When Your Intermediary Has a Personal Interest: What You as an Entrepreneur Need to Know About Article 7:418 DCC

By mr. Vincent Besters

A Situation That Occurs More Often Than You Think

Suppose: you are an entrepreneur looking to purchase a commercial property. You engage a real estate advisor to guide you through the search and negotiation process. The advisor connects you with a selling party, the deal is concluded, and you sign the purchase agreement. Only afterwards does it emerge that the advisor was also being paid by the selling party for his intermediary services. He received remuneration from both sides but never informed you of this. Do you have a claim? The answer may well be yes, and the key lies in Article 7:418 of the Dutch Civil Code.

What Does Article 7:418 DCC Provide?

Article 7:418 DCC governs the situation in which an agent or intermediary has a personal interest in the conclusion of a legal act performed on behalf of or in the interest of his principal. In such cases, the law obliges the intermediary to notify the principal immediately and fully of the nature of that interest. This extends beyond direct financial benefits, such as a commission from the counterparty, to any interest that may affect the independence of the intermediary.

The rationale behind this provision is clear: anyone who represents another party or assists them in making a decision must serve that party's interests exclusively. As soon as the intermediary also has a personal financial or other interest in the outcome, a potential conflict of loyalty arises. The legislature has therefore enshrined a strict duty of disclosure in statute, not merely a best-efforts obligation.

When Does an Intermediary Have a Personal Financial Interest?

In practice, these are situations that are not always immediately recognised as problematic. Consider a financial advisor who recommends that you invest in a particular investment fund while receiving an introduction fee from that fund's manager. Or the real estate advisor mentioned earlier who is paid from both sides. But less visible situations are also caught by this provision: an advisor who holds shares in the party with whom he arranges for you to contract, or who has a personal relationship with the counterparty that influences his judgement.

Once such an interest exists, the intermediary is required to disclose it proactively. He need not wait for the principal to ask.

Duty of Disclosure Versus Duty of Inquiry: Who Bears the Heavier Burden?

In legal practice, it is frequently argued in defence that the principal should have investigated for himself whether his advisor had a personal interest. The principal's own contributory negligence is then raised as a defence. Although a certain duty of inquiry on the part of the principal cannot be entirely excluded, the intermediary's duty of disclosure carries greater weight as a general rule.

The Supreme Court has confirmed on multiple occasions that the information obligation of the professional service provider is proportionate to the dependence and trust that the principal places in that service provider. Precisely because the principal does not always have the expertise to recognise a potential interest conflict, that obligation rests primarily with the party who does possess the requisite knowledge and insight. A principal who has not actively enquired about possible conflicts of interest can therefore not readily be held to have acted negligently on that basis.

What Are the Consequences of a Breach?

Should the intermediary breach his duty of disclosure, this may give rise to various legal consequences. In the first place, the principal may avoid the agreement with the intermediary on grounds of mistake or fraud, depending on the circumstances. In addition, the intermediary may be held liable for the loss suffered by the principal as a result of the undisclosed conflict of interest. Consider, for example, the difference between the price paid and the actual market value of the property, or the loss on an investment that would never have been made had objective advice been given.

In certain cases, the agreement with the counterparty may also be affected, particularly where the counterparty knew or ought to have known of the conflict of interest on the intermediary's side.

A Word of Caution for Practice

Article 7:418 DCC is no dead letter. Entrepreneurs who engage an advisor, estate agent, or other intermediary would be well advised to record in writing that the advisor holds no ancillary claims against the counterparty. And anyone who discovers after the fact that their intermediary provided incomplete information may have more legal remedies at their disposal than they realise.

Do you have questions about agency or contractual liability?

Mr. Vincent Besters advises entrepreneurs on contract law, agency arrangements and liability issues. Feel free to get in touch for an initial consultation.

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