Regulations on handling misrepresentation in contracts

In the conclusion of civil contracts, the principle of freedom of agreement between the parties is fundamentally respected by law. However, such freedom must be exercised on the basis of honesty and good faith. In practice, there are not infrequent cases where one party provides misrepresentation in a contract to mislead the other party for its own benefit.

I. Understanding misrepresentation in contracts

Misrepresentation in contracts refers to the act of one or more contracting parties providing, presenting, or affirming information that is untrue, incomplete, or distorted, thereby mischaracterizing the subject matter of the contract, the capacity of the parties, or other essential conditions of the transaction.

Misrepresentation may arise in different forms, ranging from intentional deception for personal gain to unintentional mistakes or omissions. Regardless of the cause, such acts may give rise to serious legal consequences, directly affecting the validity of the contract and the rights of the parties.

II. Legal provisions on misrepresentation in contracts

1. Forms of misrepresentation in contracts

Misrepresentation may take several forms, such as:

• False information: Information provided that is completely inconsistent with objective reality.
• Incomplete information: Where essential information is intentionally or unintentionally omitted, which, had it been known, would have caused the other party to refrain from contracting or to contract under different terms.
• Misleading presentation: Information presented in a manner likely to cause misunderstanding, leading the other party to rely on it improperly.

Identifying these forms is the basis for determining the severity of the violation and applying appropriate legal remedies.

2. Legal consequences of misrepresentation in contracts

Under Article 127 of the Civil Code concerning invalidity of civil transactions due to deception, threats, or coercion: Where a party enters into a civil transaction due to deception, threat, or coercion, such party has the right to request the Court to declare the transaction invalid. 

If a contract is entered into as a result of deception, such contract shall be void. Legal consequences in this case, pursuant to Article 131 of the Civil Code, include:

• An invalid civil transaction shall not give rise to, change, or terminate civil rights and obligations of the parties from the time of its establishment;
• The parties must restore the original status quo and return to each other what they have received. Where restoration in kind is impossible, restitution shall be made in monetary value;
• A bona fide party in receiving fruits and profits shall not be required to return them;
• The party at fault that caused damage must compensate;
• The handling of consequences of an invalid civil transaction relating to personal rights shall be governed by this Code and other relevant laws.

Thus, the legal consequences of misrepresentation in contracts shall be addressed in accordance with the above provisions.

3. Factors affecting the determination of misrepresentation and its legal consequences

Whether an act constitutes misrepresentation, and the corresponding legal consequences, depend on factors such as:

• The extent to which the misrepresentation influenced the decision to contract;
• The subjective intent of the party providing the information (intentional or unintentional);
• The ability of the other party to recognize the misrepresentation;
• The actual damages incurred;
• Honesty and good faith in the dispute resolution process.

These elements are decisive in assessing the degree of violation and determining the legal liability of the parties.

4. Dispute resolution in cases of misrepresentation in contracts

Disputes arising from misrepresentation in contracts may be resolved through:

• Negotiation and mediation: Encouraging voluntary resolution in a spirit of cooperation and goodwill;
• Court proceedings: Parties have the right to initiate proceedings before a competent Court to seek protection of their rights under Article 4 of the Civil Procedure Code 2015;
• Commercial arbitration: Where disputes relate to commercial activities and the parties have agreed on arbitration, the dispute may be resolved by commercial arbitration under Articles 2 and 5 of the Law on Commercial Arbitration 2010.

Selecting the appropriate dispute resolution method helps parties save time, reduce costs, and achieve desired outcomes.

5. Preventive measures against misrepresentation in contracts

To mitigate risks of misrepresentation, parties should adopt the following measures:

• Carefully verify information prior to signing contracts;
• Require submission of documents and evidence to authenticate information (assets, financial status, legal standing, etc.);
• Clearly stipulate commitments on the accuracy and completeness of information in the contract;
• Include provisions on legal liability for false information;
• Seek legal advice for contract review and early detection of legal risks.

Applying these measures comprehensively enables parties to protect themselves and avoid unnecessary legal risks.

III. Questions on misrepresentation in contracts

1. If misrepresentation only affects a minor part of the contract and does not alter the essence of the transaction, is the entire contract invalid?

According to Article 130 of the Civil Code 2015: A civil transaction shall be partially invalid if a part of its content is invalid but such invalidity does not affect the validity of the remaining parts.

Thus, if misrepresentation only affects a minor part without altering the fundamental purpose of the transaction, the contract may be declared partially invalid, with the remaining provisions retaining their validity. However, the determination of partial or total invalidity rests with the Court, based on the specific circumstances, ensuring fairness and legality.

2. When a contract is declared invalid due to misrepresentation, what restitution obligations do the parties have, and how are they performed?

Under Clause 2, Article 131 of the Civil Code 2015: When a civil transaction is invalid, the parties shall restore the original status quo and return to each other what they have received. Where restoration in kind is impossible, restitution shall be made in monetary value.

The restitution process generally involves:

• Determination of restitution obligations under a legally effective Court/Arbitral award;
• Voluntary performance by the parties;
• Enforcement by civil judgment enforcement authorities, if a party fails to comply voluntarily.

This process aims to restore the parties to their original positions and eliminate the legal consequences of the invalid contract.

3. What is the statute of limitations for requesting a declaration of invalidity of a contract due to misrepresentation, and from when is it calculated?

Pursuant to Point b, Clause 1, Article 132 of the Civil Code 2015, the statute of limitations is two (02) years from the date on which: The party mistaken or deceived knew or should have known that the transaction was established due to mistake or deception.

Therefore, the time limit to request a declaration of invalidity on the grounds of misrepresentation is two years from the date the aggrieved party knew or should have known of the misrepresentation.

4. Is there a difference between intentional and unintentional misrepresentation? How does the law address these cases?

• Intentional misrepresentation (fraud):
  + Nature: A deliberate act by one party or a third party to cause the other party to misunderstand the subject, nature, or content of the contract, leading them to conclude the contract.
  + Legal consequence: The contract is invalid due to deception under Article 127 of the Civil Code 2015.
• Unintentional misrepresentation (mistake):
  + Nature: Not deliberate but arising from carelessness, lack of knowledge, or insufficient information, causing misunderstanding of the subject or key terms of the contract.
  + Legal consequence: The contract may be invalid due to mistake if it prevents one or both parties from achieving the intended purpose of the transaction. However, if the purpose can still be achieved or the mistake remedied, the contract remains valid, pursuant to Article 126 of the Civil Code 2015.

5. Can the aggrieved party claim damages in addition to requesting invalidity of the contract?

Under Clause 4, Article 131 of the Civil Code 2015, the party at fault causing damage must compensate.

Accordingly, in addition to requesting that the contract be declared invalid, the aggrieved party may also claim damages arising from misrepresentation.

IV. Legal consultancy services on misrepresentation in contracts

The above is NPLaw’s article on misrepresentation in contracts under current law. With a team of experienced lawyers and legal professionals, NPLaw provides reliable and professional legal services to best protect clients’ lawful rights and interests. For legal assistance, please contact NPLaw for consultation and support.