What is a legally invalid contract?

A legally invalid contract is an agreement between parties that is not recognized or protected by law due to violations of mandatory legal conditions. Common cases leading to invalidity include unlawful contracts, sham contracts, or contracts signed by parties lacking legal capacity.

I. Understanding legally invalid contracts

A legally invalid contract is an agreement between parties that is not recognized or protected by law due to violations of mandatory legal conditions. Common cases leading to invalidity include unlawful contracts, sham contracts, or contracts signed by parties lacking legal capacity.

When a contract is deemed invalid, the parties cannot demand performance or claim benefits based on such a contract. Understanding such a type of contract helps individuals and businesses avoid unnecessary legal risks and damages.

II. Legal regulations on legally invalid contracts

1. Definition of a legally invalid contract

A legally invalid contract, also referred to as a void contract, is an agreement between parties that fails to meet the statutory requirements under the law, resulting in its non-recognition and non-protection.

Pursuant to Article 122 of the Civil Code 2015, a contract may be void due to violations of prohibitions prescribed by law, contravention of social ethics, lack of legal capacity of one or more contracting parties, or lack of voluntary consent. Once declared void, the contract does not give rise to obligations or entitlements.

2. Circumstances in which a contract is deemed legally invalid

Civil contracts establish, alter, or terminate civil rights and obligations, but not all contracts hold legal validity. The Civil Code 2015 provides several situations in which a contract may be considered void, including:

Contracts void due to violation of prohibitory provisions of law or contravention of social ethics according to Article 123, Civil Code 2015.
Sham contracts according to Article 124, Civil Code 2015.
Contracts entered into by minors, persons lacking civil act capacity, persons with cognitive or behavioral limitations, or those with restricted capacity according to Article 125, Civil Code 2015.
Contracts void due to mistake according to Article 126, Civil Code 2015.
Contracts void due to fraud, threat, or coercion according to Article 127, Civil Code 2015.
Contracts void due to the incapacity of a contracting party to perceive and control their acts according to Article 128, Civil Code 2015.
Contracts void for failure to comply with statutory formalities according to Article 129, Civil Code 2015.
Contracts void due to impossibility of performance according to Article 408, Civil Code 2015.

3. Legal responsibilities of parties to a legally invalid contract

Even when a contract is legally invalid (void contract), the parties may still take certain legal responsibilities, particularly liability for damages caused by dishonesty or misconduct. Article 131 of the Civil Code 2015 stipulates the following consequences of void contracts:

It does not create, alter, or terminate civil rights and obligations from the time of its conclusion leading to such a contract without legal effect.
The parties must restore the original state and return to each other what was received. If restitution in kind is impossible, the equivalent value must be reimbursed.
The non-violating parties are not required to return fruits or profits obtained in good faith.
The violating party must compensate for damages arising from the void contract in proportion to their degree of fault.
Transactions relating to personal rights shall be resolved under specific provisions of the Civil Code or relevant laws.

Thus, despite the lack of legal validity, the parties to a legally invalid contract may still be required to return assets, provide compensation, or take responsibility for unlawful acts.

III. Questions on legally invalid contracts

1. Is compensation required if damages result from the use of legally invalid contracts?

If the use of legally invalid contracts causes damage to another party, the party at fault must compensate in accordance with the law. Even though the contract is void, the law protects the legitimate rights and interests of the injured party through restitution and compensation principles.

Article 131 of the Civil Code 2015 requires the parties to return what they have received. If restitution in kind is not possible, monetary compensation must be made. Particularly, if one party’s fault caused damage, they must compensate the injured party for such losses. This ensures fairness, prevents abuse of legally invalid contracts for unjust gain, and encourages honesty and caution in civil transactions.

2. Do contracts without the company seal still have legal validity?

In most cases. The use of a company seal is no longer a mandatory condition for a contract’s validity. A contract without a seal can still be legally valid if it is only signed by the legal representative or duly authorized person, unless the company’s charter or internal regulations explicitly require a seal.

Clause 3, Article 43 of the Law on Enterprise 2020 provides that the use and management of seals are at the discretion of the enterprise in accordance with its charter or internal rules. Therefore, a contract without a seal may still be enforceable, except in the following cases:

Where the company’s charter or internal rules stipulate that seal is required.
Where the counterparty specifically requires a seal for contract validity.
Where specialized laws (e.g., in real estate, finance, or banking) mandate stricter formal requirements.

In most current practice, the signature of the legal representative or duly authorized person is the main factor establishing legal validity. However, the absence of a seal may complicate proof of authority if a dispute arises.

3. How can parties avoid entering into legally invalid contracts?

To avoid the risk of legally invalid contracts, parties should pay attention to:

Checking capacity and authority: Ensure that the signatory has full civil act capacity and lawful representative authority. In organizational transactions, verify powers of attorney, titles, and authorization documents.
Ensuring lawful purpose and content: The contract must not violate prohibitions or contravene social ethics. All provisions must be clear, transparent, and compliant with the law.
Avoiding sham, mistake, fraud, or coercion: Negotiations and execution must be conducted honestly, without misrepresentation or duress.
Complying with formal requirements: Certain contracts (e.g., land use rights transfer contracts) must be in writing, notarized, authenticated, or registered
Reviewing main terms carefully: Clearly stipulate rights, obligations, payment terms, penalties, and damages to avoid disputes and invalidity.
Retaining documentation: Keep negotiation records, correspondence, meeting minutes, and original contracts as evidence of lawful transactions.

By exercising diligence and complying with legal requirements, parties can ensure contract validity and protect their legitimate rights in the event of disputes.

IV. Legal advisory services on legally invalid contracts

NP Law provides specialized legal advisory services concerning legally invalid contracts. Our experienced lawyers advise on the rights and obligations of parties to invalid contracts, liability for damages, and dispute resolution strategies. With extensive expertise in civil law, NP Law is committed to safeguarding clients’ interests, mitigating risks, and resolving related legal issues effectively and accurately.