Validity of ContractValidity of Contract

Categories of EffectivenessCategories of EffectivenessIllegalityIllegalityMental ReservationMental ReservationMalicious CollusionMalicious Collusion

Effectiveness of Contract Effectiveness of Contract (juristic act)(juristic act)

Category of effectCategory of effect

Contract FormedContract Formed– validvalid– avoidableavoidable– Uncertain (indefinite)Uncertain (indefinite)– voidvoid

Contract Not formedContract Not formed ：： invalidinvalid

Valid

Indefinite

Avoidable

Void

Contract not formed

Contract Formed

End of the period for the right to avoid

Revoke

Retroactive effect of being void

valid

voidvalid

valid

void

void

Refuse to acknowledge

acknowledge

Retroactive effect of being valid valid

No contract at all (invalid or void)

valid

void

void

Indefinite

Avoidable

Effective elements of Juristic ActEffective elements of Juristic Act– General effective elementGeneral effective element

The party shall have capacity to make a juristic actThe party shall have capacity to make a juristic actRCC 75-85﹝RCC 75-85﹝ 、、 981 ﹞981 ﹞

Subject matter shall be legal and shall not violate Subject matter shall be legal and shall not violate mandatory laws (71), public policy(72), and justice mandatory laws (71), public policy(72), and justice (74)(74)

Declaration of intention shall be complete and no aDeclaration of intention shall be complete and no any defect (86-93)ny defect (86-93)

– Special effective elementSpecial effective elementRegistration (758)Registration (758)

Subject Matter of ContractSubject Matter of Contract

1.1. The sThe subject matter shall be legal.ubject matter shall be legal.

A.A. Shall not violated the mandatory laws(71)Shall not violated the mandatory laws(71)

2.2. The sThe subject matter shall be properubject matter shall be propera.a. Shall not violate public policy and good moral Shall not violate public policy and good moral

(72)(72)

b.b. Shall not be unconscionable (74, 274-1)Shall not be unconscionable (74, 274-1)

3.3. The sThe subject matter shall be possible (246, ubject matter shall be possible (246, 247)247)

4.4. The sThe subject matter shall be certain.ubject matter shall be certain.

Juristic act and the state lawJuristic act and the state law

Autonomous in private life: an individual can create or Autonomous in private life: an individual can create or form a private legal relationship under his/her form a private legal relationship under his/her willingness.willingness.Juristic act under private autonomy:Juristic act under private autonomy:– Making decision by his/her self and taking responsibility by Making decision by his/her self and taking responsibility by

his/her own.his/her own.– The state protects and preserves the accomplishment of private The state protects and preserves the accomplishment of private

autonomy.autonomy.– The parties can exclude laws if the law exists as a instrument of The parties can exclude laws if the law exists as a instrument of

supplement or interpretation to private intention. supplement or interpretation to private intention. – In order to maintain social order, ethics, and justice, the state In order to maintain social order, ethics, and justice, the state

may intrude private relationship by setting out a mandatory laws.may intrude private relationship by setting out a mandatory laws.

The category of laws by its functionThe category of laws by its function

Discretionary ruleDiscretionary rule– Supplemental rule Supplemental rule 320﹝320﹝ 、、 346346、、 369﹞369﹞– Interpretation ruleInterpretation rule 4﹝4﹝ 、、 370﹞370﹞Mandatory ruleMandatory rule– Imperative ruleImperative rule 27I﹝27I﹝ 、、 4747、、 760760、、 972972、、 104104

9﹞9﹞– Prohibitive rule Prohibitive rule 16﹝16﹝ 、、 1717、、 222222、、 757﹞757﹞

Article 7 of PRC Contract LawArticle 7 of PRC Contract Law

  In concluding or performing a contract, In concluding or performing a contract, the parties shall comply with laws and the parties shall comply with laws and administrative regulations and observe administrative regulations and observe social morals, and shall not disturb the social morals, and shall not disturb the social and economic order or harm the social and economic order or harm the public interests.public interests.

Article 6 and 7 0f PRC GPCLArticle 6 and 7 0f PRC GPCL

Article 6Article 6– Civil activities shall be in compliance with Civil activities shall be in compliance with the the

lawslaws; where there are no relevant provisions ; where there are no relevant provisions in the law, they shall be in compliance with in the law, they shall be in compliance with state policiesstate policies..

Article 7Article 7– civil activities shall observe the social ethics civil activities shall observe the social ethics

and shall not harm the public interest and and shall not harm the public interest and undermine the state economic plans or undermine the state economic plans or disturb the social economic order. disturb the social economic order.

Article 52 of PRC Contract LawArticle 52 of PRC Contract Law

A contract is void in any of the following A contract is void in any of the following circumstances:circumstances:– (i) One party induced conclusion of the contract through (i) One party induced conclusion of the contract through

fraud or duress, thereby harming the interests of the state;fraud or duress, thereby harming the interests of the state;– (ii) The parties colluded in bad faith, thereby harming the (ii) The parties colluded in bad faith, thereby harming the

interests of the state, the collective or any third party;interests of the state, the collective or any third party;– (iii) The parties intended to conceal an illegal purpose under (iii) The parties intended to conceal an illegal purpose under

the guise of a legitimate transaction;the guise of a legitimate transaction;– (iv)  The contract harms public interests;(iv)  The contract harms public interests;– (v)   The contract violates a mandatory provision of any law (v)   The contract violates a mandatory provision of any law

or administrative regulation.or administrative regulation.

ROC Civil CodeROC Civil CodeArticle71Article71A juridical act which violates an imperative or prohibitive provision of the act is void A juridical act which violates an imperative or prohibitive provision of the act is void except voidance is not implied in the provision.except voidance is not implied in the provision.

Article72Article72A juridical act which is against public policy or morals is void.A juridical act which is against public policy or morals is void.

Article73Article73A juridical act which does not follow the formality required by the act is void unless A juridical act which does not follow the formality required by the act is void unless otherwise provided by the act.otherwise provided by the act.

Article74Article74If a juridical act whereby a person profiting by the difficulties, recklessness or 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 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 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 court may revoke the juridical act or reduce the payment upon the application of any interested person.interested person.The application mentioned in the preceding paragraph must be made within one year The application mentioned in the preceding paragraph must be made within one year from the date of the juridical act.from the date of the juridical act.

The Effect of Illegal ContractThe Effect of Illegal Contract

Principle rule: VoidPrinciple rule: Void– Void in part or totallyVoid in part or totally– Obligatory act void or dispositive act voidObligatory act void or dispositive act void

Exception rule: Exception rule: ：：– A juridical act which violates an imperative or A juridical act which violates an imperative or

prohibitive provision of the act is void except vprohibitive provision of the act is void except voidance is not implied in the provision.oidance is not implied in the provision.

Contract shall not violate the public policy and good morContract shall not violate the public policy and good moralal– The rule:The rule: ：： ROC Civil Code §72ROC Civil Code §72– Function and legislative reasonsFunction and legislative reasons

The juristic act violated public policy or good moral The juristic act violated public policy or good moral will vitiate the national moral and e6thics: therefore will vitiate the national moral and e6thics: therefore it shall be void. (the gist of the legislative reason)it shall be void. (the gist of the legislative reason)Judge may supplement the law on account of the nJudge may supplement the law on account of the need of society and economy so that the law can preed of society and economy so that the law can progress with the development of society.ogress with the development of society.Setting up a institute to unify and organize the legaSetting up a institute to unify and organize the legal norms so as to keep the laws in the same standarl norms so as to keep the laws in the same standards.ds.

– Blanket stipulation: the judge shall specify the Blanket stipulation: the judge shall specify the extent of the rule based on specific case.extent of the rule based on specific case.

– Standard of judgment: the facts on a specific Standard of judgment: the facts on a specific case (the motive or purpose of the juristic act),case (the motive or purpose of the juristic act), legal norms, social value, customary, justice. legal norms, social value, customary, justice.

Japan Civil CodeJapan Civil Code

Article 90Article 90– A juristic act whose object is contrary to the A juristic act whose object is contrary to the

public order or good morals is null and void.public order or good morals is null and void.

Article 91Article 91– If the parties to a juristic act have declared an If the parties to a juristic act have declared an

intentions which deviates from any provision intentions which deviates from any provision of a law or ordinance not concerned with the of a law or ordinance not concerned with the public order, such intention shall prevail.public order, such intention shall prevail.

Meaning of public policy and good Meaning of public policy and good moralmoral

Public policyPublic policy– Defined as the common interest of a nation or society.Defined as the common interest of a nation or society.– ““Public” is a uncertain legal concept. It doesn’t mean Public” is a uncertain legal concept. It doesn’t mean

a will that comes from most people over half but a a will that comes from most people over half but a group concept represented or recognized by a nation group concept represented or recognized by a nation or society.or society.

– ““public policy” is a concept of legal norm which public policy” is a concept of legal norm which includes constitution and laws .includes constitution and laws .

Good MoralGood Moral– Defined as a concept of common ethics in a society.Defined as a concept of common ethics in a society.– ““good” is a uncertain legal concept and is used as a good” is a uncertain legal concept and is used as a

standard for screen customary law.standard for screen customary law.

Mr. X and Miss Y loved each other and Mr. X and Miss Y loved each other and cohabitated without marriage. Two years cohabitated without marriage. Two years ago, X promised to give away his land to Y ago, X promised to give away his land to Y as a gift and soon after the gift he as a gift and soon after the gift he transferred its ownership to Y. However, X transferred its ownership to Y. However, X and Y agreed if cohabitation is terminated, and Y agreed if cohabitation is terminated, then the land shall be returned to X. Now then the land shall be returned to X. Now Y refused to live with X and X claimed to Y refused to live with X and X claimed to transfer ownership of the land to him. transfer ownership of the land to him. Dose his claim has legal basis? Dose his claim has legal basis?

Gift concludedGift concluded Gift effectedGift effected

Gift concluded Gift concluded and effectedand effected

Gift became Gift became extinctextinct

Cohabitation startedCohabitation started(condition precedent)(condition precedent)

Cohabitation Cohabitation dismisseddismissed

CohabitationCohabitationstartedstarted

Cohabitation Cohabitation DismissedDismissed(condition subsequent)(condition subsequent)

Defects of Declaration of Defects of Declaration of IntentionIntention

1.1. Declaration inconsistent with intentionDeclaration inconsistent with intention1.1. Intentional inconsistency (variance)Intentional inconsistency (variance)

1)1) Unilateral inconsistency: mental reservationUnilateral inconsistency: mental reservation2)2) Bilateral inconsistency: A false declaration of intention made in collusion Bilateral inconsistency: A false declaration of intention made in collusion

or malicious collusionor malicious collusiona.a. Contingent inconsistencyContingent inconsistency

1)1) MistakeMistake1)1) Mistake in Contents of Declaration Mistake in Contents of Declaration

1)1) Mistake of identity in personMistake of identity in person2)2) Mistake of identity in subject matter Mistake of identity in subject matter 3)3) Mistake of identity in effect of juristic actMistake of identity in effect of juristic act

2)2) Mistake in ExpressionMistake in Expression3)3) Mistake in MotiveMistake in Motive

1)1) Mistake in qualification of personMistake in qualification of person2)2) Mistake in quality of propertyMistake in quality of property

2.2. Manifesting the intent without freedomManifesting the intent without freedoma)a) FraudFraudb)b) DuressDuress

Mental ReservationMental Reservation

Purpose to made a Purpose to made a mental reservation mental reservation– Malicious motive, circumvent debt, faking a false Malicious motive, circumvent debt, faking a false

contract, fictitious investment, provisional decisiocontract, fictitious investment, provisional decision.n.

Constituent elementsConstituent elements– There is a declaration of intentionThere is a declaration of intention

– The manifestation of declarant shall be vaThe manifestation of declarant shall be variant with its intentionriant with its intention

– The declaration shall not be a collusion beThe declaration shall not be a collusion between declarant and the other partytween declarant and the other party

Awareness v. CollusionAwareness v. Collusion

ROC Civil CodeROC Civil Code

Article 86Article 86An expression of intent shall not be void An expression of intent shall not be void for the expresser did not intend to be for the expresser did not intend to be bound by it, except the fact was known to bound by it, except the fact was known to the other party.the other party.

Japan Civil CodeJapan Civil Code

Article 93Article 93– A declaration of intention shall not be invalidatA declaration of intention shall not be invalidat

ed by the fact that the declarant made it knowied by the fact that the declarant made it knowing such declaration not to be his true intention;ng such declaration not to be his true intention; however, such declaration of intention shall b however, such declaration of intention shall be null and void if the other party was aware, or e null and void if the other party was aware, or should have been aware, of the true intention should have been aware, of the true intention of the declarant.of the declarant.

The effect of a false declaration of The effect of a false declaration of intention made in collusionintention made in collusion

Between the partiesBetween the parties– The juristic act under malicious collusion is voidThe juristic act under malicious collusion is void

– The hidden juristic act is validThe hidden juristic act is validRelation with the third partyRelation with the third party– The voidance can not be a The voidance can not be a valid defensevalid defense against any bona fide against any bona fide

third party.third party.Bona fide: without knowledge about the collusion and Bona fide: without knowledge about the collusion and without knowledge not caused by its fault.without knowledge not caused by its fault.The third party: anyone other than the parties who made the The third party: anyone other than the parties who made the collusion and their heirscollusion and their heirsValid defense against any bona fide third party: if the bona Valid defense against any bona fide third party: if the bona fide third party raises a valid defense, then the fictitious fide third party raises a valid defense, then the fictitious contract is valid. The parties made fictitious contract cannot contract is valid. The parties made fictitious contract cannot use the voidance effect against the third party. use the voidance effect against the third party.

ROC Civil CodeROC Civil Code

Article87Article87– A fictitious expression of intent made by the A fictitious expression of intent made by the

expresser in collusion with other party is voidexpresser in collusion with other party is void, but , but the voidance can not be a valid defense against any the voidance can not be a valid defense against any bona fide third party.bona fide third party.

– If the fictitious expression of intent was intended to If the fictitious expression of intent was intended to conceal another juridical act, the provisions of the act conceal another juridical act, the provisions of the act with respect to such another juridical act shall apply.with respect to such another juridical act shall apply.

PRC GPCLPRC GPCL

Article 58. Article 58. Civil acts in the following categories shall be null and voiCivil acts in the following categories shall be null and void:d:– (1) those performed by a person without capacity for civil conduct; (1) those performed by a person without capacity for civil conduct; – (2) those that according to law may not be independently performed by (2) those that according to law may not be independently performed by

a person with limited capacity for civil conduct; a person with limited capacity for civil conduct; – (3) those performed by a person against his true intentions as a result of (3) those performed by a person against his true intentions as a result of

cheating, coercion or exploitation of his unfavorable position by the othecheating, coercion or exploitation of his unfavorable position by the other party; r party;

– (4) (4) those that performed through malicious collusion are detrimental to tthose that performed through malicious collusion are detrimental to the interest of the state, a collective or a third party; he interest of the state, a collective or a third party;

– (5) those that violate the law or the public interest; (5) those that violate the law or the public interest; – (6) economic contracts that violate the state's mandatory plans; and (6) economic contracts that violate the state's mandatory plans; and – (7) those that performed under the guise of legitimate acts conceal illegit(7) those that performed under the guise of legitimate acts conceal illegit

imate purposes. imate purposes. Civil acts that are null and void shall not be legally binding from the Civil acts that are null and void shall not be legally binding from the very beginning very beginning

PRC Contract LawPRC Contract Law

Article 52      Invalidating CircumstancesArticle 52      Invalidating CircumstancesA contract is invalid in any of the following A contract is invalid in any of the following circumstances:circumstances:(i)     One party induced conclusion of the contract (i)     One party induced conclusion of the contract through fraud or duress, thereby harming the through fraud or duress, thereby harming the interests of the state;interests of the state;(ii)    (ii)    The parties colluded in bad faithThe parties colluded in bad faith, thereby , thereby harming the interests of the state, the collective or harming the interests of the state, the collective or any third partyany third party;;(iii)   The parties intended to conceal an illegal (iii)   The parties intended to conceal an illegal purpose under the guise of a legitimate transaction;purpose under the guise of a legitimate transaction;(iv)    The contract harms public interests;(iv)    The contract harms public interests;(v)     The contract violates a mandatory provision of (v)     The contract violates a mandatory provision of any law or administrative regulation.any law or administrative regulation.

PRC Contract LawPRC Contract Law

Article 59      Remedies in Case of Collusion Article 59      Remedies in Case of Collusion in Bad Faithin Bad FaithWhere the parties colluded in bad faith, Where the parties colluded in bad faith, thereby harming the interests of the state, thereby harming the interests of the state, the collective or a third person, any property the collective or a third person, any property acquired as a result shall be turned over to acquired as a result shall be turned over to the state or be returned to the collective or the state or be returned to the collective or the third person.the third person.

Japan Civil CodeJapan Civil Code

Article 94Article 94– A false declaration of intention made in collusiA false declaration of intention made in collusi

on with the other party is null and void.on with the other party is null and void.– The voidness of a declaration of intention refeThe voidness of a declaration of intention refe

rred to in the preceding paragraph may not be rred to in the preceding paragraph may not be set up against a third person who has acted in set up against a third person who has acted in good faith.good faith.

Taiwan Supreme Court Precedent Taiwan Supreme Court Precedent No. Tai- Shang 316 (1973)No. Tai- Shang 316 (1973)

The meaning of The meaning of A false declaration of intention A false declaration of intention made in collusion with the other party made in collusion with the other party can be decan be defined as a declaration of fictitious intention mutufined as a declaration of fictitious intention mutually and intentionally made by the declarant and ally and intentionally made by the declarant and the other party. Hence, the other party shall not the other party. Hence, the other party shall not only have known the declarant’s fictitious intentionly have known the declarant’s fictitious intention but fictitiously agree with the declarant fictitioon but fictitiously agree with the declarant fictitious intention. If only one party, unwilling to be bous intention. If only one party, unwilling to be bound by his declaration of intention, manifested hund by his declaration of intention, manifested his fictitious intent, it is not enough to be regardeis fictitious intent, it is not enough to be regarded as a malicious collision.d as a malicious collision.

In Comparison of Fictitious Declaration in ROC & Japan In Comparison of Fictitious Declaration in ROC & Japan Civil Code and Malicious Collusion in PRC Contract LawCivil Code and Malicious Collusion in PRC Contract Law

ROC & Japan Civil CodeROC & Japan Civil Code

– DefinitionDefinitionA false declaration of A false declaration of intention made in intention made in collusion with the other collusion with the other partyparty

– PurposePurposeInvalidate fictitious Invalidate fictitious declaration because of declaration because of the intentional the intentional inconsistency between inconsistency between declaration and declaration and intention.intention.

PRC Contract LawPRC Contract Law

– DefinitionDefinitionThe parties colluded in The parties colluded in bad faith, thereby bad faith, thereby harming the interests of harming the interests of the state, the collective the state, the collective or any third partyor any third party

– PurposePurposeProtect the interests of Protect the interests of the state, the collective the state, the collective or any third partyor any third party

In Comparison of Fictitious Declaration in ROC & In Comparison of Fictitious Declaration in ROC & Japan Civil Code and PRC Contract LawJapan Civil Code and PRC Contract Law

ROC & Japan Civil CodeROC & Japan Civil Code

– Constituent elementsConstituent elementsA declaration of A declaration of intention exists intention exists

It is a false declaration It is a false declaration of intention: of intention: inconsistency between inconsistency between declaration and declaration and intention intention

A false declaration of A false declaration of intention in intention in collusioncollusion with the other party.with the other party.

PRC Contract LawPRC Contract Law

– Constituent elementsConstituent elementsThere is a contract.There is a contract.

The parties The parties colluded in colluded in bad faithbad faith..

The contract harms the The contract harms the interests of the state, interests of the state, the collective or any the collective or any third party.third party.

In Comparison of Fictitious Declaration in ROC & In Comparison of Fictitious Declaration in ROC & Japan Civil Code and PRC Contract LawJapan Civil Code and PRC Contract Law

– EffectivenessEffectivenessDeclaration is void. (RCDeclaration is void. (RCC 87, JCC94)C 87, JCC94)

But the voidance of a dBut the voidance of a declaration of intention meclaration of intention may not be set up against ay not be set up against a third person who has a third person who has acted in good faith.(RCacted in good faith.(RCC87, JCC94)C87, JCC94)

Return profit under unjuReturn profit under unjust enrichment rules. (Rst enrichment rules. (RCC179, JCC703)CC179, JCC703)

– EffectivenessEffectivenessContract is void.Contract is void.(GPCL58, CL52)(GPCL58, CL52)

Any property acquired Any property acquired as a result shall be as a result shall be turned over to the state turned over to the state or be returned to the or be returned to the collective or the third collective or the third person. (CL 59)person. (CL 59)

Unjust Enrichment Institute in ROC Civil CodeUnjust Enrichment Institute in ROC Civil Code

Article 179Article 179– A person who acquires interests without any legal ground and prejudice to the otA person who acquires interests without any legal ground and prejudice to the ot

her shall be bound to return it.her shall be bound to return it. 　　 The same rule shall be applied if a legal ground The same rule shall be applied if a legal ground existed originally but disappeared subsequently.existed originally but disappeared subsequently.

Article 180Article 180– In any of the following cases, the prestation shall not be claimed to return: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;(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 obligatio(2) If the prestation made by the debtor for the performance of an undue obligation;n;(3) If the person who has made a prestation for the purpose of performing an obli(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;gation 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 c(4) If the prestation was made for an unlawful cause. Except when the unlawful cause exists only with regard to the recipient.ause exists only with regard to the recipient.

Article 181Article 181– In addition to the interests received, a recipient unjustly enriched shall return whaIn addition to the interests received, a recipient unjustly enriched shall return wha

tever he acquired by virtue of such interests.tever he acquired by virtue of such interests. 　　 If restitution is impossible by reasIf restitution is impossible by reason of the very nature of the interests or by reason of any other circumstance, he on of the very nature of the interests or by reason of any other circumstance, he shall be bound to reimburse the value.shall be bound to reimburse the value.

Unjust Enrichment Institute in ROC Civil CodUnjust Enrichment Institute in ROC Civil Codee

Article 182Article 182– The recipient, who did not know of the absence of the legal ground and tThe recipient, who did not know of the absence of the legal ground and t

he interests have no longer existed, is released from the obligation to rethe interests have no longer existed, is released from the obligation to return the interests or reimburse the value.urn the interests or reimburse the value.

– If the recipient knew of the absence of the legal ground at the time of thIf 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 rete 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 urn 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 grouexisting 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.nd plus the interest and to make compensation for the injury, if any.

Article 183Article 183– When the recipient unjustly enriched transferred gratuitously whatever hWhen the recipient unjustly enriched transferred gratuitously whatever h

e has received to a third party, and therefore the recipient is released froe 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 m 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 oblmake restitution to the extent which the recipient is released from his obligation.igation.

Unjust Enrichment Institute in Japan Civil CoUnjust Enrichment Institute in Japan Civil Code de

Article 7Article 703 03 – A person who without any legal ground A person who without any legal ground

derives a benefit from the property or derives a benefit from the property or services of another and thereby causes services of another and thereby causes loss to the latter shall be bound to return loss to the latter shall be bound to return such benefit. such benefit.

Articles 704~708Articles 704~708