“A void contract is a legally invalid contract. A void contract does not establish, alter, terminate civil rights and obligations of concerned parties from the moment it is created. With void contracts, both parties are released from the contractual obligations set forth in the original agreement. The original state that existed prior to the conclusion of the contract must be restored, the parties return to each other what they have received.”
The main causes of void contracts are often attributed to the issues regarding illegal subject matters, non-conforming formalities, and singing against the will of concerning parties. Other situations when a contract declared void may involve unauthorized representatives who are not competent to sign the contract in accordance with the law or company charter.
After declaring a contract void, it is no longer valid and cannot be enforced. By law, a void contract may fall into the following categories:
In this article, we address the main causes of void contracts that firms may meet during the course of business, including:
Regarding the contracts signed by companies, it is important mentioning the role of the legal representative(s) in executing transactions. In most cases, commercial contracts are considered binding on the parties if they are signed by the legal representative, or the authorized representative, and stamped with the company’s seal.
However, in some cases where, according to the provisions of law or the company’s charter, it is necessary to have a decision approved by the Board of Members (limited companies), the General Meeting of Sharholders or the Board of Directors (joint stock companies) before signing the contract. The conclusion of a contract without the approval of these authorities may result in the contract being declared void.
The following specific transactions are some examples.
By law, if, right from the moment of signing, the contract has an object that cannot be performed, such contract shall be invalidated. In case, when entering into a contract, one party knows or ought to know that the contract has an object that cannot be performed but fails to notify the other party, entailing the other party has entered into the contract, it must compensate the other party for any possible damage. However, it should be noted that, in the case of a contract with many non-executable objects, it does not mean that the entire contract will be void if there are objects of the contract are still enforceable.
In order for a contract not to be void, the parties must first ensure that the content of the agreement does not violate the prohibitions of the law and contravention of social morals.
For example: A contract to buy and sell goods/provide services with objects falling to the list of prohibited items, such as military weapons, drugs, gambling, prostitution, etc.
In addition to the legal consequence of contract being declared invalid, the parties may also be criminally and administratively liable for the above-mentioned violations of the law.
By law, contracts can be established in the form of spoken words, certain acts, or in writing. For contracts in writing, in many cases, the law requires the contract to be notarized, authenticated, which is considered as a condition for the validity of the contract. In the event this requirement is not complied with, the contract may be declared void. Formality compliance is the validity condition of the contract applied to transactions of large value, or the assets in the transaction are complex in nature.
For example: For contracts related to real estate transfer, the law stipulates that notarization and certification of contracts is valid condition.
As analyzed above, although a contract can be declared void for many different reasons, in summary, the reasons for contract invalidation can be classified into three main groups: (i) signing authority, (ii) subject matter, (iii) formality. Therefore, before signing a contract, it is necessary to answer the following questions:
The above are basic questions that the parties need to ask when entering a specific contract. For best compliance, the parties to the contract should consult a lawyer or legal advisor regarding the conditions prescribed by law applicable to each specific type of transaction. For example, when a company wants to make a capital purchase to invest in another business, it needs to determine the value of the investment assets relative to the total value of the company’s assets to determine the competent bodies to approve this decision.
Date: 18 August 2021
The article is based on the current law at the time of recording as above and may no longer be relevant at the time readers access this article due to changes in applicable law and specific cases that the reader wants to apply. Therefore, the article is for reference only.