Error, fraud or abuse of circumstances

Error, fraud or abuse of circumstances

If an agreement or contract is formed through error, fraud, or abuse of circumstances, it is voidable (the agreement is undone).
The rationale behind this rule is that a person may be compelled, under the influence of circumstances, to assume an obligation that he has entered into.

The differences between error, fraud, or abuse of circumstances are:

• Error concerns a false representation of facts.
• Fraud: Someone induces another to enter into an agreement.
• Abuse of circumstances: Someone knows or ought to understand that special circumstances, such as a position of coercion or a mental condition that severely impairs the ability to assess one's own interests, induce another to enter into an agreement.

The law of obligations is a broad, dynamic area of ​​law that consistently concerns a duty to perform or refrain from performing an act. We have extensive experience in contractual and non-contractual dispute resolution through providing advice, conducting negotiations, or litigation. We have an experienced team of lawyers and legal experts in the field of the law of obligations. Please contact us to discuss the possibilities.

Defects of will within the law of obligations

Error, fraud, and abuse of circumstances are so-called defects of will: the intention to enter into the agreement was formed in an impure manner. Together with coercion, they constitute the grounds on which an agreement is voidable. This subject falls within the broader legal field of the Law of Obligations, in which the duty to perform or refrain from performing an act is always central. Unlike in the case of a failure to perform, the problem here lies not in the execution, but already in the formation of the contract.

At MKB Juristen, lawyers and in-house counsel work together in mixed teams. This enables us to assist both international corporations and the baker on the corner when a contract has been formed under a defect of will, or conversely when a counterparty wrongly invokes error, fraud, or abuse of circumstances.

Error (Article 6:228 of the Dutch Civil Code)

In the case of error, you enter into an agreement based on a false representation of facts. Article 6:228 of the Dutch Civil Code (BW) distinguishes three situations in which the agreement is voidable, provided that you would not have entered into the agreement, or not under the same conditions, had you had a correct representation of facts:

• the error is due to incorrect information provided by the other party;
• the other party has remained silent regarding something it ought to have disclosed, in violation of its duty to disclose;
• Both parties proceeded from the same incorrect understanding (mutual error).

Unlike in the case of fraud, intent on the part of the counterparty is not required for error. An error that concerns exclusively a future circumstance, or that according to generally accepted views ought to remain at your own risk, does not lead to annulment pursuant to Article 6:228 paragraph 2 of the Dutch Civil Code.

Deception and threats (Article 3:44 of the Dutch Civil Code)

Fraud is regulated in Article 3:44, paragraph 3 of the Dutch Civil Code. This occurs when someone induces another to perform a legal act by means of an intentionally false statement, by intentionally concealing a fact that should have been disclosed, or by another artifice. The difference with error is intent: in the case of fraud, the counterparty deliberately misleads you. Commendations in general terms do not in themselves constitute fraud.

The same article also includes coercion (Article 3:44 paragraph 2 of the Dutch Civil Code): a person is unlawfully threatened with harm to person or property in order to conclude the agreement. A legal act brought about by fraud or coercion is voidable (Article 3:44 paragraph 1 of the Dutch Civil Code).

Abuse of circumstances (Article 3:44 paragraph 4 of the Dutch Civil Code)

Abuse of circumstances is regulated in Article 3:44, paragraph 4 of the Dutch Civil Code. It exists when someone knows or ought to understand that another person is induced by special circumstances to perform a legal act, and promotes its conclusion, whereas what he knows or ought to know should deter him from doing so. The following elements must be met:

• special circumstances of the injured party, such as a state of necessity, dependency, recklessness, an abnormal mental state or inexperience;
• knowability: the other party knows or ought to understand that these circumstances influence the decision;
• causal link between the special circumstances and the conclusion of the agreement;
• promotion of the realization, whereas one should have refrained from doing so.

Unlike fraud, there need not be any deception or threat here; it concerns the deliberate exploitation of someone's vulnerable position.

Consequences: destruction and rollback of performance

An agreement concluded through error, fraud, coercion, or abuse of circumstances is voidable. This means that the agreement is only undone if you invoke this, either extrajudicially or through the courts. The annulment has retroactive effect: the agreement is deemed never to have existed, and performances already rendered must be repaid or returned on the grounds of undue payment (Article 6:203 of the Dutch Civil Code). Instead of annulment, the court may also modify the consequences of the agreement pursuant to Article 6:230 of the Dutch Civil Code in order to remedy the disadvantage. In addition, in appropriate cases, there may a right to compensation .

Statute of limitations: the period for annulment

The right to annul an agreement is subject to a statute of limitations pursuant to Article 3:52 of the Dutch Civil Code. In cases of fraud, coercion, and abuse of circumstances, the three-year to run after the influence of that circumstance has ended or the fraud has been discovered. In cases of error, the period commences when the error is discovered. Anyone who waits too long loses the possibility of annulment; acting in a timely manner and interrupting the statute of limitations are therefore important. However, invoking annulment as a defense (by way of exception) may still be possible even after the expiration of that period.

Burden of proof and practice

Whoever invokes a defect of will bears, in principle, the burden of proof (“he who asserts, proves”). You will therefore have to make it plausible that the requirements have been met. Evidence may consist of correspondence, emails, financial documents, medical reports, or witness statements. In practice, a careful reconstruction of the negotiations and agreements made is often decisive. Our lawyers and in-house counsel help you build that position, or conversely, refute an unfounded claim by your counterparty, whether it concerns a share transaction of a group of companies or a supply contract with the baker on the corner.

How MKB Juristen assists you

We assess whether an agreement was concluded under duress, fraud, or abuse of circumstances, and determine the most effective course of action: extrajudicial annulment, negotiation, modification of the agreement, or legal proceedings. By combining attorneys and in-house counsel, we offer both legally sound advice and practical, commercially viable solutions. We assist international corporations and listed companies as well as small business owners. For the broader context, please refer to our page on Contract Law. Contact us to discuss your situation without obligation.