Contract Legality and Validity Review - World Credit Organization

Contract legality and validity review

Reviewing the validity of contracts is one of the responsibilities of credit practitioners and an important part of avoiding credit risks. There are several types of void contracts:

1. One party concludes the contract by means of fraud or coercion, which damages the interests of the state.

Judging from the legislative experience of various countries, most countries will treat contracts concluded due to fraud or duress as revocable contracts. For example, in civil law countries, Article 318 of the German Civil Code stipulates: "Only the party to the contract may revoke the determination of the performance of the treatment due to error, coercion or fraud; the opposite party to the right of rescission for the other party. "Article 1111 of the French Civil Code stipulates: "Coercion of a person who has entered into a contract to undertake obligations constitutes a cause of invalidity. "Article 96 of the "Japanese Civil Code" stipulates: "An expression of will made due to fraud and coercion may be revoked. "As mentioned above, in our country's original legislation, whether it is the "General Principles of Civil Law" or the three contract laws, contracts concluded due to fraud or coercion are all stipulated as invalid contracts without exception. Later The "Contract Law" adopts the following "dichotomy" for the determination of the validity of contracts concluded due to fraud and coercion, namely:

1. If one party concludes a contract by means of fraud or coercion, if it damages the interests of the state, the contract is invalid. First of all, although in most cases, the problems caused by fraud and coercion are mainly that the expression of intention is untrue and may cause partial interest imbalance between the parties, but another situation in practice is: one of the parties is fraudulent, Coercive behavior and means not only damage the interests of the other party, but also constitute a hazard to the sound operation of the entire social and economic order. Therefore, in order to protect the national and social public interests, contracts concluded under such circumstances due to fraud or coercion should be deemed invalid. Secondly, in the legislative process of this contract law, some scholars have repeatedly emphasized that fraudulent and coercive contracts are generally defined as revocable contracts in foreign legislation. In this regard, I believe that my country, as a socialist country, is quite different from Western countries in terms of economic foundation and social system, and the practices of Western countries cannot fully adapt to my country's national conditions. In the field of contractual relations, for situations that endanger the national and social public interests, the power and means of active intervention by the state must be reserved. Therefore, fraudulent and coercive contracts in the above situations should be classified as invalid contracts. Finally, characterization of fraudulent and coercive contracts that damage national interests as invalid contracts can also provide a reasonable basis for pursuing administrative and criminal liabilities of the fraudulent or coercive party beyond civil liability.

2. If one party uses fraud or coercion to force the other party to conclude a contract against its true intention, if the national interest is not damaged, the contract may be revoked. For this type of contract, it is more appropriate to define it as a revocable contract: under normal circumstances, the main effect of the fraudulent or coerced party after being deceived or coerced is that the intention is not true, that is, the freedom of will is restricted , the party concerned made a statement that did not conform to his true intention. But, objectively, will this untruthful expression definitely bring actual damage to the deceived or coerced party? In practice, the situation of fraudulent and coerced contracts is very complicated. Therefore, defining such contracts as revocable contracts and giving the fraudulent and coerced party the right to choose means respecting the independent will of the parties and safeguarding the interests of the victims. It is also conducive to promoting transactions and speeding up social and economic circulation.

Specifically, if a contract concluded by one party by means of fraud or coercion is invalid or revocable, the following conditions must be met:

(1) Fraud. Article 68 of the Supreme People's Court's "Opinions on Several Issues Concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China (Trial Implementation)" clearly stipulates: "One party deliberately informs the other party of false information, or deliberately conceals the real situation, and induces the other party to make a Wrong expression of intention can be determined as a fraudulent act.” The so-called fraudulent act refers to an act in which one party intentionally informs the other party of false information, or conceals the truth, and induces the other party to make a wrong expression of intention and conclude a contract.

In practice, there are many types of fraudulent behavior, such as selling counterfeit and shoddy products, forging product origin or quality certificates, providing false product brochures, signing contracts without the ability to perform to defraud deposits or loans, etc. Various fraudulent acts may cause losses to the deceived party. From a practical point of view, fraud and coercion may directly damage the interests of the state, and may also damage the interests of the collective or a third party.

The constituent elements of fraud are:

1. Subjectively, the deceitful party has the intention to defraud. The so-called intentional deceit means that the fraudulent party knows that what he tells the other party is false, and may cause the other party to fall into a wrong understanding, and hopes or allows this result to happen. It can be seen that the fraudulent party is actually malicious. The fact that the fraudulent party informs false information, regardless of whether it benefits itself or a third party, does not prevent the formation of malicious intent. If the fraudster realizes that his fraudulent behavior will benefit himself or a third party and cause damage to the other party and acts maliciously, it can be considered that the fraudster has subjective malice.

2. Objectively, the fraudulent party commits a fraudulent act. The so-called fraudulent behavior refers to the behavior of the fraudulent party deliberately expressing its fraud to the outside. In practice, it mostly manifests as deliberately stating false facts or deliberately concealing the real situation to make others fall into the wrong behavior. The so-called deliberate disclosure of false information refers to false statements, such as saying that a product of low quality is a high-quality product. The so-called intentional concealment of the real situation means that the perpetrator is obliged to truthfully inform the other party of a certain real situation but deliberately fails to do so. According to the principle of good faith, the parties should truthfully inform the other party of important information such as the method of use, performance, and hidden defects of the product. This is an accompanying obligation of the parties, and violation of such obligations may constitute fraud.

3. The defrauded party fell into error by defrauding. In the case of fraud, the defrauded party falls into a false perception due to fraud. It should be noted: (1) The false information provided by the fraudster is closely related to the content of the contract; if there is no connection with the content of the contract, it cannot be considered that there is a causal link between the fraudulent act and the misunderstanding. (2) The victim misunderstood the content of the contract based on a false situation, for example, mistaking the counterfeit medicine for the real medicine due to misbelief in the other party’s fake medicine propaganda. If after the fraudster commits the fraudulent act, the deceived person does not fall into a mistake or the error content that occurs is not caused by fraud, it does not constitute fraud.

4. The defrauded person expressed his intention by mistake. The defrauded person expressed his will and concluded a contract based on the erroneous understanding of the fraud, which shows that there is a causal link between the fraudulent behavior and the victim's untrue expression of will. If the defrauded person falls into a mistake due to the fraudulent behavior, but does not express his intention, it cannot be considered as fraudulent.

(2) Coercion. Article 69 of the Supreme People's Court's "Opinions on Several Issues Concerning the Implementation of the General Principles of the Civil Law of the People's Republic of China (Trial)" defines how to determine coercion, "in order to cause damage to the life, honor, property, etc. of citizens and their relatives and friends. or coercion to cause damage to the honor, reputation, property, etc. of a legal person, forcing the other party to act contrary to the true intention, can be identified as coercion.” Accordingly, the so-called coercion refers to the threat of causing damage to the person or property of another person. Coercion is the act of forcing the other party to make an untrue expression of will and conclude a contract.

The constitutive elements of coercion are:

1. The perpetrator has the intention to coerce. The so-called intentional coercion means that the perpetrator clearly knows that his behavior will cause the counterparty to fall into psychological fear, and expresses his will against his true will, and hopes or allows this result to happen. Generally speaking, the intention of coercion does not include the coercion's desire to obtain certain benefits for itself through the coercion, and profit is only a matter of its motivation. It is precisely because the coercion has the intention of coercion, so the degree of its fault is relatively large.

2. The intimidator committed an act of coercion. Coercive behavior includes the threat of imminent harm or the threat of direct harm to another person. The intimidator can threaten to cause damage to citizens, their relatives and friends, or threaten to cause damage to a legal person. The coercion does not necessarily depend on whether the harm is serious. Fear can constitute coercion. It should be noted that since the coercive act is carried out against a specific party, the determination of whether the coercive act is constituted should be judged on the basis of whether the specific victim, rather than ordinary people, feels fear under the circumstances at the time. Coercion can be constituted even if the victim does not feel fear.

Acts of coercion are usually implemented to force the other party to enter into a contract when the contract is concluded. After the contract is concluded, coercion by one party to force the other party to change or access the contract may also constitute coercion. If the purpose of coercion is not to force the other party to enter into a contract, such behavior will constitute a tort or other illegal act, and there will be no issue of coercion into a contract.

3. The coerced person entered into the contract as a result of coercion. That is to say, because one party's coercive behavior makes the other party psychologically fearful, that is, because he is facing damage or will face damage, he will have a psychological state of terror and fear. Under the domination of this psychological state, the coerced person is coerced to conclude contract. Since the coerced person concluded the contract under the condition of being intimidated, the meaning is untrue. However, if the coercive act of the coercing party does not arouse fear in the coerced person or even if there is fear, but does not make a certain expression of will, it cannot be considered that there is a causal relationship between the coercive act and the expression of will of the coerced person.

4. Coercion is illegal. Coercion imposes a kind of coercion and threat on the other party. This threat must be illegal and has no legal basis. If one party exerts some kind of pressure on the other party under the premise of legal basis, it does not constitute coercion. In addition, after the conclusion of the contract, if one party refuses to perform the contract, and the other party puts pressure on the other party to perform the contract by legal means such as imminent litigation, it does not constitute coercion.

2. Malicious collusion to harm the interests of the state, collective or third party

The contract of malicious collusion refers to the illegal collusion between the two parties to conclude some kind of contract, causing damage to the interests of the state, the collective or a third party. It can be seen that the behavior of the perpetrator is obviously illegal, so it can be treated as an illegal contract. The main characteristics of this type of contract are:

1. The parties involved were subjectively malicious. The so-called maliciousness is relative to good faith, that is, knowing or should know that a certain behavior will cause damage to the country, the collective or a third party, and intentionally do it. If both parties or one party does not know or should not know the damage result of their actions, it does not constitute malicious intent. The parties have malicious intentions, indicating that they have subjective intentions to violate the law.

2. The purpose of collusion between the parties is to harm the interests of the state, collective or third party. Collusion, first of all, means that the parties have a common purpose, that is, they all hope to harm the interests of the state, the collective or a third party through the implementation of certain actions. The common purpose may be manifested as an agreement reached by the parties in advance, or it may be that one party expresses its intention, and the other party or other parties know that the purpose achieved by implementing the act is illegal, and express acceptance in a tacit way. Secondly, the parties cooperated with each other or jointly implemented the illegal act. The intention expressed by the parties in malicious collusion is true, but this expression of intention is illegal and therefore invalid.

3. Cover up illegal purposes with legal forms

The so-called concealment of illegal purpose in a legal form means that the behavior performed by the parties is legal in form, but illegal in content and purpose. This kind of behavior is also called concealment behavior. In the implementation of this kind of behavior, the form or behavior intentionally expressed by the parties is not intended to achieve the purpose, nor is it the real meaning, but only hopes to cover up and achieve its illegal purpose through this form and behavior. For example, in the transfer of real estate, the buyer and the seller achieve the purpose of evading national taxation. On the surface, they sign a house gift contract and handle the gift certificate, but they pay the house money in private. Another example is that two trading companies A and B enter into a joint venture contract, and A invests in currency., B invests in a business house, but agrees that A will not participate in the operation and will not bear the risk, and B will pay A 20% interest on the invested capital every year. The proportion is a typical "joint operation in name, but it is actually a loan", that is, the legal content of the joint operation is used to cover up the illegal content of the lending activities of illegal financial institutions, and its purpose is to obtain high interest.

4. Damage to social and public interests

According to the practice of civil legislation in our country, harming the public interest is equivalent to the principle of public order and good customs in foreign civil laws. This principle first originated in Rome, and was widely used for reference by the civil legislation of civil law countries. For example, Article 6 of the French Civil Code states: "Individuals may not specifically agree to violate laws concerning public order and good morals." Article 138(1) of the German Civil Code states: "A legal act contrary to good morals ,invalid". Article 91 of the Japanese Civil Code stipulates: "Judicial acts whose subject matter is contrary to public order and good customs are invalid."

As the basic principle of modern civil law, the principle of public order and good customs embodies the value concept of social standard. Its main function is to adjust the conflict between personal interests, social interests and public interests, and it plays an important role in maintaining social economic order and public morality. Considered by some scholars to be the supreme principle of modern civil law.

In my country's civil legislation, both the "General Principles of Civil Law" and "Contract Law" regard safeguarding social interests as the basic principle, which is equivalent to the principle of public order and good customs in Western countries in terms of other status and functions.

In judicial practice, there are two issues to pay attention to when determining invalidity:

1. Correctly handle the relationship between contracts that damage social public interests and other invalid contracts. Judging from the essence and core of the invalid contract system, the reason why such contracts are invalidated is because they violate the law and social public interests. Judging from the provisions of Article 52 of the "Contract Law", other types of invalid contracts also have the attribute of directly or indirectly damaging the public interest.

2. Correctly grasp the judgment standard of harming social public interests: as a basic principle clause, its most basic feature is abstractness and generality, so it is particularly important to grasp its judgment standard in practice, and this judgment standard cannot be directly determined by legislation. Regulation. Because if various specific standards and applicable situations are directly stipulated by legislation, this clause will lose its abstractness and generality, and at the same time, it will lose its function of overcoming the limitations of statutory law. Judging from foreign legislation and judicial experience, the so-called standards are often sought through some writings and classic cases. Regarding the scope and standards of social public interests, we have discussed that social interests should include "the foundation, environment, order, goals and ultimate principles of social life in our country, as well as good customs and habits".

V. Violation of mandatory provisions of laws and administrative regulations

This kind of contract is a typical invalid contract. The laws mentioned here refer to the laws formulated by the National People's Congress and its Standing Committee, and the administrative regulations refer to the regulations formulated by the State Council. Acts that violate these national laws and regulations are of course invalid. All invalid contracts are illegal, and the violation of the mandatory provisions of laws and administrative regulations is more obvious than other invalid contracts in terms of illegality. Most of the parties have the intention to violate the law subjectively when they conclude such contracts (of course, even if the parties violate the law subjectively out of negligence, that is, they do not know that the contract clauses entered into are prohibited by the law at the time of signing the contract, or shall confirm that the contract is void). It is worth noting that my country's Contract Law only stipulates that contracts that violate the national laws and administrative regulations stipulated by the State Council are invalid, but it does not mention violations of administrative regulations? Are contracts with local regulations and local regulations invalid? question. This is not to say that all contracts that violate these provisions are valid, but only that contracts that violate these provisions are not necessarily invalid contracts. Whether these contracts should be declared void should consider various factors, for example, whether the violated provisions comply with National laws and regulations, whether they conform to the basic spirit of the Constitution and laws, etc.

6. Contracts concluded by persons with limited capacity for civil conduct are invalid if they are not ratified by their legal representatives, but contracts for pure benefits or contracts concluded in accordance with their age, intelligence, and mental health conditions do not have to Ratified by legal representative.

The counterparty can urge the legal representative to ratify within one month. If the legal representative fails to make a statement, it shall be deemed as a refusal to ratify. Before the contract is ratified, the bona fide counterparty has the right to rescind it. The withdrawal shall be made by means of notice.

Seven. The actor has no power of agency, exceeds the power of agency, or concludes a contract in the name of the principal after the power of agency is terminated. If the contract is not ratified by the principal, it will not be effective against the principal. Take responsibility.

The counterparty may urge the principal to ratify within one month. If the principal fails to make a statement, it shall be deemed as a refusal to ratify. Before the contract is ratified, the bona fide counterparty has the right to rescind it. The withdrawal shall be made by means of notice.

VIII. If the actor has no power of agency, surpasses the power of agency, or concludes a contract in the name of the principal after the power of agency is terminated, and the counterparty has reason to believe that the actor has the power of agency, the act of agency is valid, otherwise, invalid.

9. For a contract concluded by the legal representative or the person in charge of a legal person or other organization beyond its authority, if the counterparty knows or should know that it has exceeded its authority, the representative's act is invalid.

A contract concluded by a legal representative or person in charge exceeding the authority, if the counterparty knows or should have known that he exceeded the authority, the contract is invalid; if the counterparty does not know that he exceeded the authority, it is a bona fide counterparty and the contract is valid.

X. If a person without the right of disposal disposes of other people's property, if the right of disposition has not been ratified by the obligee or the person without the right of disposal has not obtained the right of disposal after signing the contract, the contract is invalid.

It should be understood and judged whether the parties have the right to dispose of the subject matter of the contract. If there is no right to dispose, the obligee should be required to ratify, otherwise, the contract is invalid.

The above content is excerpted from: "Building an Integrity Unit——Risk Control and Integrity Management" (by Fang Bangjian)

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