Invalidity of Contract
A valid contract causes contracting parties an obligation 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 and any obligation to indemnify for the damages caused by the negligence.
Generally, the invalidity will be considered only, if it is referred 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 any need to refer on them. For example, a form error in connection with a real estate sale will be taken into account ex officio and an application for the registration of title to property will be rejected. In this case a term voidness is used.
Most of the invalidity grounds may be rectified. Rectification process may take place and the contract may become valid, for example, if the violated party subsequently accepts an invalid contract. Invalidity may also be rectified, if the party does not refer to it within a reasonable period of time. However, all invalidity grounds may not be rectified. For example nullity on 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 due to a typo or other error of the party a different content 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, he will suffer the consequences of its own negligence or 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 dishonourable and worthless procedures. The intoxication of the other contracting party does not in itself render the contract invalid but can have an effect on the party’s legal competence.
A contract is invalid also, if a person, who concludes the contract is not competent to make agreements, such as she or he does not have the required competence to perform a legal act or right or represent the party which name the agreement is to be made in.
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 has any performance obligations based on the agreement. If the parties have already performed something, the payments or other performances have to be returned. If the return is not possible, the party has to compensate value of performance.