Contracts are a fundamental legal basis for establishing and maintaining civil and commercial relationships. However, during the conclusion and execution of contracts, disputes may arise when one party is deceived, resulting in the contract no longer reflective of the parties’ voluntary and transparent intentions. The following article by NPLaw analyzes the legal provisions regarding contract cancellation due to fraud.

I. current situation of contract cancellation due to fraud

In both legal practice and civil transactions, contract cancellation due to fraud remains a common and contentious issue. Many contracts are executed based on false, misleading, or concealed information from one party, causing damage to the other, who then seeks contract annulment.

In practice, cases involving fraud in contract formation frequently occur in sectors such as the purchase and sale of assets, leasing, service provision, and even in complex civil and commercial contracts. Determining fraud, proving its nature, and assessing the extent of damage suffered by the deceived party are among the most challenging issues for Courts and the parties involved.

II. Legal provisions on contract cancellation due to fraud

1. What is contract cancellation due to fraud?

According to Article 127 of the Civil Code 2015, fraud in civil transactions refers to intentional acts by one party or a third person to cause the other party to misunderstand the subject, nature of the object, or content of the transaction, leading to the establishment of such a transaction. When 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.

Thus, contract cancellation due to fraud can be understood as a request by one contracting party to a competent authority to declare the contract invalid on the grounds that the other party, or a third person, intentionally misled them regarding the subject, nature of the object, or content of the contract, thereby causing the contract to be concluded.

2. Legal consequences of contract cancellation due to fraud

When a party enters into a contract due to deception, threat, or coercion, such a party has the right to request the Court to declare the contract invalid.

Pursuant to Article 131 of the Civil Code 2015, the legal consequences of an invalid civil transaction are as follows:

  • An invalid civil transaction does not set up, alter, or terminate the civil rights and obligations of the parties from the time it was established.
  • When a civil transaction is invalid, the parties must restore the original state and return to each other what they have received.
  • If restitution in kind is impossible, repayment shall be made in cash.
  • A party in lawfully receiving yields and profits is not required to return such yields and profits.
  • The party at fault causing damage must compensate for the loss.

3. Cases where contracts may be declared invalid

Under Article 122 of the Civil Code 2015, a civil transaction is invalid if it fails to satisfy any of the conditions set forth in Article 117 of the Code, unless otherwise provided by law.

Specifically, a civil contract may be declared invalid in the following cases:

  • Invalid due to violation of legal prohibitions or contravention of social ethics;
  • Invalid due to simulation;
  • Invalid due to being entered into by a minor, a person lacking legal capacity, a person with cognitive or behavioral difficulties, or a person with restricted legal capacity;
  • Invalid due to mistake;
  • Invalid due to deception, threat, or coercion;
  • Invalid due to the person concluding it being incapable of understanding or controlling their acts;
  • Invalid due to failure to comply with formal requirements;
  • Invalid due to an object that cannot be executed.

III. Questions regarding contract cancellation due to fraud

1. Which authority has jurisdiction to resolve disputes concerning contract cancellation due to fraud?

The competent authorities include:

  • People’s Courts: The primary agency responsible for resolving civil disputes related to contracts, including those involving cancellation due to fraud. Typically, the district-level People’s Court where the defendant resides, works, or where the disputed property is located has jurisdiction.
  • Commercial Arbitration (if agreed by the parties): If the contract contains an arbitration clause, the parties may choose to resolve disputes, including those concerning contract cancellation due to fraud, through arbitration.

2. Distinguishing between contract invalidity and contract cancellation in cases of fraud

  • A contract invalid due to fraud is treated as though it never existed, as one party’s fraudulent conduct distorted the other’s intent during contract formation. Consequently, the contract fails to meet the validity conditions prescribed by law, and the parties must return what they have received.
  • Cancellation of a contract due to fraud occurs when a valid and ongoing contract is discovered to have been influenced by fraudulent conduct. In such a case, the deceived party may request cancellation, meaning the contract ceases to be effective from that point onward, while transactions already executed remain valid, and the parties must fulfill or settle obligations in accordance with cancellation rules.

3. Authority competent to resolve disputes on contract cancellation due to fraud

The People’s Court primarily holds jurisdiction to resolve civil disputes concerning contract cancellation due to fraud. The district-level Court where the defendant resides, works, or where the violation occurred will accept the case.

If the contract contains an arbitration clause, the dispute may be resolved by Commercial Arbitration.

4. What evidence must the deceived party provide?

The deceived party must present:

  • Evidence of fraud: Messages, emails, contracts, meeting minutes, recordings, videos, witness statements, etc.;
  • Evidence of damage: Invoices, documents, financial statements, or other materials proving actual losses;
  • Evidence of the contractual relationship: Contracts, agreements, payment documents;
  • Evidence of misled intent: Documents demonstrating that the deceived party entered the contract based on false or concealed information.

5. Is the deceived party entitled to compensation for damages?

According to Article 131 of the Civil Code 2015, when a contract is invalid due to fraud, the party at fault causing damage must compensate for the loss.

IV. Legal consultancy services on contract cancellation due to fraud

The above information provided by NPLaw offers a comprehensive overview of contract cancellation due to fraud. Should clients have any further questions regarding this issue or other legal matters, please contact NPLaw for direct consultation and guidance.