Invalidity of a contract due to impossibility of performing its subject matter

In civil, commercial, investment and other transactions, the parties often enter into contracts to establish rights and obligations relating to property, goods, services or work. However, not all contracts have legal validity. One of the important grounds for a contract to be declared invalid is that the contract has a subject matter that cannot be performed. This issue is common in transactions involving the transfer of land use rights, the sale of future-formed assets, service contracts dependent on legal conditions or objective practical conditions, etc. Understanding the situations in which a contract becomes invalid, together with the resulting legal consequences, helps individuals, enterprises and organizations proactively prevent risks and choose the optimal course of action when disputes arise.

1.Overview and legal basis for invalidity of a contract due to impossibility of performing its subject matter

Under Article 385 of the Civil Code 2015 (“Civil Code”), a contract is an agreement between two or more parties to establish, change or terminate civil rights and obligations. Under Articles 116 and 117 of the Civil Code, a contract is valid only when it meets all conditions relating to the parties, purpose, content, form and importantly, that the subject matter of the contract must be lawful and capable of being performed. The subject matter of a contract is the property, property rights or work that the parties undertake to perform, including transfer of property, transfer of rights, payment, performance or non-performance of an act.

Article 408 of the Civil Code provides that when the subject matter of a contract cannot be performed immediately at the time the contract is concluded, the contract is invalid. Accordingly:

• The subject matter of a contract that cannot be performed refers to a property, property right or work that is completely incapable of being transferred or performed. This impossibility must be absolute and cannot be remedied by any lawful measure at the time the contract is concluded.
• In addition, at the very time the contract is formed, the subject matter must already be in a state of impossibility. In other words, at the time the contract was entered into, the objective or principal obligation agreed by the parties is objectively incapable of being performed and such impossibility does not arise from any subsequent event.

2.Identifying cases where a contract becomes invalid due to impossibility of performing its subject matter

In practice, a contract may have a subject matter that cannot be performed for different reasons. Three common situations include:

• The subject matter no longer exists at the time of conclusion.

For example: The parties sign a contract for the sale of property but the property has already been destroyed, severely damaged or confiscated before the contract is concluded. The contract is invalid because there is no property to transfer.

• The subject matter is legally restricted and cannot legally be performed.

For example: A service contract involves a service requiring a practicing certificate, but the service provider is not eligible to obtain such certificate. The contract is invalid because the provider lacks the legal capacity to perform the service.

• The subject matter is so vague or indeterminate that it cannot be identified or performed.

For example: The parties enter into a car sale contract but fail to specify model, type, color or year of manufacture, making it impossible to determine which specific vehicle is to be delivered. The contract becomes invalid for lack of an identifiable subject matter.

Other situations include cases where the subject matter depends on an event that cannot occur or performance is objectively impossible, such as a transportation contract requiring use of a permanently closed route or a construction contract at a location that cannot legally be used due to planning changes. Whether the cause is objective or subjective, if impossibility exists at the moment of contracting, the contract is considered invalid.

3.Legal consequences of a contract invalid due to impossibility of performing its subject matter

When a contract is declared invalid, its legal consequences are resolved under Clauses 1 and 2 of Article 131 of the Civil Code. An invalid contract does not give rise to any rights and obligations of the parties from the time it is concluded. The parties must restore the original state and return to each other what they have received. If only part of the contract is invalid because the impossible portion is separable, the remaining part continues to apply.

If one party has received assets or payment, such assets or payment must be returned, together with any lawful interest arising. If a party has derived benefits from using property under an invalid contract, such benefits must also be returned. If the property cannot be returned because it has been destroyed or no longer exists, the party that caused the loss must compensate for the corresponding value.

The party at fault causing the contract to become invalid is responsible for compensating the other party for damage. Damage in commercial or investment transactions may include opportunity costs, preparation costs, losses due to delay or losses from missed business opportunities. However, the amount of compensation depends on the determination of fault. Courts often assess fault based on the diligence of the parties at the time of contract conclusion, their ability to verify legal conditions and their understanding of the legal status of the subject matter.

4.Practical recommendations to limit risks

Practical experience in legal advisory and dispute resolution shows that risks leading to invalid contracts due to impossibility of performing the subject matter often arise from insufficient verification of legal status, transaction conditions and the capacity to perform obligations during the pre-contractual stage. Enterprises and individuals should conduct thorough due diligence, including verifying ownership status, transaction conditions, authority, legal restrictions and actual feasibility.

Another important measure is to anticipate the possibility of legal or practical changes in the contract. The parties may include clauses on change of circumstances, alternative subject matter or mechanisms for handling situations where the subject matter becomes impossible to perform. Independent legal advice should be sought before signing complex contracts.

Finally, where the subject matter requires legal conditions for performance (such as real estate projects or regulated services), the performing party should be required to provide full legal documents and take responsibility for the legality of the subject matter. This enhances the ability to prove fault if the contract becomes invalid and protects the interests of the non-breaching party.

In conclusion, invalidity of a contract due to impossibility of performing its subject matter is a legal mechanism ensuring the integrity and effectiveness of civil transactions. Proper understanding and accurate application of the Civil Code and relevant laws enable the parties to identify, prevent and address invalid contracts effectively, thereby minimizing risks and damages in contractual relationships.