The Validity of a Deposit Contract in the Case Where the Secured Contract Is Invalid

In civil and commercial transactions in Vietnam, deposit contracts are used very commonly, especially in transactions of large value. However, many disputes arise around the issue of whether, when the secured contract is invalid, the deposit contract remains valid and how the legal consequences are handled. This article analyzes the validity of a deposit contract in the case where the secured contract is invalid based on the provisions of current Vietnamese law and practical application.

1.Overview of the deposit contract and the secured contract

• Deposit contract:

Pursuant to Article 328 of the Civil Code 2015, a deposit is the act whereby one party delivers to the other party a sum of money, precious metals, gemstones or other valuable property for a certain period of time to secure the conclusion or performance of a contract. From this definition, it can be seen that a deposit contract is a civil transaction that is independent in form, but dependent in purpose, meaning that it exists to serve the conclusion or performance of another contract.

In nature, a deposit contract is not the principal contract governing the final exchange of rights and obligations between the parties but rather a security measure for the performance of obligations with a sanctioning nature. Therefore, the validity and legal value of a deposit contract are always closely related to the secured contract but are not entirely identical to that contract.

• Secured contract:

A secured contract is a contract whose conclusion or performance is secured by the parties through one of the security measures for performance of obligations as provided in Article 292 of the Civil Code 2015, including the deposit measure.

The law does not require the secured contract to be signed concurrently with the deposit contract. In many cases, the deposit is established at the pre-contractual stage, when the parties have not yet completed the conditions necessary to conclude the official contract. However, the secured contract must be clearly identified in terms of the type of contract, the subject matter and the secured obligations; otherwise, there will be a potential risk of disputes regarding the validity of the deposit contract.

2.The principle of relative independence between the deposit contract and the secured contract

An important principle that must be affirmed is that a deposit contract does not automatically lose its validity merely because the secured contract has not been concluded, is invalid or is not performed. Vietnamese law recognizes the relative independence of the deposit contract, which is reflected in the fact that the deposit contract will be valid if it fully satisfies the conditions for validity of a civil transaction, regardless of whether the secured contract has been concluded or performed.

In many cases, it is precisely the failure to conclude the secured contract that constitutes the basis for applying the deposit sanction. If one party refuses to conclude or perform the secured contract without lawful grounds, the legal consequences of the deposit will arise in accordance with the agreement or pursuant to Article 328 of the Civil Code 2015.

For example: A enters into a deposit contract with B, under which A pays a deposit of VND 50 million to secure that, within 30 days, A and B will proceed to conclude a contract for event organization services. After receiving the deposit, B refuses to sign the service contract without a legitimate reason, even though A continues to satisfy all agreed conditions. In this case, although the service contract has not been concluded, the deposit contract remains independently valid. B’s failure to conclude the secured contract constitutes a basis for applying the deposit sanction, whereby B is obliged to return the deposit amount and compensate an amount equivalent to the value of the deposit in accordance with Article 328 of the Civil Code 2015, unless the parties have otherwise agreed.

However, this independence is not absolute. The validity of the deposit contract is still governed by the secured obligation and by the legality of the secured contract in certain cases.

3.Validity of the deposit contract in the case where the secured contract is invalid

A more complex issue arises when the secured contract is invalid due to violation of prohibitions of law, contravention of social morals, lack of capacity of the parties, non-existence of the subject matter or failure of the subject matter to satisfy conditions for transactions then how the validity of the deposit contract should be determined. The general principle derived from judicial practice is that if the secured contract is invalid due to the fault of one party, the deposit contract may still be considered valid for the purpose of determining the liability of the party at fault. Conversely, if the secured contract is invalid due to objective reasons or due to the fault of both parties, the deposit sanction is usually not applied; instead, the parties return to each other what they have received.

In particular, if the secured contract is invalid because the transaction subject matter does not meet the conditions prescribed by law (for example, land use right that does not meet the conditions for transfer), many views hold that the deposit contract in this case is also invalid because the secured obligation is the conclusion of an unlawful contract. Accordingly, a key factor in assessing the validity of a deposit contract is the purpose of the deposit. If, from the outset, the deposit is intended to secure a transaction that the parties clearly know cannot or is not permitted to be performed, then the deposit contract is at risk of being declared invalid due to an unlawful purpose. Conversely, if at the time of making the deposit, the parties have reasonable grounds to believe that the secured contract can be lawfully concluded, then the subsequent failure to perform that contract does not automatically render the deposit contract invalid.

4.Practical experience in developing a plan for handling deposit disputes

In practical legal consultancy and dispute resolution, correctly understanding the relationship between the validity of the deposit contract and the secured contract is not only of theoretical significance but also directly determines the approach to handling the case. An appropriate approach from the outset helps the parties limit risks, proactively control legal consequences and avoid unnecessary prolonged disputes.

For the depositing party, the most important experience is to carefully assess the legality, the possibility of conclusion and the possibility of performance of the secured contract before paying the deposit. In many cases, the cause of losing the deposit does not stem from the receiving party’s breach but from the fact that the secured contract cannot be concluded or performed due to legal obstacles. Paying a deposit in such circumstances entails high risks and often places the depositing party in a disadvantageous position when disputes arise.

For the deposit-receiving party, practical experience shows that it is not advisable to receive a deposit when one does not yet meet the legal conditions to conclude or perform the secured contract. In practice, many deposit-receiving parties believe that receiving money in advance is merely to “reserve a slot” or “create goodwill” but when the contract cannot be performed, they face the obligation to return the deposit and compensate an amount equivalent to the deposit value in accordance with the law. Exercising caution from the deposit-receiving stage helps avoid legal risks and unexpected financial liabilities.

In the process of resolving disputes, determining the fault of the parties, the true purpose of the deposit transaction and the time at which the legal event arises are key factors in determining whether or not to apply the deposit sanction. Judicial practice shows that courts do not mechanically apply forfeiture of the deposit or deposit penalties; instead, courts usually comprehensively consider the transaction context, the reasons for failure to conclude or perform the contract, as well as the degree of fault of each party in resolving the case. Therefore, collecting documents and evidence from the outset and building arguments around the relationship between the two contracts are decisive factors for the effectiveness of the handling strategy.

A deposit contract is an effective legal instrument but also entails many risks if not used properly. The validity of a deposit contract does not entirely depend on the secured contract but it also cannot be separated from the purpose and legality of that contract. Properly understanding this relationship enables the parties to proactively prevent disputes, develop appropriate handling strategies and better protect their lawful rights and interests in civil and commercial transactions.