Validity of Contract

1. Validity of Contract Categories of Effectiveness Illegality Mental Reservation Malicious Collusion

2. Effectiveness of Contract (juristic act)

3. Category of effect • Contract Formed • valid • avoidable • Uncertain (indefinite) • void • Contract Not formed：invalid

4. No contract at all (invalid or void) Contract not formed valid Valid End of the period for the right to avoid valid valid Avoidable Revoke valid void Avoidable Retroactive effect of being void Refuse to acknowledge void void Indefinite acknowledge void Indefinite valid Retroactive effect of being valid void Void Contract Formed

5. Effective elements of Juristic Act • General effective element • The party shall have capacity to make a juristic act﹝RCC 75-85、981﹞ • Subject matter shall be legal and shall not violate mandatory laws (71), public policy(72), and justice (74) • Declaration of intention shall be complete and no any defect (86-93) • Special effective element • Registration (758)

6. Subject Matter of Contract The subject matter shall be legal. Shall not violated the mandatory laws(71) The subject matter shall be proper Shall not violate public policy and good moral (72) Shall not be unconscionable (74, 274-1) The subject matter shall be possible (246, 247) The subject matter shall be certain.

7. Juristic act and the state law • Autonomous in private life: an individual can create or form a private legal relationship under his/her willingness. • Juristic act under private autonomy: • Making decision by his/her self and taking responsibility by his/her own. • The state protects and preserves the accomplishment of private autonomy. • The parties can exclude laws if the law exists as a instrument of supplement or interpretation to private intention. • In order to maintain social order, ethics, and justice, the state may intrude private relationship by setting out a mandatory laws.

8. The category of laws by its function • Discretionary rule • Supplemental rule ﹝320、346、369﹞ • Interpretation rule﹝4、370﹞ • Mandatory rule • Imperative rule﹝27I、47、760、972、1049﹞ • Prohibitive rule ﹝16、17、222、757﹞

9. Article 7 of PRC Contract Law •  In concluding or performing a contract, the parties shall comply with laws and administrative regulations and observe social morals, and shall not disturb the social and economic order or harm the public interests.

10. Article 6 and 7 0f PRC GPCL • Article 6 • Civil activities shall be in compliance with the laws; where there are no relevant provisions in the law, they shall be in compliance with state policies. • Article 7 • civil activities shall observe the social ethics and shall not harm the public interest and undermine the state economic plans or disturb the social economic order.

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

12. ROC Civil Code • Article71A juridical act which violates an imperative or prohibitive provision of the act is void except voidance is not implied in the provision.Article72A juridical act which is against public policy or morals is void.Article73A juridical act which does not follow the formality required by the act is void unless otherwise provided by the act.Article74If a juridical act whereby a person profiting by the difficulties, recklessness or 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 court may revoke the juridical act or reduce the payment upon the application of any interested person.The application mentioned in the preceding paragraph must be made within one year from the date of the juridical act.

13. The Effect of Illegal Contract • Principle rule: Void • Void in part or totally • Obligatory act void or dispositive act void • Exception rule: ： • A juridical act which violates an imperative or prohibitive provision of the act is void except voidance is not implied in the provision.

14. Contract shall not violate the public policy and good moral • The rule:：ROC Civil Code §72 • Function and legislative reasons • The juristic act violated public policy or good moral will vitiate the national moral and e6thics: therefore it shall be void. (the gist of the legislative reason) • Judge may supplement the law on account of the need of society and economy so that the law can progress with the development of society. • Setting up a institute to unify and organize the legal norms so as to keep the laws in the same standards. • Blanket stipulation: the judge shall specify the extent of the rule based on specific case. • Standard of judgment: the facts on a specific case (the motive or purpose of the juristic act), legal norms, social value, customary, justice.

15. Japan Civil Code • Article 90 • A juristic act whose object is contrary to the public order or good morals is null and void. • Article 91 • If the parties to a juristic act have declared an intentions which deviates from any provision of a law or ordinance not concerned with the public order, such intention shall prevail.

16. Meaning of public policy and good moral • Public policy • Defined as the common interest of a nation or society. • “Public” is a uncertain legal concept. It doesn’t mean a will that comes from most people over half but a group concept represented or recognized by a nation or society. • “public policy” is a concept of legal norm which includes constitution and laws . • Good Moral • Defined as a concept of common ethics in a society. • “good” is a uncertain legal concept and is used as a standard for screen customary law.

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

18. Gift concluded Gift effected Cohabitation started (condition precedent) Cohabitation dismissed Gift concluded and effected Gift became extinct Cohabitation started Cohabitation Dismissed (condition subsequent)

19. Defects of Declaration of Intention • Declaration inconsistent with intention • Intentional inconsistency (variance) • Unilateral inconsistency: mental reservation • Bilateral inconsistency: A false declaration of intention made in collusion or malicious collusion • Contingent inconsistency • Mistake • Mistake in Contents of Declaration • Mistake of identity in person • Mistake of identity in subject matter • Mistake of identity in effect of juristic act • Mistake in Expression • Mistake in Motive • Mistake in qualification of person • Mistake in quality of property • Manifesting the intent without freedom • Fraud • Duress

20. Mental Reservation • Purpose to made a mental reservation • Malicious motive, circumvent debt, faking a false contract, fictitious investment, provisional decision. • Constituent elements • There is a declaration of intention • The manifestation of declarant shall be variant with its intention • The declaration shall not be a collusion between declarant and the other party • Awareness v. Collusion

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

22. Japan Civil Code • Article 93 • A declaration of intention shall not be invalidated by the fact that the declarant made it knowing such declaration not to be his true intention; however, such declaration of intention shall be null and void if the other party was aware, or should have been aware, of the true intention of the declarant.

23. The effect of a false declaration of intention made in collusion • Between the parties • The juristic act under malicious collusion is void • The hidden juristic act is valid • Relation with the third party • The voidance can not be a valid defense against any bona fide third party. • Bona fide: without knowledge about the collusion and without knowledge not caused by its fault. • The third party: anyone other than the parties who made the collusion and their heirs • Valid defense against any bona fide third party: if the bona fide third party raises a valid defense, then the fictitious contract is valid. The parties made fictitious contract cannot use the voidance effect against the third party.

24. ROC Civil Code • Article87 • A fictitious expression of intent made by the expresser in collusion with other party is void, but the voidance can not be a valid defense against any bona fide third party. • If the fictitious expression of intent was intended to conceal another juridical act, the provisions of the act with respect to such another juridical act shall apply.

25. PRC GPCL • Article 58. Civil acts in the following categories shall be null and void: • (1) those performed by a person without capacity for civil conduct; • (2) those that according to law may not be independently performed by a person with limited capacity for civil conduct; • (3) those performed by a person against his true intentions as a result of cheating, coercion or exploitation of his unfavorable position by the other party; • (4) those that performed through malicious collusion are detrimental to the interest of the state, a collective or a third party; • (5) those that violate the law or the public interest; • (6) economic contracts that violate the state's mandatory plans; and • (7) those that performed under the guise of legitimate acts conceal illegitimate purposes. • Civil acts that are null and void shall not be legally binding from the very beginning

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

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

28. Japan Civil Code • Article 94 • A false declaration of intention made in collusion with the other party is null and void. • The voidness of a declaration of intention referred to in the preceding paragraph may not be set up against a third person who has acted in good faith.

29. Taiwan Supreme Court Precedent No. Tai- Shang 316 (1973) • The meaning of A false declaration of intention made in collusion with the other party can be defined as a declaration of fictitious intention mutually and intentionally made by the declarant and the other party. Hence, the other party shall not only have known the declarant’s fictitious intention but fictitiously agree with the declarant fictitious intention. If only one party, unwilling to be bound by his declaration of intention, manifested his fictitious intent, it is not enough to be regarded as a malicious collision.

30. ROC & Japan Civil Code Definition A false declaration of intention made in collusion with the other party Purpose Invalidate fictitious declaration because of the intentional inconsistency between declaration and intention. PRC Contract Law Definition The parties colluded in bad faith, thereby harming the interests of the state, the collective or any third party Purpose Protect the interests of the state, the collective or any third party In Comparison of Fictitious Declaration in ROC & Japan Civil Code and Malicious Collusion in PRC Contract Law

31. ROC & Japan Civil Code Constituent elements A declaration of intention exists It is a false declaration of intention: inconsistency between declaration and intention A false declaration of intention in collusion with the other party. PRC Contract Law Constituent elements There is a contract. The parties colluded in bad faith. The contract harms the interests of the state, the collective or any third party. In Comparison of Fictitious Declaration in ROC & Japan Civil Code and PRC Contract Law

32. Effectiveness Declaration is void. (RCC 87, JCC94) But the voidance of a declaration of intention may not be set up against a third person who has acted in good faith.(RCC87, JCC94) Return profit under unjust enrichment rules. (RCC179, JCC703) Effectiveness Contract is void.(GPCL58, CL52) Any property acquired as a result shall be turned over to the state or be returned to the collective or the third person. (CL 59) In Comparison of Fictitious Declaration in ROC & Japan Civil Code and PRC Contract Law

33. Unjust Enrichment Institute in ROC Civil Code • Article 179 • A person who acquires interests without any legal ground and prejudice to the other shall be bound to return it.The same rule shall be applied if a legal ground existed originally but disappeared subsequently. • Article 180 • 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;(2) If the prestation made by the debtor for the performance of an undue obligation;(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;(4) If the prestation was made for an unlawful cause. Except when the unlawful cause exists only with regard to the recipient. • Article 181 • In addition to the interests received, a recipient unjustly enriched shall return whatever he acquired by virtue of such interests.If restitution is impossible by reason of the very nature of the interests or by reason of any other circumstance, he shall be bound to reimburse the value.

34. Unjust Enrichment Institute in ROC Civil Code • Article 182 • The recipient, who did not know of the absence of the legal ground and the interests have no longer existed, is released from the obligation to return the interests or reimburse the value. • If 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 return 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 ground plus the interest and to make compensation for the injury, if any. • Article 183 • When the recipient unjustly enriched transferred gratuitously whatever he 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 make restitution to the extent which the recipient is released from his obligation.

35. Unjust Enrichment Institute in Japan Civil Code • Article 703 • A person who without any legal ground derives a benefit from the property or services of another and thereby causes loss to the latter shall be bound to return such benefit. • Articles 704~708