Articles
Contract Invalidity in Vietnam – Consequences from improper business registration

02 - 05 - 2012
By Le Trung Nghia*

In Vietnam, contract invalidity is one of most complex areas that Vietnamese courts encounter today. Vietnamese laws have not yet provided comprehensive stipulations in this area, and court cases related to this issue are helpful in clarifying this matter.

According to Articles 122 and 127 of the Civil Code of Vietnam, a contract can be declared invalid if failing to meet one of the following conditions:

1)    Persons participating in the transaction have capacity for civil acts;

2)    The objective and contents of the transaction are not contrary to the law or social morals;

3)    Persons participating in the transaction act entirely voluntarily; or

4)    The form which the laws require for a civil transaction.

In Vietnam, when a legal entity does not have the registered business lines required to such party's commitments relating to the consideration exchanged under the contract, it may be deemed as "violating the prohibitory provisions of laws" as in the second item. This requirement may be different to other jurisdictions. That is, in some jurisdictions, a party to a contract does not necessarily have business lines registered in its incorporation document, so as to conclude contract and deliver the respective consideration exchanged under the contract. In Vietnam, the company contracting in a transaction must be registered to, for example, conduct and deliver certain services committed under a contract.

The cassation decision No. 04/2004/HDTP-KT dated 27 April 2004 of the People's Supreme Court in settlement of a dispute was a case in which a transaction was declared invalid due to an improper business registration on the part of the seller.

In this case, the courts interpret Article 137 of the Civil Code on consequences of contract invalidity. According to Article 137, an invalid civil transaction - including contract invalidity - shall not give rise to civil rights and obligations of the parties or to changes and termination of such rights and obligations as from the time the transaction is entered into and the parties shall restore everything to its original state and shall return to each other what they have received.

In Article 137, one may be concerned about the meaning of the phrase "what they have received", i.e. what exactly will be returned if a transaction is declared invalid? Will there be interest accrued or other penalties as contemplated by the contract? The answer from the above cassation decision No. 04/2004/HDTP-KT is that the ‘the value of the goods already sold', which was found to be the sale price listed in the contract, was ordered for returning to the other party; and there was no interest imposed for delay of payment despite the parties' agreement to the contrary.

Given the period of years dealing with the dispute and the court procedure, the ‘damages' incurred from the lost interest is quite considerable.

Court cases have weak precedential value in Vietnam. However, the decision under cassation decision No. 04/2004/HDTP-KT is meaningful as it provides the point of view of the courts in construing consequences of contract invalidity.  From this case, to protect the interests to the highest extent, one should consider contract validity carefully, and especially should satisfy the legal requirements relating to business registration, before concluding a transaction.

(*) Please contact the authors at nghia.le@indochinecounsel.com or our partners if you wish to have more information or specific advice for the topic of this article.

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