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.
When is a contract declared void?
After declaring a contract void, it is no longer valid and cannot be enforced.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:
- Breach of legal prohibitions or contravention of social morals
- Being established and performed by minors, persons having lost their capacity for civil acts or having had their capacity for civil acts restricted, or persons having difficulty in awareness and control of their own acts
- Being entered into by persons incapable of being aware of or controlling their acts
- Deception, threat or coercion
- Non-compliance with formality
- Being signed without appropriate authorization
- Impossibility of performing subject matter
In this article, we address the main causes of void contracts that firms may meet during the course of business, including:
- Contracts void due to being signed without appropriate authorization
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.
- Transactions of selling assets with a value of (i) 50% or more of the total value of assets recorded in the latest financial statement of the company or (ii) a smaller percentage or value specified in the company’s charte These transactions are subject to approval authority of the Members’ Council of limited companies.
- Contracts of purchase, sale, borrowing, lending and other contracts and transactions with a value of 35% or more of the total value of assets recorded in the company’s most recent financial statement, unless otherwise another ratio or value is stated in the company’s charter. These transactions are subject to the approval authority of the Board of Directors of joint-stock companies.
- Decisions to invest in or sell assets valued at 35% or more of the total value of assets recorded in the company’s most recent financial statement, unless otherwise another ratio or value is stated in the company’s charter. These transactions are subject to the approval authority of the General Meeting of Shareholders of joint-stock companies.
- Contracts void due to the impossibility of performing subject matter
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.
- Contracts void due to breach of legal prohibitions or contravention of social morals
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.
- Contracts void due to Non-compliance with formality
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.
How to prevent a contract declared void?
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:
- Who is authorized to sign the contract? Does the contract need to be approved by the company’s internal management bodies?
- Are the stipulations agreed in the contract such as goods, services, and other works legal and ethical?
- How does the law regulate the form of the contract?
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.