Validity of Contract
Categories of Effectiveness
Illegality
Mental Reservation
Malicious Collusion
Effectiveness of Contract
(juristic act)
Category of effect
Contract Formed
– valid
– avoidable
– Uncertain (indefinite)
– void
Contract Not formed：invalid
No contract at all (invalid or void)
Contract
not formed
valid
Valid
valid
Avoidable
valid
End of the period for
the right to avoid
valid
Revoke
void
Avoidable
Retroactive effect of being void
Refuse to
acknowledge
void
Indefinite
void
Indefinite
acknowledge
valid
Retroactive effect of being valid
Void
Contract Formed
void
void
Effective elements of Juristic Act
– General effective element
The party shall have capacity to make a juristic
act﹝RCC 75-85、981﹞
Subject matter shall be legal and shall not violate
mandatory laws (71), public policy(72), and justice
(74)
Declaration of intention shall be complete and no
any defect (86-93)
– Special effective element
Registration (758)
Subject Matter of Contract
1. The subject matter shall be legal.
A. Shall not violated the mandatory laws(71)
2. The subject matter shall be proper
a. Shall not violate public policy and good moral
(72)
b. Shall not be unconscionable (74, 274-1)
3. The subject matter shall be possible (246,
247)
4. The subject matter shall be certain.
Juristic act and the state law
Autonomous in private life: an individual can create or
form a private legal relationship under his/her willingness.
Juristic act under private autonomy:
– Making decision by his/her self and taking responsibility by
his/her own.
– The state protects and preserves the accomplishment of private
autonomy.
– The parties can exclude laws if the law exists as a instrument of
supplement or interpretation to private intention.
– In order to maintain social order, ethics, and justice, the state
may intrude private relationship by setting out a mandatory laws.
The category of laws by its function
Discretionary rule
– Supplemental rule ﹝320、346、369﹞
– Interpretation rule﹝4、370﹞
Mandatory rule
– Imperative rule﹝27I、47、760、972、1049﹞
– Prohibitive rule ﹝16、17、222、757﹞
Article 7 of PRC Contract Law
In concluding or performing a contract,
the parties shall comply with laws and
administrative regulations and observe
social morals, and shall not disturb the
social and economic order or harm the
public interests.
Article 6 and 7 0f PRC GPCL
Article 6
– Civil activities shall be in compliance with the
laws; where there are no relevant provisions
in the law, they shall be in compliance with
state policies.
Article 7
– civil activities shall observe the social ethics
and shall not harm the public interest and
undermine the state economic plans or
disturb the social economic order.
Article 52 of PRC Contract Law
A contract is void in any of the following
circumstances:
– (i) One party induced conclusion of the contract through
fraud or duress, thereby harming the interests of the state;
– (ii) The parties colluded in bad faith, thereby harming the
interests of the state, the collective or any third party;
– (iii) The parties intended to conceal an illegal purpose under
the guise of a legitimate transaction;
– (iv) The contract harms public interests;
– (v) The contract violates a mandatory provision of any law
or administrative regulation.
ROC Civil Code
Article71
A juridical act which violates an imperative or prohibitive provision of the act is void
except voidance is not implied in the provision.
Article72
A juridical act which is against public policy or morals is void.
Article73
A juridical act which does not follow the formality required by the act is void unless
otherwise provided by the act.
Article74
If a juridical act whereby a person profiting by the difficulties, recklessness or
inexperience of another causes to be delivered or promised pecuniary payment to
such an extent that under that circumstances, the transaction is obviously unfair, the
court may revoke the juridical act or reduce the payment upon the application of any
interested person.
The application mentioned in the preceding paragraph must be made within one year
from the date of the juridical act.
The Effect of Illegal Contract
Principle rule: Void
– Void in part or totally
– Obligatory act void or dispositive act void
Exception rule: ：
– A juridical act which violates an imperative or
prohibitive provision of the act is void except
voidance is not implied in the provision.
Contract shall not violate the public policy and good
moral
– The rule:：ROC Civil Code §72
– Function and legislative reasons
The juristic act violated public policy or good moral
will vitiate the national moral and e6thics: therefore
it shall be void. (the gist of the legislative reason)
Judge may supplement the law on account of the
need of society and economy so that the law can
progress with the development of society.
Setting up a institute to unify and organize the
legal norms so as to keep the laws in the same
standards.
– Blanket stipulation: the judge shall specify the
extent of the rule based on specific case.
– Standard of judgment: the facts on a specific
case (the motive or purpose of the juristic act),
Japan Civil Code
Article 90
– A juristic act whose object is contrary to the
public order or good morals is null and void.
Article 91
– If the parties to a juristic act have declared an
intentions which deviates from any provision
of a law or ordinance not concerned with the
public order, such intention shall prevail.
Meaning of public policy and good
moral
Public policy
– Defined as the common interest of a nation or society.
– “Public” is a uncertain legal concept. It doesn’t mean
a will that comes from most people over half but a
group concept represented or recognized by a nation
or society.
– “public policy” is a concept of legal norm which
includes constitution and laws .
Good Moral
– Defined as a concept of common ethics in a society.
– “good” is a uncertain legal concept and is used as a
standard for screen customary law.
Mr. X and Miss Y loved each other and
cohabitated without marriage. Two years
ago, X promised to give away his land to Y
as a gift and soon after the gift he
transferred its ownership to Y. However, X
and Y agreed if cohabitation is terminated,
then the land shall be returned to X. Now
Y refused to live with X and X claimed to
transfer ownership of the land to him.
Dose his claim has legal basis?
Gift concluded
Gift effected
Cohabitation started
(condition precedent)
Gift concluded
and effected
Cohabitation
started
Cohabitation
dismissed
Gift became
extinct
Cohabitation
Dismissed
(condition subsequent)
Defects of Declaration of
Intention
1.
Declaration inconsistent with intention
1.
Intentional inconsistency (variance)
1)
2)
a.
Unilateral inconsistency: mental reservation
Bilateral inconsistency: A false declaration of intention made in collusion
or malicious collusion
Contingent inconsistency
1)
Mistake
1)
2)
3)
2.
Mistake in Contents of Declaration
1) Mistake of identity in person
2) Mistake of identity in subject matter
3) Mistake of identity in effect of juristic act
Mistake in Expression
Mistake in Motive
1) Mistake in qualification of person
2) Mistake in quality of property
Manifesting the intent without freedom
a)
b)
Fraud
Duress
Mental Reservation
Purpose to made a mental reservation
– Malicious motive, circumvent debt, faking a false
contract, fictitious investment, provisional
decision.
Constituent elements
– There is a declaration of intention
– The manifestation of declarant shall be
variant with its intention
– The declaration shall not be a collusion
between declarant and the other party
Awareness v. Collusion
ROC Civil Code
Article 86
An expression of intent shall not be void
for the expresser did not intend to be
bound by it, except the fact was known to
the other party.
Japan Civil Code
Article 93
– A declaration of intention shall not be
invalidated by the fact that the declarant made
it knowing such declaration not to be his true
intention; however, such declaration of
intention shall be null and void if the other
party was aware, or should have been aware,
of the true intention of the declarant.
The effect of a false declaration of
intention made in collusion
Between the parties
– The juristic act under malicious collusion is void
– The hidden juristic act is valid
Relation with the third party
– The voidance can not be a valid defense against any bona fide
third party.
Bona fide: without knowledge about the collusion and
without knowledge not caused by its fault.
The third party: anyone other than the parties who made the
collusion and their heirs
Valid defense against any bona fide third party: if the bona
fide third party raises a valid defense, then the fictitious
contract is valid. The parties made fictitious contract cannot
use the voidance effect against the third party.
ROC Civil Code
Article87
– A fictitious expression of intent made by the
expresser in collusion with other party is void, but
the voidance can not be a valid defense against any
bona fide third party.
– If the fictitious expression of intent was intended to
conceal another juridical act, the provisions of the act
with respect to such another juridical act shall apply.
PRC GPCL
Article 58. Civil acts in the following categories shall be null and
void:
– (1) those performed by a person without capacity for civil conduct;
– (2) those that according to law may not be independently performed by
a person with limited capacity for civil conduct;
– (3) those performed by a person against his true intentions as a result of
cheating, coercion or exploitation of his unfavorable position by the
other party;
– (4) those that performed through malicious collusion are detrimental to
the interest of the state, a collective or a third party;
– (5) those that violate the law or the public interest;
– (6) economic contracts that violate the state's mandatory plans; and
– (7) those that performed under the guise of legitimate acts conceal
illegitimate purposes.
Civil acts that are null and void shall not be legally binding from the
very beginning
PRC Contract Law
Article 52
Invalidating Circumstances
A contract is invalid in any of the following
circumstances:
(i) One party induced conclusion of the contract
through fraud or duress, thereby harming the
interests of the state;
(ii) The parties colluded in bad faith, thereby
harming the interests of the state, the collective or
any third party;
(iii) The parties intended to conceal an illegal
purpose under the guise of a legitimate transaction;
(iv) The contract harms public interests;
(v) The contract violates a mandatory provision of
any law or administrative regulation.
PRC Contract Law
Article 59
Remedies in Case of Collusion
in Bad Faith
Where the parties colluded in bad faith,
thereby harming the interests of the state,
the collective or a third person, any property
acquired as a result shall be turned over to
the state or be returned to the collective or
the third person.
Japan Civil Code
Article 94
– A false declaration of intention made in
collusion with the other party is null and void.
– The voidness of a declaration of intention
referred to in the preceding paragraph may
not be set up against a third person who has
acted in good faith.
Taiwan Supreme Court Precedent
No. Tai- Shang 316 (1973)
The meaning of A false declaration of intention
made in collusion with the other party can be
defined as a declaration of fictitious intention
mutually and intentionally made by the
declarant and the other party. Hence, the other
party shall not only have known the declarant’s
fictitious intention but fictitiously agree with the
declarant fictitious intention. If only one party,
unwilling to be bound by his declaration of
intention, manifested his fictitious intent, it is not
enough to be regarded as a malicious collision.
In Comparison of Fictitious Declaration in ROC & Japan
Civil Code and Malicious Collusion in PRC Contract Law
ROC & Japan Civil Code
– Definition
A false declaration of
intention made in
collusion with the other
party
– Purpose
Invalidate fictitious
declaration because of
the intentional
inconsistency between
declaration and
intention.
PRC Contract Law
– Definition
The parties colluded in
bad faith, thereby
harming the interests of
the state, the collective
or any third party
– Purpose
Protect the interests of
the state, the collective
or any third party
In Comparison of Fictitious Declaration in ROC &
Japan Civil Code and PRC Contract Law
ROC & Japan Civil Code
– Constituent elements
A declaration of
intention exists
It is a false declaration
of intention:
inconsistency between
declaration and
intention
A false declaration of
intention in collusion
with the other party.
PRC Contract Law
– Constituent elements
There is a contract.
The parties colluded in
bad faith.
The contract harms the
interests of the state,
the collective or any
third party.
In Comparison of Fictitious Declaration in ROC &
Japan Civil Code and PRC Contract Law
– Effectiveness
Declaration is void.
(RCC 87, JCC94)
But the voidance of a
declaration of intention
may not be set up
against a third person
who has acted in good
faith.(RCC87, JCC94)
Return profit under
unjust enrichment rules.
(RCC179, JCC703)
– Effectiveness
Contract is
void.(GPCL58, CL52)
Any property acquired
as a result shall be
turned over to the state
or be returned to the
collective or the third
person. (CL 59)
Unjust Enrichment Institute in ROC Civil Code
Article 179
– A person who acquires interests without any legal ground and prejudice to the
other shall be bound to return it. The same rule shall be applied if a legal
ground existed originally but disappeared subsequently.
Article 180
– In any of the following cases, the prestation shall not be claimed to return:
(1) If the prestation was for the performance of a moral obligation;
(2) If the prestation made by the debtor for the performance of an undue
obligation;
(3) If the person who has made a prestation for the purpose of performing an
obligation knew, at the time of performance, that he was not bound to perform;
(4) If the prestation was made for an unlawful cause. Except when the unlawful
cause exists only with regard to the recipient.
Article 181
– In addition to the interests received, a recipient unjustly enriched shall return
whatever he acquired by virtue of such interests. If restitution is impossible by
reason of the very nature of the interests or by reason of any other circumstance,
he shall be bound to reimburse the value.
Unjust Enrichment Institute in ROC Civil
Code
Article 182
– The recipient, who did not know of the absence of the legal ground and
the interests have no longer existed, is released from the obligation to
return the interests or reimburse the value.
– If the recipient knew of the absence of the legal ground at the time of
the receipt, or if he was subsequently aware of it, he shall be bound to
return the interests acquired at the time of the receipt or such interests
still existing at the time when he was aware of the absence of the legal
ground plus the interest and to make compensation for the injury, if any.
Article 183
– When the recipient unjustly enriched transferred gratuitously whatever
he has received to a third party, and therefore the recipient is released
from his obligation to return the interests, such third party shall be
bound to make restitution to the extent which the recipient is released
from his obligation.
Unjust Enrichment Institute in Japan Civil
Code
Article 703
– A person who without any legal ground
derives a benefit from the property or
services of another and thereby causes
loss to the latter shall be bound to return
such benefit.
Articles 704~708