Invalidity of a legal act

What it means

Invalidity of a legal act means that a contract, notice of termination, power of attorney or other act does not produce the legal effects the parties intended. The grounds are set out mainly in the Civil Code: breach or circumvention of the law, conflict with good morals, lack of required written form, vagueness or unintelligibility, lack of capacity or free will.

Absolute and relative invalidity are distinguished. An absolutely invalid act is void from the outset, and a court takes this into account of its own motion even if nobody invokes it. A relatively invalid act, such as one entered into under a mistake induced by the other party, is treated as valid until the affected party invokes its invalidity within the limitation period.

Invalidity differs from voidability against creditors: a voidable transaction is valid, but the creditor can have it declared ineffective against itself. A sham or non-existent act, which never came into being because the expression of will was entirely indeterminate, must also be distinguished.

How it works in practice

The consequence of invalidity is that the parties must return what they received under the invalid act, under the rules on unjust enrichment. If a company delivered goods under an invalid contract, it is not entitled to the agreed price but only to the return of the goods or compensation for their value, which is not necessarily the same.

In business practice the most common grounds for invalidity are missing written form for contracts that require it, such as transfers of a business share or property, an indeterminate subject or price, signature by an unauthorised person and failure to publish a contract subject to mandatory publication.

When reviewing clients’ contracts we therefore check who signs, whether they are authorised to act for the company, whether the essential terms are sufficiently specific and whether the required form is observed. An error at this stage is cheap to fix; later it can unravel the whole transaction.

What to watch out for

The most common mistake is a contract signed for the company by someone without authority, such as one director where the articles require two signatures. The other party can then invoke invalidity, or the company may find the contract does not bind it. Signing authority should always be checked in the commercial register extract.

Watch the tax consequences too. If a contract proves invalid, the accounting and tax entries based on it must be corrected, for example by issuing corrective VAT documents. With a dispute lasting years, the correction deadline may pass and the tax effect remains awkwardly open.