Author: TNTP LAW

Lending activities always carry numerous risks due to various reasons, such as borrowers failing to repay, repaying incompletely or late, or losing the ability to pay. To mitigate these risks, lenders often require borrowers to implement security measures such as pledges, mortgages, or third-party guarantees. Among these measures, mortgage is a commonly chosen option by lenders. To implement this measure, the parties must enter into a mortgage contract. In this article, TNTP will outline the key points that parties need to consider when entering into a mortgage contract.

1. Form of the mortgage contract

Article 319.1 of the 2015 Civil Code stipulates that “The mortgage contract takes effect from the time of conclusion, unless otherwise agreed or otherwise provided by law.” Thus, the above regulation implicitly confirms that the mortgage is only recognized if the parties enter into a mortgage contract. If the obligor fails to perform or improperly performs their obligations, the mortgagee has the right to handle the mortgaged asset.

In practice, the content regarding asset mortgage can be separately documented (commonly known as a mortgage contract) or recorded as clauses within the main contract (loan contract). However, for certain types of mortgaged assets, the law requires that the mortgage document be notarized, authenticated, and registered as a secured transaction, so parties usually prioritize creating a mortgage contract. For example, mortgage contracts for land use rights and assets attached to land must be notarized or authenticated.

2. Content of the mortgage contract

Law does not stipulate mandatory contents for a mortgage contract. Therefore, the parties will specify terms suitable to their circumstances and actual conditions. Basic terms that should be included in a mortgage contract are:

• Information of the mortgagor and mortgagee;
• Information on the mortgaged asset, such as type, quantity, and value;
• Information on the loan under the asset loan contract secured by the mortgagor;
• Rights and obligations of the parties;
• Liability for contract breaches;
• Dispute resolution methods;
• Mortgaged asset realisation;
• Cases of contract termination and legal consequences;
• Contract validity, etc.

3. Effectiveness of the mortgage contract and its effectiveness against third parties

Based on Article 319.1 of the 2015 Civil Code and Article 22 of Decree 21/2021/ND-CP, the mortgage contract takes effect from the time of conclusion, unless otherwise agreed or law stipulates otherwise, such as provisions on notarization and authentication. The ineffectiveness of the mortgage against third parties does not alter or terminate the validity of the mortgage contract.

Accordingly, the mortgage measure only takes effect against third parties if the mortgage contract has legal effect. The time of effectiveness against third parties is the time of registration. Decree 99/2022/ND-CP stipulates cases that must be registered and cases registered upon request. Cases that require registration include mortgage of land use rights, mortgage of residential houses, and assets attached to land in cases where ownership rights are certified on the Certificate of ownership, mortgage of aircraft, mortgage of ships, etc. For other types of assets, the parties have the right to agree on whether to register the mortgage measure.

The mortgage contract will cease to be effective upon the occurrence of events such as (i) The obligation secured by the mortgage terminates; (ii) The mortgage is canceled or replaced by another security measure; (iii) The mortgaged asset has been realized; and (iv) Other cases as agreed by the parties.

The above article on “Key considerations when entering into a mortgage contract” is presented by TNTP. Should readers have any issues to discuss with TNTP, please contact us for timely support.

Best regards,

In the context of Vietnam’s economy, deducting employees’ wages is a contentious issue, especially when considering its legality and fairness. However, the question remains whether wage deduction is a reasonable and fair method for both parties. In this article, TNTP will present the points that both businesses and employees need to be aware of regarding the deduction of employee wages.

1. Cases where the company can deduct wages:

• According to Article 124 of the Labor Code 2019, disciplinary measures for employees include reprimand, deferment of a pay raise for up to 6 months, demotion, and dismissal.

• Additionally, under Clause 2 Article 127 of the Labor Code 2019, it is prohibited for employers to apply monetary fines or reduce the employee’s wage.

Thus, although companies, as employers, can use disciplinary measures to manage personnel and maintain discipline within the company, withholding wages instead of applying disciplinary measures is prohibited. Therefore, companies are not allowed to deduct employees’ wages for disciplinary purposes.

• However, in practice, there are cases where companies or employers arbitrarily deduct employees’ wages. According to Article 102 of the Labor Code 2019, employers are only allowed to deduct employees’ wages in the following cases:

– When the employee damages tools, or equipment, or causes damage to the company’s property.

– When the employee loses tools, equipment, or other property entrusted by the employer.

– When the employee consumes materials exceeding the allowable limit, they must compensate for the damage either partially or entirely based on market prices or internal labor regulations.

Thus, the company is only allowed to deduct employees’ wages to compensate for damage caused to tools, equipment, or company property, or for excessive consumption of materials beyond the permitted limit.

2. Regulations on deducting employees’ wages

According to Article 102 and Article 129 of the Labor Code 2019, deducting employees’ wages to compensate for damages must also adhere to the following regulations:

• Amount of compensation for damages

– In case the damage caused by an employee is not serious, not deliberate, and is worth less than 10 months’ region-based minimum wage announced by the Government, the employee shall have to pay a compensation of not more than his/her 03 months’ salary, which shall be monthly deducted from his/her salary. Any monthly deduction shall not exceed 30% of the net monthly salary of the employee, after the deduction of insurance premiums.

– In cases where materials are consumed beyond the permitted limit, the employee shall pay compensation for damage in full or in part at the market price or as stipulated in the internal labor regulations or the responsibility contract (if any).

– In case this is caused by a natural disaster, fire, war, major epidemic, calamity, or another force majeure event that is unforeseeable and insurmountable, and all necessary measures and possibilities for avoidance have been taken, the compensation shall be exempted.

• Notification of reasons for wage deductions: Employees have the right to know the reasons for the deduction of their wages, and the deduction must be communicated transparently.

3. Handling violations in cases where the company deducts employees’ wages against legal regulations

• According to Clause 3, Article 19 of Decree 12/2022/NĐ-CP, apart from the cases permitted to deduct wages as mentioned in section 1, companies engaging in arbitrary deduction of employees’ wages may face administrative penalties ranging from 20,000,000 VND to 40,000,000 VND. Employers using fines or wage cuts instead of applying labor disciplinary measures may face these penalties.

• Additionally, according to Clause 4, Article 19 of Decree 12/2022/NĐ-CP, measures to remedy the consequences of wage cuts instead of labor disciplinary measures include compelling the employer to return collected amounts or pay full salaries to employees.

4. Solutions for companies

• Enhance legal awareness: Companies and employees need to be trained on legal regulations related to wage deductions and labor discipline to avoid violations and protect rights.

• Implement fair procedures: Procedures for handling discipline and wage deductions should be fair, transparent, and consistent, ensuring that employees have the opportunity to explain and protect their rights.

• Seek legal advice from lawyers or legal experts: Companies and employees should seek support from lawyers or legal experts to advise and assist with legal issues related to labor. Lawyers or legal experts can help companies assess and manage legal risks, ensuring compliance with legal regulations.

Companies must strictly adhere to legal regulations regarding wage deductions to protect employees’ rights and maintain a fair and transparent working environment. Applying effective and transparent disciplinary measures, along with creating a positive work environment and consulting legal experts, will help companies develop sustainably and build trust among employees.

The above article, ” Is the company allowed to deduct employees’ wages?” is presented by TNTP for our valued readers. If you have any issues for discussion, please contact TNTP for assistance.

Best regards,

The land use rights mortgage contract is one of the most common methods that the borrower chooses to mortgage their land use rights as collateral to borrow credit from the bank. In practice, there are many disputes arising from the non-performance of the borrower with the bank for a long time, leading to the bank initiating a lawsuit against the borrower to the Court for resolution. However, during the period when the mortgage contract is valid, the borrower’s Land use rights certificate is revoked or cancelled. Similar events occur quite often in practice and Caselaw No. 36/2020/AL is a typical example for the Court to apply in practice when adjudicating cases with similar content. In this article, TNTP’s lawyers will comment and clarify the content of Caselaw No. 36/2020/AL.

1. Summary of the case

a) On March 22, 2010, Bank V entered into Credit Contract No. 10.36.0015 with Mr. Nguyen Van C and Mrs. Vu Thi T. Accordingly, Bank V lent Mr. C and Mrs. T 900.000.000 VND, with an annual interest rate of 12% within the term; the overdue interest rate is 150% of the in-term interest rate; the loan term is 12 months.

In order to secure the loan, Mr. C and Mrs. T have mortgaged their asset, which is the land use rights of a parcel with an area of 3.989,7 m2 belonging to parcel No. 12, map sheet No. 05, H Commune, B Town (Land use rights certificate No. Đ544493 issued by the People’s Committee of B Town on July 14, 2004) under Mortgage Contract No. 10.36.0015 dated March 18, 2010. The secured transaction was registered at the Land use rights Registration Office of B town on March 19, 2010.

b) After borrowing the money, Mr. C and Mrs. T did not fulfill their payment obligations to Bank V. Therefore, Bank V filed a lawsuit demanding that Mr. C and Mrs. T repay the entire debt of VND 1.449.537.500 (of which VND 900.000.000 is the principal and VND 549.537.500 is the temporary interest calculated as of July 17, 2013 and interest until the date of debt repayment).

c) During the time the Mortgage Contract was in effect, the People’s Committee of B town issued Decision No. 3063/QĐ-UBND dated August 31, 2011 to revoke Land use rights certificate No. Đ544493. However, Bank V determined that although Land use rights certificate No. Đ544493 no longer exists, the land use right of the 2,400 m2 area that Mr. C and Mrs. T had previously transferred (after being adjusted according to the actual situation) has been completed, so it still has collateral value for the loan of Mr. C and Mrs. T. Bank V will request the Civil judgment enforcement Agency of B city to prioritize the auction of the collateral asset to Bank V.

d) The defendant, Mr. Nguyen Van C, stated that he confirmed the information about the Credit Contract and Mortgage Contract as presented by Bank V is correct. After borrowing, he paid Bank V a portion of the interest debt, which is 122.775.000 VND, but he has not paid the principal amount, and he agrees with Bank V’s lawsuit request.

e) Mr. C and Mrs. T had filed an administrative lawsuit against Decision No. 3063/QĐ-UBND dated August 31, 2011 of the People’s Committee of B Town. However, both the court of first instance and the court of appeals did not accept their request, so he requested the Court to resolve the case according to the provisions of the law, as the collateral asset no longer exists.

f) In the First Instance Commercial Judgment No. 04/2013/KDTM-ST dated December 10, 2013, the People’s Court of Ba Ria – Vung Tau province decided:

• Mr. Nguyen Van C and Mrs. Vu Thi T are required to pay Joint Stock Commercial Bank V – B Branch the amount of VND 1.449.537.500, of which VND 900.000.000 is the principal and VND 549.537.500 is the interest.

• The Mortgage Contract No. 10.36.0015 dated March 18, 2010 signed between Joint Stock Commercial Bank V – B Branch and Mr. Nguyen Van C and Mrs. Vu Thi T regarding the mortgage of a land area of 3,989.7 m2 belonging to parcel No. 12, map sheet No. 05, H Commune, B Town, as per Land use rights certificate No. D544493 issued by the People’s Committee of B Town (now the People’s Committee of B City) on July 14, 2004 in the names of Mr. Nguyen Van C and Mrs. Vu Thi T, is declared void. Therefore, it has no collateral value for the repayment of the debt under Credit Contract No. 10.36.0015 dated March 3, 2010.

g) On December 23, 2013, Joint Stock Commercial Bank V – B Branch filed an appeal.

h) In the Appellate Commercial Judgment No. 48/2014/KDTM-PT dated August 15, 2014, the Appeals Court of the People’s High Court in Ho Chi Minh City decided:

• Dismiss the appeal request of Joint Stock Commercial Bank V – B Branch; to uphold the First Instance Commercial Judgment No. 04/2013/KDTM-ST dated December 10, 2013 of the People’s Court of Ba Ria-Vung Tau province.

• To accept the request of Joint Stock Commercial Bank V – B Branch regarding the dispute over the credit contract against Mr. Nguyen Van C and Mrs. Vu Thi T.

– To order Mr. Nguyen Van C and Mrs. Vu Thi T to pay Joint Stock Commercial Bank V – B Branch the amount of VND 1.449.573.500, of which the principal is 900.000.000 VND and the interest is 549.573.500 VND.

– To declare the Mortgage Contract No. 10.36.0015 dated March 18, 2010 signed between Joint Stock Commercial Bank V – B Branch and Mr. Nguyen Van C and Mrs. Vu Thi T regarding the mortgage of an area of 3,989.7m2 belonging to parcel No. 12, map sheet No. 5, H Commune, B Town according to the Land use rights certification No. D544493 issued by the People’s Committee of B Town (now B City) on July 7, 2004 in the name of Mr. Nguyen Van C and Mrs. Vu Thi T is invalidated. It has no value to secure the payment of the debt for the credit contract No. 10.36.0015 dated March 22, 2010.

i) After the appellate trial, Joint Stock Commercial Bank V submitted a petition requesting a review under the cassation procedure for the above-mentioned appellate judgment.

j) On August 15, 2014, the Chief Justice of the People’s Supreme Court filed a cassation appeal against the Commercial Appellate Judgment No. 48/2014/KDTM-PT of the Appellate Court of the People’s High Court in Ho Chi Minh City regarding the part declaring the Mortgage Contract No. 10.36.0015 dated March 18, 2010 invalidated; requesting the Judicial Council of the People’s Supreme Court to hear the cassation and vacate a part of the above-mentioned Commercial Appellate Judgment and vacate a part of the Commercial First Instance Judgment No. 04/2013/KDTM-ST dated December 10, 2013 of the People’s Court of Ba Ria – Vung Tau Province regarding the part declaring the Mortgage Contract No. 10.36.0015 dated March 18, 2010 invalid; returning the case file to the People’s Court of Ba Ria – Vung Tau Province to re-trial at the first instance in accordance with the provisions of law.

k) At the cassation trial, the representative of the People’s Supreme Procuracy proposed that the Judicial Council of the People’s Supreme Court accept the Cassation Appeal of the Chief Justice of the People’s Supreme Court.

2. Assessment of the Court

• Bank V and Mr. Nguyen Van C both confirmed that Bank V and Mr. Nguyen Van C, Mrs. Vu Thi T signed Credit Contract No. 10.36.0015 dated March 22, 2010 and Mortgage Contract No. 10.36.0015 dated March 18, 2010. The mortgaged asset is a land area of 3,989.7 m2 belonging to parcel No. 12, map sheet No. 05, H Commune, B Town, according to Land use rights certificate No. Đ544493 issued by the People’s Committee of B Town on July 14, 2004 in the name of Mr. Nguyen Van C and Mrs. Vu Thi T. The asset was registered for secured transactions at the Land use rights Registration Office of B Town on March 19, 2010. According to the provisions of Article 343 of the Civil Code 2005; Point c, Clause 1, Article 10 and Point a, Clause 1, Article 12 of Decree No. 163/2006/NĐ-CP dated December 29, 2006 of the Government on secured transactions, the mortgaging of the above land use rights is in accordance with the provisions of law.

• Main point of Case law: On August 31, 2011, the People’s Committee of B Town issued Decision No. 3063/QĐ-UBND on the revocation and cancellation of the Land use rights certificate No. Đ544493 issued by the People’s Committee of B Town on July 14, 2004 in the name of Mr. Nguyen Van C and Mrs. Vu Thi T. The revocation and cancellation of the aforementioned Land use rights certificate was due to errors in the land area and the order and procedures for issuing the Land use rights certificate to Mr. C and Mrs. T. However, the revocation and cancellation of the Land use rights did not deprive the lawful land use rights of Mr. C and Mrs. T, as the transfer of land use rights between the couple Mrs. Tran Thi Ngoc H, Mr. Tran Huynh L and the couple Mr. C, Mrs. T had been completed, and the parties had no disputes over this transfer contract.

On the other hand, before the Land use rights certificate of Mr. C and Mrs. T was revoked, Mr. C and Mrs. T had mortgaged this land use right to the Bank multiple times to borrow money, most recently on March 19, 2010. The land use rights mortgage contract between Mr. C, Mrs. T and the Bank complied with the provisions of the law, so this contract is legally valid. The court of first instance and the court of appeal based on Article 411 of the Civil Code 2005 stated that the land use rights mortgage contract No. 10.36.0015 dated March 18, 2010 mentioned above is invalid because the object of this mortgage contract no longer exists is not appropriate.

• According to Official Letter No. 887/CNVPĐK-ĐKCG dated March 28, 2017, the Branch of the Land Registration Office of B City determined that: After the People’s Committee of B Town issued Decision No. 3063/QĐ-UBND on the revocation and cancellation of the Land use rights certificate No. Đ544493 and the Administrative Judgment No. 01/2013/HC-PT dated January 4, 2013 of the People’s Court of Ba Ria – Vung Tau Province took effect, the Civil Judgement Enforcement Agency of B City had issued Decisions on Judgment Enforcement in accordance with the effective civil judgments that Ms. Tran Thi Ngoc H had the obligation to enforce. Accordingly, the property of 2.741,1 m2 of land in parcel 386, map sheet No. 05, H Commune was organized for auction. Mr. Bui Van C1 was the successful bidder for the land use rights of 2.747,1 m2 of land. On March 14, 2016, the People’s Committee of B City issued the Land use rights certificate No. CA959055 for the auctioned area to Mr. Bui Van C1.

• Therefore, to ensure the rights and obligations of the parties involved, when re-adjudicating the case, the court of first instance needs to rely on Clause 4, Article 68 of the Civil Procedure Code to bring in the Civil judgment enforcement Agency of B City, Ms. Tran Thi Ngoc H, Mr. Bui Van C1, and the People’s Committee of B City as parties with related rights and obligations, in order to comprehensively and thoroughly resolve the case.

3. Comment on Case law

• Regarding the subject matter of a Mortgage Contract:
– According to the regulations in the Land Law 2013, in order to be able to mortgage the land use rights (“LUR”), the following 4 conditions must be fully satisfied:
(i) The land to be mortgaged must have a Land use rights certificate;
(ii) The land must not be in dispute;
(iii) The LUR must not be seized for the enforcement of a judgment;
(iv) The land must still have a remaining term of use, and only the LUR within the remaining term of use can be mortgaged.
– According to the definitions in the Land Law 2003 and the Land Law 2013, the Land use rights certificate is a legal document by which the State confirms the LUR of the person who has the LUR (Clause 20 Article 4 of the Land Law 2003 and Clause 16 Article 3 of the Land Law 2013). The issuance of a Land use rights certificate occurs when the land user has already had the LUR, and it is only applied to those entities that have the LUR. This also means that in practice, there will be entities that have the LUR but have not yet been issued a Land use rights certificate.

Thus, in essence, it is not that the entity only has the LUR after being issued a Land use rights certificate. The LUR of the entity may have arisen before the entity was issued a Land use rights certificate.

– According to the content recorded in the Case law, LUR is the subject matter of the mortgage relationship. The important issue is to determine whether the mortgagor still has the LUR and the remaining LUR after the Land use rights certificate is revoked. The conclusion of the cassation review has affirmed that “… The revocation, cancellation of the Land use rights certificate does not deprive the legitimate of the transferred land use rights” (of the mortgagor). The consequence of this only occurs when the revocation, or cancellation of the Land use rights certificate “is due to errors in the land area and the order and procedures for issuing the Land use rights certificate”. Furthermore, the mortgagor’s LUR in this case still exists. Specifically, the Case law has clearly stated that the transaction “has been completed, and the parties have no disputes about this transfer contract”. When the LUR transfer contract is not deemed invalid, the LUR of the transferee (the mortgagor) is still recognized.

Accordingly, the above is the basis for the Case law to affirm that the land use rights (LUR) of the mortgagor “are not lost”.

• Regarding the validity of the Mortgage Contract:

– The determination of the validity of the Mortgage Contract in this case aims to recognize the obligation to perform the contract of the parties. Specifically, both the court of first instance and the court of appeal have concluded that the Mortgage Contract in this case is invalidate.

– According to Clause 1, Article 411 of the Civil Code 2005, stated that “in the event that, from the time of conclusion, the contract has an object that cannot be executed for objective reasons, then this contract shall be invalidate”. The content of this provision has also been reiterated in Clause 1, Article 408 of the Civil Code 2015. Comparing the case with the regulation, it can be seen that this case does not fall within the scope of application of this Article. When entering into the contract, Mr. C and Mrs. T’s couple, and even Bank V, did not know that the revocation of the Land use rights certificate would occur in the future. The provisions in Clauses 2 and 3, Article 411 of the Civil Code 2005 are also not compatible, as the Land use rights certificate in this case was revoked due to an error in the area. This means that the remaining land use rights after the adjustment are the assets securing the debtor’s debt repayment obligation (if the mortgage contract is determined to be valid).

It can be seen that the prerequisite condition for declaring the contract invalid in this case is that the “object cannot be performed” must appear from the time of signing the mortgage contract. However, according to the content of the case, the revocation of the Land use rights certificate occurred after the parties had entered into the Mortgage Contract, and in fact, the dispute over the mortgage of land use rights arose after the mortgage contract had been signed. Because of that, the mortgage contract still has legal validity.

Thus, it can be seen that the cassation decision of the People’s Supreme Court’s Judicial Council to not recognize the first-instance and appellate judgments when they declared the contract invalid is completely reasonable.

This is an article from TNTP on “Case law No. 36/2020/AL regarding the validity of mortgage contract for land use rights when the land use rights certificate is revoked, canceled”. We hope this article will be helpful for our dear readers.

Sincerely,

The limitations period is the period during which a party has the right to file a lawsuit to request the court or arbitration to resolve a civil case to protect the infringed legal rights and interests; if this period expires, the right to sue is lost. In the article below, TNTP will present some issues related to the limitations period on a mortgage contract for the parties to refer to when initiating legal proceedings at the competent dispute settlement body.

1. On the dependency of the limitations period on a mortgage contract

Since a mortgage contract is essentially an ancillary contract, a component of the main contract – the loan contract, the filing of a lawsuit in general and the limitations period to resolve disputes, in particular, are calculated according to the limitations period of the main contract.

2. On the limitations period

According to Article 429 of the 2015 Civil Code, the limitations period to request the court to resolve contract disputes in general, and mortgage contract disputes in particular, is 03 years from the date the entitled person knew or should have known that their legal rights and interests were infringed. However, the reclamation of assets in a loan contract does not apply to the limitations period because it falls under the category of “requesting the protection of ownership rights.” The lender no longer owns the loaned asset from the moment the borrower receives it according to the following regulation: “A borrower shall become the owner of borrowed property from the time of delivery of the property.” Therefore, when the lender sues to require the borrower to fulfil the payment obligation, the principal debt amount is not subject to the limitations period, but the limitations period applies to the interest debt and other related costs arising from the loan contract.

The 2015 Civil Code stipulates “limitations period to request the court to resolve contract disputes”, but does not mention arbitration. Meanwhile, the 2015 Civil Code stipulates “If a particular civil right is violated or is under a dispute, the protection of such right shall be implemented as prescribed in procedural law at the court or arbitration.” According to Article 33 of the 2010 Law on Commercial Arbitration, except for other provisions in specialized laws, the limitations period under arbitration procedures is 02 years from the time the legal rights and interests are infringed.

3. On the periods excluded from the limitations period

The 2015 Civil Code stipulates periods excluded from prescriptive periods for initiating legal action for civil cases and from prescriptive periods for requesting resolution of civil cases, including:

• The period during which a force majeure event or an objective obstacle occurs, preventing the entitled person from filing a lawsuit or making a request within the limitations period.

• The period during which there is no representative in cases where the entitled person is a minor, has lost civil act capacity, has difficulty in perception and behaviour control, or has limited civil act capacity. The minor, a person who has lost civil act capacity, a person with difficulty in perception and behaviour control, or a person with limited civil act capacity does not have another representative to replace in the following cases: the representative dies if an individual, or ceases to exist if a legal entity; the representative, for legitimate reasons, cannot continue to represent.

4. On the re-commencement of the limitations period

When the limitations period expires, the limitations period starts can re-commence in the following cases:

• The obligated party has acknowledged part or all of their obligation to the claimant;

• The obligated party acknowledges or fulfils part of their obligation to the claimant;

• The parties have reconciled.

5. On the acceptance of cases of the Court

Previously, the court would not accept or would return the case if the limitations period had expired. However, according to the 2015 Civil Procedure Code, in case the limitations period expires, the court still has to accept the case and only applies the limitations period rules upon the request of at least one party.

The above is the article by TNTP on “Legal regulations on the limitations period on mortgage contracts”. If you have any issues to discuss, please contact TNTP for timely support.

Best regards,

Invalid civil contracts and the legal consequences of invalid civil contracts are important topics in contract law. An invalid civil contract is a civil transaction that expresses the will of the participating parties but violates the conditions for the contract’s validity as stipulated in the Civil Code. In the following article, TNTP will present the basic information you need to know about invalid civil contracts and the legal consequences of invalid civil contracts.

1. Recognizing invalid civil contracts

Article 122 of the 2015 Civil Code stipulates: “Civil transactions which fail to satisfy any one of the conditions specified in Article 117 of this Code shall be invalid.”. Additionally, Clause 1, Article 407 of the 2015 Civil Code states, “The provisions on invalid civil transactions in Articles 123 to 138 inclusive of this Code shall also govern invalid contracts.”. Therefore, a contract that fails to satisfy the requisite legal conditions for validity as prescribed by law, or in cases where the law stipulates otherwise, is considered an invalid civil contract.

Cases of invalid civil contracts include the following:

• Invalid contracts due to failure to meet validity conditions, specifically:

 The purpose and content of the contract breach of legal prohibitions or contravention of social ethics;

 The parties entering into the contract were deceived, threatened, or coerced;

 The contract was established fraudulently;

 The parties establishing and executing the contract are minors or legally incapacitated persons or persons with limited cognition and behaviour control or persons with limited legal capacity;

 The parties entered into the contract due to a misunderstanding;

 The parties entered into the contract at a time when they were lacking in cognition and behaviour control;

 The contract does not comply with the required form.

However, the 2015 Civil Code also stipulates that in certain cases, even if a civil contract is established under the aforementioned conditions of invalidity, the contract may still be valid. For example, if the contract has been established as required to be in writing but the document does not comply with the stipulations of the law, and one or both parties have already performed at least two-thirds of their obligations in the transaction, then upon the request of one or both parties, the court may issue a decision recognizing the validity of that transaction.

• Invalidity of civil contracts due to the impossibility of performing subject

If at the time of entering into the contract, the contract has a subject that cannot be performed, then this contract is invalid. This provision applies in cases where the contract has one or more parts of the subject that cannot be performed, but the remaining parts of the contract are still valid.

• Invalidity of civil contracts due to the invalidity of principal contract

The invalidity of the principal contract results in the termination of the ancillary contract, unless the parties agree that the ancillary contract replaces the main contract. This provision does not apply to types of security for the performance of obligations. The invalidity of the ancillary contract does not terminate the principal contract unless the parties agree that the ancillary contract is an inseparable part of the principal contract.

• Invalidity of the civil contract according to the specific provisions

In addition to the 2015 Civil Code, which specifies cases of contract invalidity, specialized laws also have their provisions regarding the invalidity of contracts. The contract will be governed by the relevant specialized law, which will be applied to resolve the declaration of invalidity of the contract and the legal consequences resulting from its invalidity.

2. Legak consequences of invalid civil contracts

The legal consequences of an invalid contract are carried out according to the provisions of Article 131 of the 2015 Civil Code. Accordingly, an invalid contract will lead to the following legal consequences:

• An invalid civil transaction shall not give rise to, change or terminate any civil rights and obligations of the parties as from the time the transaction is entered into.

If a civil contract is legally entered into, it becomes effective in practice. In the case of an invalid civil contract, if the parties have not yet performed the contract, they are not required to continue its execution. If the parties are currently performing the contract, they must stop its execution.

• In case a civil transaction is invalid, the parties shall restore everything to its original state and shall return to each other what they have received; If the restitution can not be made in kind, it may paid in money

This consequence is stipulated in Clause 2 of Article 131 of the 2015 Civil Code; however, this provision has limitations as it cannot be applied to contracts whose subject is acts. Unlike with property, where parties in a contract can return the property to each other, in the case of contracts whose subject is acts, the parties cannot return the acts to each other.

• A bona fide person receiving yield and/or income is not required to return such yield and/or income

During the period from when the party receiving the asset transfers the asset until the contract is declared invalid, a bona fide person has the right to own the yield and income arising from the asset, which is the subject of the invalid contract.

• The party at fault which caused the damage must compensate

A party is considered at fault if this party acts in a way that leads the other party to mistakenly believe that this party has all the necessary conditions to enter into the contract. In cases where both parties are at fault, determining the degree of fault of each party is the basis for specifying the extent of compensation.

Above is the article “Invalid civil contracts and legal consequences of invalid civil contracts” that TNTP presents to you. If you have any issues that need discussion, please contact TNTP for timely assistance.

Best regards,