An invalid commercial contract does not give rise to rights and obligations between the parties. Accordingly, the parties reimburse each other for what they have received. This transaction is not recognized by law.

In practical commercial business activities, there are many cases where the parties have to deal with the consequences of invalid commercial contracts. Depending on when the invalid transaction is detected, the parties in the transaction will have different handling methods.

1. What is an invalid commercial contract?

A commercial contract is a civil transaction, so it must meet the conditions for a civil transaction to be valid according to Article 117 of the Civil Code 2015, including:

  • Subject: The parties entering into a commercial contract must have civil legal capacity, the representatives of the contracting parties must have civil act capacity;
  • The parties must ensure the voluntary element;
  • The purpose and content of the commercial contract do not violate legal prohibitions or are not contrary to social ethics. In particular, the purpose of a commercial contract is the benefit that the parties wish to achieve when entering the contract. These legal prohibitions result from a set of rules of social order from which commercial contracts cannot derogate, even if the parties so wish.. Social ethics are common standards of behavior in social life, recognized and respected by the community.

In addition, commercial contracts must be formally complied with as a condition of the transaction when required by law.

From the above provisions, it can be understood that if a commercial contract does not meet the conditions of a valid civil transaction, one party has the right to request a competent Court to declare that commercial contract invalid. This means that commercial contracts are not automatically invalid unless declared invalid by the Court. However, if the parties continue to perform this contract, especially when the contract is completely invalid, they may face the risk of having input costs excluded by competent tax authorities when calculating corporate income tax.

2. Some common cases of invalid commercial contracts

  • The law lists several cases where civil contracts in general and commercial contracts in particular are invalid due to:
    • For example: Townhouse purchase and sale contract for foreigners in the form of a property rental contract;
    • Minors, people who have lost civil act capacity, people with difficulty in cognition and behavior control, or people with limited civil act capacity may establish and perform;
    • Confusion leads to the parties not achieving the purpose of establishing the transaction;
    • Being deceived, threatened, or coerced (violating the voluntary element);
    • Establishers are not aware and in control of their own behavior.
  • Besides, depending on the nature and extent of the invalidity, invalid commercial contracts can be divided into:
    • Invalid in its entirety when the entire content of the contract is invalid or does not comply with the form even though time has been given for remedy when one party requests the Court to declare it invalid;
    • Partial invalidity occurs when part of the content of a commercial contract is invalid but does not affect the validity of the remaining part of the commercial contract.
  • For commercial contracts that are completely invalid: do not give rise to, change, or terminate the civil rights and obligations of the parties from the time the transaction is established. Accordingly, when a commercial contract is invalid, the parties in the contractual relationship will restore the original state and return to each other what they have received. If it is not possible to repay in kind, the monetary value will be returned.

     The party at fault for causing the commercial contract to be invalid is responsible for compensation according to the provisions of the law.

  • For partially invalid commercial contracts: The parties will continue to perform the valid parts of the contract. The content of an invalid contract will not give rise to the rights and obligations of the parties.

     For example: The garment processing contract between company A (processor) and company B (clothing wholesaler) stipulates that when one party violates the contract, they will be fined 30% of the contract value. This content violates the law (Article 301 of the 2005 Commercial Law) and will therefore be invalid. However, considering the will of the parties, the establishment of sanctions for violations is the free choice of the parties and is not against the law, but the proposed penalty level violates the provisions of Article 301 of the Commercial Law 2005. Therefore, the Court will normally adjust the fine to 08% of the violated obligation if the parties cannot agree on a reasonable level when the parties submit the dispute to resolve in Court or Arbitration.

In summary, understanding the legal consequences of invalid commercial contracts is important to manage business risks and ensure the process of entering into and implementing commercial contracts takes place smoothly, in accordance with the purposes and needs of the business. This process requires a deep understanding of the law and compliance with its regulations, while also being willing to cooperate and find the best solution to protect the interests of the parties involved in the commercial contract.

The article is based on laws applicable at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable laws and the specific cases that the reader may wish to apply may have changed. Therefore, the article is for referencing only.

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