For contracts in general and the sale of goods contracts in particular, the contracting parties must satisfy the passive legal capacity and active legal capacity as stipulated by law. Disputes in the sale of goods contracts often arise when the contracting party fails to satisfy these legal prerequisites. This article by TNTP will analyze several common disputes relating to contracting parties in the sale of goods contracts.
1. Disputes concerning passive legal capacity and active legal capacity
According to the provisions of the Civil Code 2015 and the Commercial Law 2005, the contracting parties must possess appropriate passive legal capacity and active legal capacity to establish and perform transactions. However, in certain cases, disputes arise due to contracting parties lacking these legal capacities. Common disputes include:
• The signatory lacks active legal capacity (e.g., minors, lack of active legal capacity, persons with limited active legal capacity).
• The signatory lacks the authority to represent or beyond the scope of representation.
These disputes commonly arise when the individual signing the contract is not the legal representative, is not properly authorised, or acts beyond the scope of their authority. In such cases, the legal consequences of the contract will be addressed under Articles 142 and 143 of the Civil Code 2015.
• The contracting organization fails to meet legal conditions for operation (e.g., has not registered its business, operates outside its registered business lines, or fails to meet conditions for regulated business lines).
Certain business activities, such as trading in petroleum, alcohol, tobacco, pharmaceuticals, or medical equipment, fall under conditional business lines as prescribed by law. If the seller does not meet the legal requirements for conducting business in these sectors, the sale of goods contract may be declared invalid under the Civil Code 2015. For instance, an enterprise that lacks a license to trade in medical equipment but enters into a contract to sell such goods may have its contract declared invalid.
2. Disputes arising from the seller’s lack of the right to sell goods
Another type of dispute related to contracting parties in the sale contracts arises when the seller lacks the right to sell the goods. Under the Civil Code 2015, the seller must either own the goods or have the legal right to sell them. If the seller is neither the owner nor properly authorized by the owner, the sale of goods contract may be declared invalid. A practical example is a company selling goods mortgaged to a bank without the bank’s consent.
3. Disputes arising from a legal entity’s branch lacking authorization to sign a sale of goods contract
According to Article 84 of the Civil Code 2015, a branch is a dependent unit of a legal entity and, therefore, does not have independent legal status. A branch may only sign a sale contract if authorized by the legal entity. Contract disputes will arise when the branch arbitrarily signs a contract without legal authorization, leading to the partner requesting the contract to be invalidated or claiming compensation for damages. For instance, if a branch of Company A signs a contract to sell a large consignment without Company A’s authorization, the buyer may request the court to declare the contract invalid for violating the provisions on contracting parties.
4. Disputes due to non-compliance with approval requirements of the general meeting of shareholders, board of directors, members’ council, or partnership member
In the organizational and operational model of a partnership, the decision on large-value contracts belongs to the partnership members. Similarly, in joint-stock companies or limited liability companies, contracts of substantial value or critical importance often require approval by the General Meeting of Shareholders, Board of Directors, or Members’ Council, depending on the provisions of law and the company’s charter. Thus, if the representative signs a contract without obtaining the requisite approval, the contract may be declared invalid for lack of authority or exceeding the scope of representation.
Disputes related to contracting parties in the sale of goods contracts stem from various causes, including a lack of legal knowledge, intentional violations, or internal management errors within enterprises. To mitigate risks, parties should strictly comply with legal regulations and thoroughly verify the authority of the counterparty before signing a contract.
Above are the contents and legal sharing of TNTP on “Disputes Regarding the Contracting Party Signing Sale Contract”. We hope this article is useful to you.
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