Study On Validity Of Illegal Contracts

In a contract dispute case the judge shall review the validity of the contract whether one party advocates the validity of the contract or not.If validity of the contract concerned is determined,statement shall be made in the judgment document that the contract concerned is the party's true declaration of will and is not against the mandatory provisions of laws and the contract concerned is legal and effective.If the illegal and ineffective contract concerned is determined,then the specific mandatory provisions of laws should be cited in the judgment document.Since the review of contract validity cannot be avoided in each contract dispute case,judicial recognition of contract validity must be conducted.As an issue of value judgment,the judicial recognition of violation of mandatory provisions of laws,or of illegal contract validity,requires relevant legal support.Traditionally,illegal contracts are invalid and validity of such contracts would not be taken into consideration.However,the inchoation of mandatory norms has witnessed the validity of illegal contracts whether legislature has established this concept or not.As the result,judicial recognition of illegal contract validity becomes the subject in the present study,although it is still difficult to specify and standardize mandatory norms.Concept of mandatory norms is not adopted in Article 153 of General Provisions of the Civil Law of the People's Republic of China due to the disagreement between theoretical and practical fields and the lack of specific standards.Similarly,"mandatory provisions on effectiveness" in Supreme People's Court Interpretation on Certain Questions Concerning the Application of the Contract Law of P.R.C.in 2009 has not been judicially justified because of the difficulty to define such concept,in addition to the lack of specific judicial recognition standard.This is due to the fact that mandatory norms belong to legal concepts instead of mere legal or legislative concepts.As the result,how to implement judicial recognition of validity of illegal contracts will still encounter legislative,legal and practical difficulties.Rather than sticking to standardization of mandatory norms,the exploration and recognition of validity of illegal contracts needs to start from history of laws since human institutions including legal systems all develop from their primitive stages to more mature ones.To look for solutions in legal systems one has to turn to the history of invalid contract.Both mandatory provisions and violation of invalid contracts came into being before the establishment of a country and a law,and were originated from taboo and violation of contract that was against taboo.The theoretical basis of invalid contracts includes fairness,conscience,justice and efficiency,referring to the basis of civil law,ethics,philosophy and economics respectively.Valid contracts,with their own idea of value judgment,arc based on encouragement of trade,freedom of contract,and exchange of equivalent values.However,the value judgment of invalid contract rules has been less discussed although these rules also have such ideas of value judgment as maintaining trade order as the initial need,safeguarding freedom of contract as the result and encouraging and promoting trade as the objective.Prior to law,mandatory provisions are originated from the clan taboos.The nominalization of mandatory provisions proposed by Shi Shangkuan has proved to be the misinterpretation of some Chinese scholars.Instead,it was originated from the tradition in the Roman Law by which the restraining statute or prohibitive law were classified into leges imperfectae,leges minrs quam perfectae and leges perfectae.During its introduction to China,misreading occurred,with one of them being the two extremes in theory and in judicial practice concerning the validity of contract in the case of violating mandatory provisions.Although standardization and specification of mandatory provisions remains a challenge,their significance can never be ignored since the judges' idea towards validity of illegal contact would be fundamentally changed and,as the result they would be careful enough not to deny the validity of such contracts.It is necessary to apply restrictive conditions to mandatory provisions so as to prevent over-interference of public law and at the same time maintain moderate judicial control.Dichotomy thus plays an important role in examining the entry of public law in the field of private law and the impact of mandatory provisions on private law.As a means of preventing the negative effect of mandatory provisions towards civil juristic act,dichotomy would help judges to regulate invalid civil juristic act for the purpose of respecting and protecting true declaration of will.It is proposed that mandatory provisions be adopted with prudence to negate contract validity and invalid contract confirmation should be reasonably minimized.Then various factors concerning the validity of contract should be comprehensively considered since mandatory provisions are not the only means of judicial recognition of illegal contract validity.Nominalization of mandatory provisions should take such issues into consideration as the purpose of legislation,balance of conflicting interests,type of legal interest,transaction security,as well as invalid legal consequences,legal effect,principle of honesty and credibility,and the principle of fairness and impartiality.In the process of reform and opening to the outside world,the development of invalid legal act norms in China,with judicial recognition of illegal contract validity in particular,has witnessed the successions of total invalidity,partial invalidity and restricted invalidity.Despite of such achievement,drawbacks concerning judicial recognition of illegal contract validity still exist,namely,lack of standardization of legal basis,expansion of invalid contracts,misjudgment of mandatory provision nominalization,mistakes in legal basis of judgment,and self-contradictory between confirmation of invalid contract and limitation of action.Particularly,the application of Article 52 of PRC Contract Law is nonstandard.For example,a contract is valid according to this article while the contract is invalid if it is indirectly applied to this article.Sometimes,the article is generally applied to or the provisions under this article is misused.Expansion of invalid contracts refers to the inclusion of contracts with flaws as invalid ones.Confirmation of invalidity of entrusted financial contracts with the minimum-guarantee clauses lacks legal basis.Moreover,not-in-effect contracts are judged as invalid ones.Reasons underlying above juridical misjudgments include less attention attached to applicable laws in judicial practice,unlimited use of mandatory provisions and misjudgment of mandatory provision norms.The key to overcome the above drawbacks and flaws is firstly to reduce inapplicable mandatory provisions in legislation and to judge contract validity with prudence.In addition,the idea of "validity on the basis of doubtful resumption" should be employed,that is,contract validity should not be denied easily,principle of party autonomy should be respected,partial invalidity of a contract should not be used to deny the effect of the contract,and legal revocation and rescission should precede contract invalidity.Illegal contracts concerning violation of qualification admittance with potential subsequent correction are of great significance in the present study.Contracts of this type refer to contracts of purchasing and selling houses,house leasing contracts,contracts of land granting,contracts of cooperative development of real estate projects,where letter of intent or contract has been concluded,or the contract has been performed,but the seller,the transferor or the lease holder within the stated time or all the while fails to obtain according to law pre-sale permit,construction project planning permission,building construction permit,fire safety inspection certificate,land use warrant and qualification certificate of real estate development and management.Such contracts also include the contracts of unauthorized disposition of property sealed up by the court,or the contracts of subject matter or construction act which remain defects but have the potential to obtain relevant permits or eliminate such defects.Different from invalid contracts under potential correction or transfer,these contracts are valid when defects are to be eliminated.Study on basis and concept of invalid contract,and judicial recognition of illegal contract validity aim to restrain the over-interference of mandatory provisions or public power towards autonomy of will,respect intent of the parties,confirm contract validity,control judicial judgment of invalid contract and finally encourage trade and social-economic development.