement. Christian Thomasius correctly described the laesio enormis as a hydra generating a new problem for every one that had been resolved. The natural law codifications followed divergent paths: according to the Prussian Allgemeines Landrecht für die Preußischen Staaten (ALR) §§ 58 ff I 11, a disproportion whereby ‘the purchase price exceeds twice the amount of the value of the goods’ was to justify the presumption of a mistake, invalidating the contract and providing for a subsequent right on the part of the purchaser to rescind the contract. On the other hand, Art 1674 of the French Code civil contains—at Napoleon’s insistence—a provision merely for the protection of sellers of real property in cases where the price falls below 5/12 of the true value of that property. § 934 of the Austrian Allgemeines Bürgerliches Gesetzbuch (ABGB), in turn, protects both the seller and the buyer in the event of a ‘reduction in excess of half’.
Conversely, the draftsmen of the German Bürgerliches Gesetzbuch (BGB) pointedly rejected the legal concept of laesio enormis in accordance with other recent codifications of the 19th century. Beyond the prohibition of usury in § 138(2) BGB, which is not based on a specific value being exceeded or undercut, no limitations on the freedom to agree upon a price were established. In this regard, the German Bürgerliches Gesetzbuch (BGB)—just like Art 21(1) of the Swiss Code of Obligations (OR) of 1911—is the result of Immanuel Kant’s philosophy of freedom, and the economic liberalism of the late 19th century.
The history of the laesio enormis has been a permanent back and forth. During certain periods of time, paternalistic and protective legislation was favoured, with prices being scrutinized and regulated while, at other times, more confidence was placed in the autonomy of market participants.
2. Regulatory structures and tendencies of legal development
(a) European legal systems follow mutatis mutandis either the older laesio enormis model of an objective price control—first instituted by Diocletian in his constitutions―or the more recent model favoured by the Swiss Code of Obligations (OR) and the German Bürgerliches Gesetzbuch (BGB) protecting the weaker party against unconscionable exploitation (‘usury’). The first model presumes the parties to have intended to agree on a ‘just’ price. For this reason, the disadvantaged party is to be entitled to rescind the contract on the basis merely of a deviation of the price agreed upon from the just price, as long as that deviation exceeds a certain limit. In addition to a significant disproportion between performance and counter-performance, the more recent model, on the other hand, an objectionable conduct on the part of the party benefiting from the transaction, particularly in the form of exploitation of a predicament, of an emergency situation, or of a position of superiority. However, it needs to be borne in mind that evidentiary requirements for such conduct vary widely.
The two models also differ with regard to the legal consequences. In most cases the disadvantaged party is granted the right to rescind the contract, or the contract is considered to have been void from the outset. Occasionally, it is still provided that the party benefiting from the contract can prevent rescission of the contract by making up the difference in price. Avoidance of the contract due to fraud or duress also always remains possible.
(b) The most notable proponents of the regulatory model of objective price control are France (and Belgium) as well as Austria. French law provides for the exceptional rescission of a contract, rescission pour cause de lésion, according to Art 1674 of the French Code civil if a seller of real property receives less than 5/12 of the actual value of the property in question. This right of rescission cannot be contractually abrogated; however, the purchaser may prevent termination of the contract by making up the difference in price. In cases of a lesion of more than half, Austrian law also adopts the objective conception of laesio enormis with regard to exchange transactions and likewise grants the party that benefits from the contract the right to prevent its rescission by making up the difference in price (§§ 934 ff ABGB). Surprisingly, the Austrian Consumer Protection Act of 1979 declared this provision to be mandatory, regardless of whether or not the disadvantaged party is a consumer. However, exceptions are made for, eg, gambling, settlements and mixed donations.
The most notable proponents of the second, more liberal regulatory model requiring a subjective element in the form of deliberate exploitation are Germany, Switzerland, Portugal, Spain, the Netherlands, Italy, and England. According to § 138(1) BGB, transactions contra bonos mores (illegality of contracts) are void; and according to § 138(2), transactions with a usurious character are also void. The latter provision requires an obvious disproportion between performance and counter-performance as well as the exploitation of a predicament, inexperience, lack of judgment, or significant weakness of will. This corresponds to Arts 20(1) and 21(1) of the Swiss Code of Obligations (OR) with the only difference that usury according to Art 21(1) OR renders the transaction voidable rather than void. According to the relevant case law, the disadvantaged party may also request adjustment of the contract. The same applies according to Arts 282 and 283 of the Portuguese Código civil. In a similar vain, the Spanish Código civil rejects the laesio enormis. No disparity between performance and counter-performance at all is required by Art 3:44(4) of the Burgerlijk Wetboek (BW), according to which a contract can only be rescinded on the basis of ‘misbruik van omstandigheden’ (abuse of circumstances) on the part of the contractual partner (predicament, dependency, recklessness, abnormal state of mind, inexperience); however, Art 3:54 BW envisages the possibility of adjustment. In contrast, Art 1448 of the Codice civile—similar to the objective conception and the Codice civile of 1865—still requires a lesion of more than half but additionally requires an emergency situation on the part of the disadvantaged party (bisogno), which the other party has exploited. The party benefiting from the contract can prevent its rescission by additional (monetary) performance (Art 1450 Codice civile). English law, according to which even a completely inadequate counter-performance suffices as consideration, also comes to the rescue of disadvantaged parties in cases falling short of fraud and duress through the institute of undue influence. This is particularly the case where a special relationship of trust exists between the parties; a subjective element is therefore required. According to the (less common) doctrine of unconscionable bargains the weaker party may rescind a contract if that party’s poor economic situation or lack of knowledge was deliberately exploited.
(c) The liberal conception of protecting the contractual partners’ autonomy makes the intentional exploitation of a position of weakness, rather than merely a more or less arbitrarily fixed deviation in value between performance and counter-performance a necessary requirement for intervention. This conception established itself in the 19th century and, as has been shown, is now the prevailing model in European private law codifications.
Nevertheless the emergence of a more paternalistic price control system is starting to become evident in several states. On the one hand, the new Art 1114-3 of the Avant-Projet de Réforme du Droit des Obligations et du Droit de la Prescription of the French Code civil from 2005 provides that the procurement of an excessive advantage (avantage excessif) through the exploitation of a predicament amounts to an act of force (violence). On the other hand, and going beyond the old Art 1674 Code civil, the same draft also contains a new Art 1122-2, according to which particularly consumers are protected against a significant imbalance (déséquilibre significatif) between performance and counter-performance by being entitled to demand the modification or setting aside of the relevant contract clause. The Austrian Consumer Protection Act of 1979 with its excessive tendency has already been mentioned. Such a tendency towards an objective price control can also be observed in Germany: in a series of cases concerning consumer loans, the Federal Supreme Court (Bundesgerichtshof, BGH) has since 1981 effectively sidestepped the requirements of § 138(2) BGB, which are generally hard to prove and limited in scope. Contrary to the intentions of the BGB’s draftsmen, the BGH has resorted to § 138(1) in order to invalidate ‘quasi’-usurious transactions. According to the Court’s analysis, an objectively gross disproportion between performance and counter-performance and the reprehensibility of the beneficiary’s conduct are required for the contract to be void under § 138(1) BGB. However, the BGH infers the presence of the latter, subjective, requirement from the presence of the objective one, ie, the gross disparity between performance and counter-performance. Since its leading decision from 19 January 2001 (BGHZ 146, 298), the BGH has extended these principles to contracts of sale. Due to the fact that the BGH no longer even requires the beneficiary to have been aware of the disproportion in his favour, it has de facto abandoned the BGB’s subjective conception and has largely departed from the original model based on freedom of contract. This approach, which has rightly been criticized, has thus far been followed neither by Greece, which knows a provision similar to § 138 of the German BGB in Arts 178 f of the Greek Civil Code, nor by Switzerland.
3. Plans for unification
In accordance with the modern doctrine on the protection of the parties’ autonomy, Art 4:109 of the PECL (just like Art 3:10 UNIDROIT PICC and Art II.-7:207 DCFR) provides that a party may avoid a contract if it found itself in a position of weakness—in particular, economic distress, urgent needs, improvidence, ignorance, inexperience, and lack of bargaining skills are mentioned—and if its contractual partner has taken advantage of that position in a way which is grossly unfair or has taken an excessive benefit. The court may adapt the contract in accordance with the requirement of good faith and fair dealings, both on the request of the party entitled to avoidance and the other party. Article 30(3) of the draft for the Code Européen des Contrats (Avant-Projet) only requires the existence of a ‘disparity’ between performance and counter-performance in addition to the exploitation of the disadvantaged contractual party’s weakness. Alarmingly, according to Art 156(5), an inference as to this latter requirement may be drawn from the circumstances of the case.
Literature
Theo Mayer-Maly, ‘Renaissance der laesio enormis?’ in Zweite Festschrift Karl Larenz (1983) 395; Reinhard Zimmermann, The Law of Obligations (1996) 255 ff; Tony Weir (tr), Hein Kötz, European Contract Law, vol I (1997) 130 ff; Christoph Becker, ‘Abweichen vom Marktpreis’ (1997) 5 ZEuP 475; Martin Pennitz, ‘Zur Anfechtung wegen laesio enormis im römischen Recht’ in Festschrift Theo Mayer-Maly (2002) 575; Kristoffel Grechenig, ‘Die laesio enormis als enorme Läsion der sozialen Wohlfahrt?’ (2006) 14 Journal für Rechtspolitik 14; Boudewijn Sirks, ‘Laesio enormis again’ (2007) 54 Revue Internationale des droits de l’Antiquité 461; Thomas Finkenauer, ‘Zur Renaissance der laesio enormis beim Kaufvertrag’ in Festschrift Harm Peter Westermann (2008) 183; Claude Witz, ‘Napoléon et la lésion dans la vente d’immeuble’ in Festschrift Elmar Wadle (2008) 1239; Miquel Martín-Casals ‘From laesio enormis to Unfair Advantage’ in Festschrift Eugen Bucher (2009) 499.
