Bui Duc Giang
Attorney at law and Ph.D in law
- Under the new Civil Code, in certain circumstances, a contract may be voidable for want of form;
- This text has crossed out the condition “permission”, while specialized laws require certain contracts be approved;
- Contract safeguarding methods based on the quantity of obligations already performed don’t appear to much help parties to contracts avoid the risk of nullity.
Article 117.2 of the 2015 Civil Code provides that ‘the form of a civil transaction is a condition for its validity in cases where the law so provides.”
Regarding formal requirements of civil transactions, Article 119 of the 2015 Civil Code provides as follows:
- Civil transactions may be expressed verbally, in writing or through specific acts. Civil transactions by electronic means in the form of data messages in accordance with the law on e-transactions shall be deemed to be written transactions.
As contracts are one category of civil transactions (Article 116 of the 2015 Civil Code), these principles will apply to them.
As per Articles 407.1 and 132.1 of the 2015 Civil Code, the time limit within which a request may be made to a court to declare a civil transaction null and void for want of form is two years from the date the civil transaction was established.
No need for contract approval?
Article 124.2 of the 2005 Civil Code provides that “where the law provides that a civil transaction must be in writing, notarized, authenticated or registered or obtain permission, such provisions shall be complied with.”
Comparing this text with Article 119 of the 2015 Civil Code mentioned above, it can be noted that the condition “permission” has been omitted from the latter.
This condition means that the formation of the contract concerned must be approved or obtain consent and such approval or consent shall be a condition for its validity.
For instance, pursuant to Article 56.2(d) of Law No. 68/2014/QH13 on Enterprises dated November 26, 2014 (the Law on Enterprises), the Members’ Council of a limited liability company with two or more members shall approve loan agreements and contracts for sale of assets valued at 50 percent or more of the total value of assets recorded in the latest financial statements of the company, or a smaller percentage or value as stipulated in the charter of the company.
In the same spirit, contracts entered into by a shareholding company with its associated persons must be approved by its Board of Directors or General Meeting of Shareholders (Article 162 of the Law on Enterprises).
As such, it would be difficult to qualify the approval requirement under the Law on Enterprises, especially when this Law says nothing on the consequences of the lack of approval. This clerical mistake is likely to create difficulties in the coming time.
Paradoxically, the approval requirement features also in the 2015 Civil Code. For example, under Article 212.2 of this Code, “in the case of disposal of registered immoveable property or moveable property or property being the main source of income of a family, it must be agreed by all the family members who are adults with full capacity for civil acts, unless otherwise provided by law.”
Article 64.1 of Decree No. 43/2014/ND-CP dated May 15, 2014, implementing the Land Law, provides that “contracts and transaction documents on land use rights and ownership of land-attached assets of households must be signed by the persons named in the certificates of land use rights and ownership of houses and other assets attached to land or their authorized persons in accordance with the civil law”.
Article 14.5 of implementing Circular No. 02/2015/TT-BTNMT dated January 27, 2015, of the Ministry of Natural Resources and Environment, provides that “the persons named in the certificates of land use rights and ownership of houses and other assets attached to land or their authorized persons in accordance with the civil law prescribed in Article 64.1 of Decree No. 43/2014/ND-CP shall be permitted to sign contracts or transaction documents on land use rights and ownership of assets attached to land only if all members of the household using the land have agreed in writing and such agreement has been notarized or authenticated in accordance with law.”
As such, for instance, in case of sale of, or creation of a security interest over, the land use rights of a household using the land, a prior approval of such transaction is required to ensure its validity and enforceability.
In light of the above, the approach of Article 119 of the 2015 Civil Code appears to conflict with specialized laws and other provisions of the 2015 Civil Code as well. Such a legal gap should have been avoided if the lawmakers had paid enough attention to the 2005 Civil Code’s wording.
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“Safeguarding” contracts in breach of formal requirements
Under Article 134 of the 2005 Civil Code, “where the law provides that the form of a civil transaction is a condition for its validity but the parties fail to comply with the specific form, at the request of one party or all parties, the court or another competent state agency may make a decision compelling the parties to conduct the formalities as provided for the transaction within a specified period of time. If such formalities are not complied with within such period of time, the transaction shall be deemed invalid.”
The 2015 Civil Code has abolished such way of remedying the contract’s form irregularity. Instead, it provides for some mechanism aimed at safeguarding the contract based on the quantity of obligations which have been already performed.
Indeed, Article 129.1 of the 2015 Civil Code provides that “where the civil transaction established was required to be in writing, but the document does not conform to the provisions of the law, and one party or more parties has or have performed at least two-thirds of the obligations in the transaction, the court shall, at the request of one party or the parties, issue a decision to recognize the validity of such transaction.”
Specialized laws may impose that contracts contain a certain number of particulars. This is a new tendency as well. For instance, according to Article 141.1 of Law No. 50/2014/QH13 on Construction dated June 18, 2014, a construction contract shall contain the following items:
- Applicable legal bases;
- Language to be used;
- Contents and volume of the work;
- Quality and technical requirements of the work, check and acceptance and handover;
- Duration and schedule for performance of the contract;
- Price of the contract, advances, currency used for payment, and payment for the construction contract;
- Security for performance of the contract and guarantee for refund of advances for the contract;
- Revisions to the construction contract;
- Rights and obligations of parties to the contract;
- Liability for contractual breaches, bonuses, and penalties for contractual breaches;
- Suspension and termination of the contract;
- Resolution of disputes in relation to the contract;
- Risks and force majeure events;
- Finalization and liquidation of the contract; and,
- Other items.
Similarly, Article 18 of Law No. 66/2014/QH13 on Real Estate Business dated November 25, 2014, prescribes that a contract for sale, lease or hire-purchase of a house or construction work (e.g., a commercial building) must have the following main contents:
- Names and addresses of parties;
- Information about the real estate;
- Price of sale, lease or hire-purchase;
- Method of and time limit for payment;
- Time limit for handover and receipt of the real estate and the enclosed file;
- Rights and obligations of the parties;
- Liability for contractual breach;
- Penalty for contractual breach;
- Cases of termination or rescission of the contract and measures for dealing with such cases;
- Dispute resolution;
- Time of effectiveness of the contract.
As such, Article 129.1 of the 2015 Civil Code officially considers as a formal requirement the one that a contract must have certain contents. This approach is a step forward in the context that the issue has not been dealt with in a clear way in the current law.
In the same spirit, Article 129.2 of the 2015 Civil Code prescribes that “where the civil transaction which has been established in writing is in breach of compulsory provisions on notarization or authentication, but one party or the parties has or have performed at least two-thirds of the obligations in the transaction, the court shall, at the request of one party or the parties, issue a decision to recognize the validity of such transaction. In this case, the parties are not required to carry out notarization or certification.”
In this regard, it should be noted that the law requires certain kinds of contracts to be notarized or authenticated.
For instance, Article 167.3 of the Land Law provides that contracts for contribution as capital of land use rights or land use rights and assets attached to land must be notarized or authenticated.
Likewise, under Article 122.1 of Law No. 65/2014/QH13 on Housing dated November 25, 2014, agreements of mortgage over a house must be notarized or authenticated and such agreements will take effect from the date of notarization or authentication.
The solutions to safeguard contracts mentioned above seem to be innovative but it would be very difficult to determine “at least two-thirds of the obligations in the transaction.”
One may suggest defining the total of obligations in the contract and then calculating the two-thirds. However, such calculation will not be feasible if amongst those obligations, there are some which are not divisible or where the list of obligations in the contract is an open one.
Some take the view that only key obligations of the contract will be taken into consideration for the purpose of calculation. For example, in a sale agreement, those are the purchaser’s obligation to pay the contract’s price and the seller’s obligation to deliver goods. For a loan agreement, the condition would be met if the lender has disbursed two-thirds of its commitments. However, the wording of Article 129 of the 2015 Civil Code does not appear to permit such a flexible interpretation.
The parties may think about stating in their contract how to calculate two-thirds of the obligations in the transaction. Nevertheless, if afterward, one of those parties rejects that calculation, it would be difficult to anticipate whether or not the court will recognize the parties’ initial agreement (intention). Furthermore, in both scenarios mentioned in Article 129 of the 2015 Civil Code, court intervention is still required. It is a pity notably in the current context that court proceedings may be sometimes cumbersome and time-consuming. The validity of the contract should have been automatically recognized instead!
The above analysis shows that there are various legal gaps in the 2015 Civil Code regarding formal requirements for contracts. As this is a complicated field, the parties to a contract should be aware of those in order to minimize contract avoidance risks.-