Annulment of contract: mistake and fraud

Even after a contract has been entered into, there are still possible ways out. Well-known routes for this are termination, dissolution (ontbinding) and annulment. If information was missing when the contract was entered into, the contract can be annulled on the grounds of the vices of consent: mistake (dwaling) and fraud (bedrog). This blog discusses these vices of consent and the conditions for successfully relying on them.

Vices of consent

A vice of consent exists if a person’s consent and statement correspond, but that person’s consent was not properly arrived at. If the consent was arrived at under the influence of a lack of information due to an incorrect representation of the facts, a contract already entered into can be annulled on the basis of the following vices of consent:

• mistake (Article 6:228 of the Dutch Civil Code); and
• fraud (Article 3:44 of the Dutch Civil Code).

Those vices of consent overlap considerably, but there are also legal differences between them.

Case law review

A review of Dutch case law of courts of first instance (published on rechtspraak.nl) over a period of ten months roughly reveals the following findings.

Mistake

Over 600 cases were appealed on the grounds of mistake. These appeals were allowed in 9% and rejected in 80% of the cases. In the remaining 11% of the cases, the appeals on the grounds of mistake were ultimately not included in the assessment.

Fraud

Over 200 cases were appealed on the grounds of fraud. These appeals were allowed in only 3% and rejected in 70% of the cases. In the remaining 27% of the cases, the appeals on the grounds of fraud were ultimately not included in the court’s assessment.

The numbers seem to confirm that a higher threshold applies for allowing an appeal on the grounds of fraud than an appeal on the grounds of error. This can be explained by the fact that fraud essentially goes a step further than mistake and by the legal differences between these vices of consent.

Requirements for reliance on mistake

Under Article 6:228 of the Dutch Civil Code, an agreement that has been entered into under the influence of mistake can be annulled if:

• the mistake is due to a communication from the non-mistaken party, unless it can be assumed that the contract would also have been entered into without that information;
• the non-mistaken party should have informed the mistaken party of what it knew or should have known about the mistake; or
• the non-mistaken party assumed the same false premises as the mistaken party when entering into the contract (mutual mistake), unless it should not reasonably have understood, even if the facts had been correctly presented, that this would deter the mistaken party from entering into the contract.

Mistake may be a ground for annulment of the contract if the contract would not have been entered into, or would not have been entered into on the same terms, if the facts had been correctly presented (causal relationship).

Successful reliance on mistake requires not only a causal relationship between the mistake and the entry into the contract, but also awareness on the part of the non-mistaken party that the existence of a certain characteristic was of decisive importance to the mistaken party (the awareness requirement); see Dutch Supreme Court 28 June 2019, ECLI:NL:HR:2019:1046 (Renteswaps III).

The mistaken party’s duty to investigate is based on the generally accepted standards referred to in Article 6:228(2) of the Dutch Civil Code. A duty to investigate is more readily assumed for facts that are easy to discover. Established case law provides that the duty of disclosure takes precedence over the duty to investigate. The mere fact that a party does not investigate certain relevant data does not mean that the other party does not have a duty of disclosure with respect to those same data (Dutch Supreme Court 16 June 2000, ECLI:NL:HR:2000:AA6237 (L.E Beheer/Stijnman).

The party that caused the mistake cannot argue in relation to the mistaken party that that party had a duty to investigate (Dutch Supreme Court 15 November 1957, NJ 1958/67 (Baris/Riezenkamp) and Dutch Supreme Court 30 November 1973, NJ 1974/97 (Van der Beek/Van Dartel)).

Requirements for reliance on fraud

Under Article 3:44(3) of the Dutch Civil Code, a contract may be annulled on the grounds of fraud if a party induces another party to perform a certain juridical act by:

• making a deliberately false statement for that purpose;
• deliberately not disclosing a fact that the non-disclosing party was obligated to disclose; or
• using another ‘artifice’ (e.g. withholding crucial information when selling a house).

A causal relationship is also required to rely on fraud as a ground for annulment of the contract: the person would not have entered into the contract, or would not have done so on the same terms, if the fraud had not occurred.

Unlike in the case of mistake, reliance on fraud does not require that the non-mistaken party was aware of the causal relationship between the fraud and the entry into the contract. Fraud may also occur without this awareness. Another important difference is that in the case of fraud a wrongful act is always identifiable. Instead of or in addition to the annulment of the juridical act, the injured party can claim damages from the party that committed the fraud. This is not necessarily possible in the case of mistake.

What about non-essential facts?

Successful reliance on mistake or fraud is not dependent on whether the undisclosed facts relate to the essence of the contract. The concealment of facts that are not the essence of the contract may have caused a party to enter into that contract under the influence of a misrepresentation of the facts, and may justify reliance on mistake or fraud (Dutch Supreme Court 17 April 2020, ECLI:NL:HR:2020:717).

Burden of proof

According to the main rule of Article 150 of the Code of Civil Procedure, the party claiming legal consequences of facts or rights that it has alleged bears the burden of proving those facts or rights. The party seeking to annul a contract on the basis of a vice of consent is under the burden of proof of the existence of the vice of consent in question and of the causal relationship between the provisions of the contract and that vice of consent.

The evidential requirements are less strict when it comes to the causal relationship. It suffices that the party relying on the vice of consent asserts and, if that assertion is disputed, demonstrates that it would not have accepted one or more parts of the agreement without the influence of the vice of consent. It is not a requirement to indicate precisely on what other terms that party would have entered into the contract (see regarding mistake: Dutch Supreme Court 4 September 2009, ECLI:NL:PHR:2009:BH7854 (Van Eendenburg/De Alternatieve) and regarding fraud: Dutch Supreme Court 27 January 1905, W 8175 (Heilgymnastiek).

If the other party argues that it also entered into the contract on the basis of the same incorrect assumption, that is a case of mutual mistake. In that case, the focus is on the arguments rather than the burden of proof. It is therefore possible to gain an evidentiary advantage by also relying on mutual mistake when relying on an incorrect or misrepresented statement.

Conclusion

A contract may be annulled on the grounds of a lack of information by relying on mistake or fraud. These vices of consent overlap significantly, but there are also legal differences between them. Unlike reliance on mistake, for instance, reliance on fraud does not require awareness on the part of the non-mistaken party regarding the causal relationship between the fraud and the entry into the contract.

Depending on the circumstances of the case, mistake or fraud may be relied on by the mistaken party. In the case of reliance on fraud, it would seem obvious to alternatively rely on mistake. If the court finds that the mistaken party has not relied on intent, and reliance on fraud is unsuccessful, reliance on mistake may well stand a chance of succeeding. Unlike in the case of reliance on fraud, the awareness requirement must be met if a party relies on mistake. It must be substantiated that the other party was aware of the causal relationship between the mistake and the entry into the contract.

Successful reliance on mistake or fraud is not dependent on whether the incorrect statements or withheld facts relate to the essence of the contract. Incorrect statements or concealed facts that do not relate to the essence of the contract may also justify reliance on mistake or fraud.