A contract concluded to the detriment of the principal

In Decision No. 439 of 20 March 2012 in Civil Case No. 23/2011, the Supreme Court of Cassation held that a representative authorised to negotiate the price must exercise that authority with the care of a prudent owner, which in this context means contracting at the average market price. The freedom to negotiate conferred by a power of attorney is not a licence to disadvantage the principal. It allows the representative to assess market conditions flexibly in the principal’s interests.

According to point 3 of Interpretative Decision No. 5 of 12 December 2016 in Supreme Court of Cassation Case No. 5/2014, a contract concluded through collusion between the representative and a third party to the detriment of the principal is ineffective against the principal and does not produce its intended legal consequences. Article 40 of the Obligations and Contracts Act requires two elements: a contract detrimental to the principal and an understanding between the representative and the third party to the principal’s detriment. Whether the contract is detrimental depends on all the circumstances bearing on the principal’s interests and the representative’s reasons for concluding it. The harm may take different forms: terms unfavourable in the economic circumstances, an unjustified burden on the principal’s assets, or misuse of powers, even within the scope of the authority granted. In addition to harm, the second element must be present: collusion between the representative and the third party. Article 40 does not presume bad faith on the part of the third party. A principal who alleges it must prove it. Intention is assessed on all the evidence concerning the circumstances of the contract, including a combination of indirect evidence sufficient to support an inference of collusion to cause harm.

In Decision No. 21 of 24 March 2015 in Civil Case No. 3529/2014, the Supreme Court of Cassation gave examples of such circumstantial evidence. The representative and the third party may be close relatives to a degree giving rise to a statutory presumption of knowledge of the harm (Article 135(2) of the Obligations and Contracts Act) or an interest in the outcome (Article 172 of the Code of Civil Procedure), including a relationship entitling a witness to refuse to testify (Article 166(1), point 2, of that Code). Long-standing business dealings may indicate familiarity with the representative’s affairs. Subsequent dealings with the subject matter may show that the third party knew of and took advantage of the economic circumstances. The third party may transfer title back to the representative, or other acts may suggest that the transaction was concluded in collusion to harm the principal. In every case the evidence as a whole must firmly establish that the principal was harmed through collusion between the representative and the third party.

This article is not a legal opinion or advice on any particular situation or person. For legal assistance in a similar case, consult a civil lawyer familiar with the case law on the Obligations and Contracts Act.