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November 14, 2012

The protection of the bona fide third party in a voidable transfer of property

There are some cases where a contract between a seller and a buyer is avoided even though the latter sell it again to a bona fide third party. Is the second contract voidable ? Does the third party have to return the object ?

The questions introduce two issues. The first issue concerns the equity, do we have to protect the bona fide third party, and consider the second contract is still valid ? It would be fair to ensure a protection, but it would be against the contractual principle under which the first transfer has not been executed, so the buyer would not have been entitled to sell the object again.

The second issue concerns the principle of stability of the transaction. According to this principle, everything must be done to ensure the validity of a contract, and its consequences. To void the second contract makes the contractual relationship in generally unstable because a chain reaction can start.

The abstract transfer system will all the time protect the bona fide third party and ensure the stability of the transaction, because the legal act of transfer is independent from the contract. The void of the contract does not have consequence on the transfer of rights, so the seller is still entitled to sell the object again.

The causal transfer system is not as clear as the abstract. A strict application of this system makes both contracts avoided. But in few national laws (as in France), there is an exception when the third party acted in good faith (But in any case, there is an exception to ensure the stability of the transaction.). In Common law, the exceptions are more strict.

I think the abstract transfer system is the system which provides the best solution regarding to the fact that it protects the bona fide third party, and ensure the stability of the transaction.

Source : Erp, S. Van, and B. Akkermans, Property Law: Ius Commune Casebooks for a Common Law of Europe (Hart Publishing Limited 2012)

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