Validity of commercial contracts

Contract[1] is a common document in the course of business activities, recording the agreement between the parties on the establishment, change, or termination of their rights and obligations. However, not all of the commercial contracts entered into by the parties are valid.

Under the Civil Code of Vietnam (the “Civil Code 2015“), contract is a type of civil transaction, then, in order to be valid, it must fully satisfy the conditions on the content and form of an effective civil transaction specified in Article 117 of the Civil Code 2015. Lacking one of those conditions results in an invalid contract. Therefore, when entering into a commercial contract, the parties should pay attention to the following issues:

1. Ensure that the subject has suitable legal capacity[2]

Entities participating in commercial contracts are traders, including lawfully established economic organizations and individuals that conduct commercial activities independently and regularly and have business registrations. These subjects must have appropriate active and passive legal capacity to join in the contract.

In case the participant is an economic organization such as an enterprise or a cooperative, it is necessary to check the establishment and operation status of the organization as well as the signing authority of its representative. This information is clearly stated on the enterprise registration certificate or the cooperative registration certificate. Theoretically, only the legal representative of the enterprise or the chairman of the board of directors of the cooperative has the authority to represent such organizations to sign contracts.[3] Therefore, if the representative in the contract is not one of the abovementioned individuals, it is necessary to request authorization documents showing the corresponding content.

Besides, the issues of the authority to sign contracts in case the company has more than one legal representative for limited liability companies and joint stock companies or the requirement of approval from higher levels of governance for certain kinds of contracts are also noteworthy.[4] These issues will usually be clearly stated in the company’s charter.

In case the partner is an individual, in addition to considering the active legal capacity, that is whether that individual has the right to participate in the establishment and performance of that commercial contract, the parties of the contract must also consider the passive legal capacity related to age and ability to control the behavior of that individual. Although it is unusual in business activities to enter into a contract with individuals who have certain limitation in their passive legal capacity, the issue of obtaining consent from their legal representative should be checked carefully.

2. Ensure the voluntary participation of the parties[5]

In civil transactions and commercial contracts in particular, the honest goodwill of the parties always plays an important role. The contracts are always constructed with specific purposes. Based on the information received, both parties will consider whether those purposes might be attainable or not and decide to sign the contract. Therefore, the existence of any misunderstanding or deception affecting the accuracy of the information, and threats or compulsion of will can lead to the invalidity of the contract.

To avoid misunderstanding or deception in a commercial contract, in the negotiation process, each party should make a list of information and documents that need to be provided by the other party to verify that the information is accurate and complete. When drafting a contract, the content of each clause in the contract must also be detailed and clear. In addition, in the current international integration context, more and more commercial contracts with foreign elements[6] are drafted in foreign languages such as English, Chinese and French, so besides a deep understanding of the content of the transaction, the writer should also have strong foreign language skills, especially in legal terms to assure that all parties of the agreement have the same interpretation on the contract terms and conditions. As a result, commercial contracts with foreign elements often involve lawyers in drafting and negotiating support.

3. Ensure that the purpose and contents are not contrary to the law and/or social ethics[7]

Although a commercial contract is built on the principle of freedom of will, to ensure social order, the purpose and content of such contract must not violate the law and/or social ethics.

While social ethics are common standards of conduct in social life, respected by the community, and easily recognized, prohibitions of the law are provisions of the law that do not allow subjects to perform certain acts[8], which are scatteredly regulated in the Vietnamese legal documents system.

Example 1: According to the Enterprises Law 2020, the act of doing business in a conditional business line when the business conditions are not fully met as prescribed by law is prohibited, so when entering into a contract related to conditional business lines, the party should require the documents proving eligibility to conduct those businesses.[9]

Example 2: When carrying out a merger, consolidation, acquisition or joint venture between enterprises, the Competition Law provides that enterprises are prohibited from conducting economic concentration that causes or probably causes substantial anti-competitive effects on the Vietnamese market.[10] The assessment of that impact is within the competence of the National Competition Commission, however, the parties should also analyze themselves on factors such as combined market share, the degree of concentration on the relevant market, and competitive advantage.

In general, checking the prohibition of the law and preparing a contract that does not violate the law requires a broad and in-depth understanding of the legal provisions and the application of the law. Therefore, for important commercial contracts of great value, which significantly affect the existence of the business, traders often seek the advice of a lawyer.

4. Ensure the form of the contract complies with the law (if any)

Usually, civil transactions can be expressed verbally, in writing, or by specific acts. In commercial business, the parties often choose to use documents to record agreements, which is also convenient for the process of archiving and performing other accounting and tax operations. This partly limits the risk of the contract being invalidated due to a violation of the agreement’s formal regulations. However, it should also be noted that, for some types of commercial contracts, after being made in writing, it still requires notarization, authentication, and/or registration, especially the contracts with subjects related to land use rights and land-attached assets.[11]

In conclusion, though the commercial contract is not automatically become invalid when a party to the contract or a third party identifies that one of the above conditions has not been satisfied, in order to avoid the loss of time, money, and effort when the contract has been being concluded or performed in whole or in part and turning out to be invalid, each of the mentioned problems should be inspected thoroughly.

[1] In this article, a commercial contract means a contract where at least one party is a trader

[2] Article 117.1.a of the Civil Code 2015

[3] Article 12 of the Enterprise Law 2020, Article 37 of the Cooperative Law 2012

[4] The transaction of investing or selling of assets that are worth at least 35% of the total assets written in the latest financial statement in the joint stock companies must be approved by the General Meeting of Shareholders before executing according to Article 138.2.d of the Enterprise Law 2020

[5] Article 117.1.b of the Civil Code 2015

[6] The foreign element here can be the subject, object or place of contract performance according to Article 663.2 of the Civil Code 2015

[7] Article 117.1.c of the Civil Code 2015

[8] Article 123 of the Civil Code 2015

[9] Article 16.6 of the Enterprises Law 2020

[10] Article 30 of the Competition Law 2018

[11] Article 119.2 of the Civil Code 2015

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