What should companies bear in mind when asking the court to declare a contract null and void?

A contract is a form of expression for a civil transaction, therefore it is a document that expresses the agreement between the parties. In the course of its business, a company may need to enter into contracts with various parties, including employees, suppliers, customers, partners and other entities. For each contract, the legal value of the contract is always a concern for many businesses, as the voidability of the contract for any reason will cause the business some inconvenience and even legal liability. However, in order to protect their rights, businesses often need to ask the court to declare the contract void. This article discusses some considerations for businesses when asking the court to set aside a contract and the legal consequences that businesses need to be aware of if the contract is set aside.

On the basis and statute of limitations when requesting to declare a contract invalid

A contract is an agreement between the parties on establishing, changing or terminating civil rights and obligations^[1], and at the same time, the contract is also considered a civil transaction^[2], so the provisions on invalid civil transactions from Article 123 to Article 133 of the Civil Code 2015 will be applied to the contract. At that time, the civil contract can be declared invalid if it does not meet the conditions for the validity of the contract as prescribed in Article 117 of the Civil Code 2015. Specifically, the cases in which the enterprise can request the Court to declare the contract invalid are prescribed from Article 123 to Article 129 of the Civil Code 2015 and commonly include the following cases:

1. Civil transactions are invalid due to breach of legal prohibitions or contravention of social ethics
2. Civil transactions are invalid due to forgery
3. Civil transactions are invalid due to misunderstanding
4. Civil transactions are invalid due to non-compliance with the regulations on form.

In addition to considering the basis for the request, enterprises must also consider another important factor: the statute of limitations. According to the law, the statute of limitations for requesting to declare a contract invalid is limited to a certain period of time, except for some special cases. The statute of limitations for requesting the Court to declare a contract invalid is the period of time within which an application can be filed, requesting the Court to declare the contract invalid. After this period, the enterprise will lose the right to request. It should be noted that, except for special cases such as contracts being invalid due to violation of the prohibition of law, contrary to social morality and invalid due to forgery^[3], the statute of limitations for requesting the Court to declare the contract invalid for the remaining cases is 02 years. However, this statute of limitations does not apply automatically but must be requested by one or more parties in the transaction to the Court^[4]. Therefore, when requesting the Court to declare the contract invalid, the parties should consider in advance the statute of limitations from the time they discover that the contract may be invalid under one of the above cases until they file the application with the Court to have a plan to ensure their rights.

Other considerations for enterprises before requesting the Court to declare a contract invalid

In reality, not all requests to declare a contract invalid are accepted by the Court. It can be seen that, from the provisions of current law, enterprises need to pay attention to some of the following points before requesting the Court to declare a contract invalid.

First, distinguish between cases of civil contracts being invalid due to non-compliance with the form and invalid due to violation of the prohibition of the law

In addition to the conditions for the validity of contracts stipulated in Article 117 of the Civil Code 2015, some provisions of specialized laws also impose additional conditions for the validity of specific types of contracts when meeting the requirements of specialized laws. For example, housing sale contracts must be notarized according to regulations^[5], in cases where the contract is not notarized, it may be considered non-compliance with the provisions on form, leading to the contract not meeting all the conditions for the contract to be valid. However, the enterprise can still request the Court to recognize the validity of the transaction if one party has performed at least two-thirds of the obligations of the contract. In fact, Precedent 55/2022/AL has recognized the validity of a contract that violates the formality condition when applying the above provisions. Specifically, the content recorded in the precedent states “although the transaction for the transfer of land use rights between the parties does not comply with the form prescribed in Clause 1, Article 502 of the Civil Code 2015, the plaintiff has delivered 110,000,000 VND to the defendant, the defendant has transferred the land use rights to the plaintiff, which means it has performed more than two-thirds of the obligations in the transaction, so the transaction is recognized as valid”. In the case of the form of the contract, only if the law provides for it is it considered a condition. Therefore, if the contract does not comply with the form but the content of the agreement is legal and the parties have performed two-thirds of the obligations in the transaction, it is likely to be recognized as valid. At this time, the request to declare the contract invalid will have almost no chance of being accepted.

Meanwhile, invalidating a contract due to violation of the prohibition of the law is when the contract has a purpose or content that violates the prohibition of the law. It can be understood that the prohibition of the law is the provisions of the law that do not allow the subject to perform certain acts. The Civil Code 2015 does not specifically explain the prohibition of the law. Normally, before entering into a contract, the parties can learn about the relevant specialized laws (for example, the Labor Code 2019), the general provisions in that law will mention the prohibited provisions. From there, the parties can make agreements that are not entangled in the prohibition. Accordingly, the limitation set here is the law, so if a sub-law document (such as a decree, circular, etc.) requires it, it will not be considered a violation of the prohibition of the law. Distinguishing cases requesting the Court to declare a contract invalid not only affects the statute of limitations for requesting the Court to declare the contract invalid but can also affect the possibility of the request being accepted.

Source: Government News

Second, consider the case where a third party requests to declare the contract invalid

Currently, civil law does not specifically stipulate whether a third party (a party not directly involved in the contract) can request the Court to declare the contract invalid or not. Basically, in some cases of infringement of public interests (violation of the prohibition of the law, contrary to social ethics and due to forgery), the third party benefiting from the contract^[6] can also request the contract to be declared invalid. In the remaining cases, the third party’s permission to request is still relatively limited. A typical case is mentioned in Judgment No. 66/2024/DS-PT dated September 6, 2024 of the People’s Court of Ninh Thuan Province. Accordingly, Ms. Le Thi H (plaintiff) and Ms. Le Thi M (defendant) disputed in the original contract related to the deposit (regarding the transfer of land use rights) between Ms. H and Ms. M. Later, Ms. M did not perform the deposit contract but transferred the land use rights to Ms. Nguyen Thi Dai T1. At that time, Ms. H requested the Court to declare the land use rights transfer contract between Ms. M and Ms. T1 invalid due to the dispersion of assets to avoid the obligation to execute the judgment. The Court of Appeal annulled the first instance judgment accepting the cancellation of the above transfer contract because the contract between Ms. M and Ms. T1 was completely legal and bona fide, and this contract was not the subject of dispute in the original contract related to the deposit between Ms. H and Ms. M^[7]. From this judgment, it can be seen that the Court of First Instance and the Court of Appeal have recognized Ms. H’s right to sue to declare the contract invalid due to its impact on her legitimate rights. However, due to the lack of precedent or official guidance, in cases where the enterprise is a third party to the contract, the request for the Court to declare the contract invalid may not be accepted.

Third, consideration on the request content to the Court

One of the issues that enterprises need to pay attention to when requesting the Court to declare the contract invalid is to simultaneously request the Court to resolve the legal consequences of the contract being declared invalid. Normally, enterprises often assume that the legal consequences when the contract is invalid have been specifically regulated by the Civil Code 2015 and are automatically implemented. However, in reality, there are still some unclear requirements when resolving the consequences of an invalid contract, such as resolving issues arising from changes in property, yields and profits from property, and compensation for damages. If these issues are not resolved by the Court at the time of declaring the contract invalid, it can easily lead to disputes later on. At that time, the enterprise will have to re-file a lawsuit in another case, which is time-consuming and costly for the enterprise. Therefore, the enterprise should request the Court to resolve the legal consequences of the contract being declared invalid at the same time as requesting the Court to declare the contract invalid.

Contracts declared invalid: legal consequences and considerations for enterprises 

When the Court declares a contract invalid, enterprises need to pay attention to the legal consequences that may arise. An invalid contract is considered as the parties do not have any rights or obligations under the contract. Specifically, a civil transaction does not create, change, or terminate the civil rights and obligations of the parties from the time the transaction is established^[8]. Therefore, when the Court declares a contract invalid, the parties must restore the original state and return what they have received. The parties do not need to fulfil the rights and obligations that will arise in the future, except for the content that is not declared invalid, the parties continue to perform on the basis of Article 130 of the Civil Code 2015. In addition, the return of assets received from an invalid contract must comply with different regulations depending on the type of asset^[9]. For movables, if not used, the property must be returned intact; If damaged or used, the replacement will not be returned unless otherwise agreed. For real estate, the original property must be returned exactly, for example, if the parties have completed the transfer procedure, the owner’s name on the original certificate must be changed.

In addition, enterprises also need to clearly understand which party in the transaction will suffer damage if the contract is invalid and the party at fault must compensate and may cause serious financial risks for the enterprises. According to the provisions of the Civil Code 2015, determining the fault and actual damage is very important in order to be able to request compensation. Determining the responsibility of each party in the contract is necessary to have a reasonable solution to the invalid contract. If the contract has been performed, determining the level of performance of each party’s obligations will affect the level of compensation. In addition, enterprises also need to consider the rights or obligations of third parties in the transaction when the contract is declared invalid. For example, if a third party has performed some rights or obligations related to the contract, they may also suffer damage and have the right to claim compensation. Therefore, it is very important to consider the impact of an invalid contract on the third party in order to make appropriate requests or actions, and at the same time to avoid the risk of disputes and lawsuits arising due to the consequences of an invalid contract on the third party.

In general, requesting the Court to declare a contract invalid is a complex legal process, requiring businesses to clearly understand the grounds, statute of limitations and related legal consequences before making a request. Not only should the ability of the enterprise to sue as a party to the transaction or a third party be assessed, but the legal consequences when the Court declares the contract invalid should also be noted so that the enterprise can handle it appropriately, and at the same time, it is also the basis for enterprises to pay attention when establishing a contract to ensure their rights.