Invalidity of Contract

A valid contract obliges contracting parties to fulfill the obligations agreed in the contract and, if the obligations are neglected, liability for damages caused by the negligence. The parties do not have any obligations of performance on the basis of an invalid agreement or any obligation to indemnify for the damages caused by the negligence.

Generally, the invalidity will be considered only if it is referred to by making an objection against the other party or bringing a legal action in court. On the other hand, certain invalidity grounds will be taken into account ex officio without need to refer to them. For example, an error in the form of the contract in connection with a real estate sale will be considered ex officio, and an application for the registration of title to property will be rejected. In this case the term voidness is used.

Most grounds for invalidity may be rectified. Rectification may take place and the contract may become valid, for example, if the party violated subsequently accepts an invalid contract. Invalidity may be rectified even if the party does not refer to it within a reasonable period of time. However, all invalidities may not be rectified. For example, nullity on the basis of exception of formality provision relating to real estate sale cannot be rectified.

Different grounds for invalidity

Contracts can be declared void on certain grounds.

Contracts concluded by coercion are invalid. Use of coercion may entail violence or threats directed at one’s life or health.

Usury also renders a contract invalid. Usury means taking advantage of someone’s state of distress, lack of judgement or position dependent on another.

If a contract has a different content due to a typo or other error of the party than intended, the contract is not binding without any changes, if the other party knew or had to have known of the mistake. If the other party has not and should not have been aware of this so-called expression error, the agreement is valid and binding unchanged. This does not apply when a party has signed a contract without reading it. If the contract in such a situation is different in content from the content that the signatory has imagined, they will suffer the consequences of their own negligence, or the agreement is binding unchanged.

Fraudulent misrepresentation is a ground for invalidity. A contract induced by fraudulent misrepresentation. i.e. by intentionally giving false information or failing to provide relevant information, is invalid.

Other grounds for invalidity are e.g. false documents which are not intended to become “real” contracts, contracts that violate law or are contrary to good practice as well as dishonorable and worthless procedures. Intoxication of one of the contracting parties does not in itself render the contract invalid but the circumstances may be such that it is dishonest for a party who has entered a contract with an intoxicated person to invoke the contract.

The contract is also invalid if the contractor has not had legal capacity, i.e. the capacity to perform legal acts at all. If the person who made the contract is not entitled to represent the person in whose name the contract is made, the contract is invalid as against the person on whose behalf it was wrongfully made, but the signatory without the right of representation is personally liable for the contract.

If a party wishes to withdraw from a contract such party must refer to the basis for invalidity. An invalidity based on a formality error in real estate sale instead does not require any reference to invalidity. It will be taken into account ex officio and will lead to a rejection of a registration of title.

Consequences of invalidity

If a legal act is invalid, it will be annulled from the very beginning. The invalidity has a retroactive effect.

Parties have no need to take any special actions due to invalidity if they have not made any performances according to the agreement. Neither party then has any performance obligations based on the agreement. If the parties have already performed something, payments or other performances must be returned. If the return is not possible, the party has to compensate the value of performance.