Invalid and unconcluded contract: difference in Russian law

Invalid contract

NB: In order to preserve the terminology used in legislation, the term “transaction” will be used in some places. Let us recall that “transaction” is a broader concept than “agreement”, and therefore the grounds for invalidating a transaction equally apply to the contract. Art. 431.1 of the Civil Code of the Russian Federation: “The provisions of this Code on the invalidity of transactions apply to contracts, unless otherwise established by the rules on certain types of contracts and this article.”

Legal regulation: General conditions regarding the invalidity of transactions in Russia are enshrined in §2 of Chapter 9 of the Civil Code of the Russian Federation. In addition to the general provisions, the invalidity of a contract is dealt with by separate rules relating to various types of contracts, as well as Art. 431.1. - “Invalidity of the contract.”

Unlike an unconcluded contract, in an invalid contract the parties may agree on all essential terms, but the contract itself directly violates the provisions of the law. That is, the conditions required by law to recognize a transaction as valid (legality of content; ability of individuals and legal entities committing it to participate in the transaction; compliance with the will and expression of will; compliance with the form of the transaction) are not observed. Based on this, the invalidity of the transaction may be due to the following factors:

• Illegality of content (vice of content). Transactions that are contrary to the law, including transactions that are contrary to the principles of law and order and morality.
• Inability of individuals and legal entities committing it to participate in the transaction (defect of the subject composition). Lack of legal capacity of persons participating in the transaction, exceeding the limits of authority, lack of parental consent of a person aged 14 to 18, inconsistency with the goals of the activity.
• Inconsistency between the will and expression of the parties (vice of will). The transaction was made under the influence of material misconception, deception, violence, threat or adverse circumstances.
• Failure to comply with the form of the transaction (flaw in form). A defect in form is expressed in non-compliance with the simple written or notarial form of a transaction established by law or by agreement of the parties, as well as with state registration requirements. In paragraph 3 of Art. 163 of the Civil Code of the Russian Federation states that if notarization of a transaction is mandatory, then failure to comply with the notarial form of the transaction entails the invalidity (nullity) of the transaction. Also, if this is specified in the contract or is contained in cases directly specified in the law, failure to comply with the simple written form of the transaction may also lead to its invalidity (nullity) - clause 2 of Art. 162 of the Civil Code of the Russian Federation.

A transaction is invalid on the grounds established by law, due to its recognition as such by the court (voidable transaction) or regardless of such recognition (void transaction) - clause 1 of Art. 166 of the Civil Code of the Russian Federation.

The invalidity of a transaction means that the action that was committed in the form of a transaction does not have the qualities of a legal fact capable of giving rise to those civil consequences that the subjects desired (E.A. Sukhanov).

Examples from judicial practice

Carrying out work without a contract

Execution of work

Situation: company A agreed with company B to carry out certain work on the territory of company A. At the same time, an agreement defining essential conditions was not drawn up, however, there were no claims regarding the work performed, and the work was paid for. After the lapse of time, significant work defects were identified, on the basis of which company A filed a lawsuit against company B with a claim to eliminate these defects without paying for additional warranty work.

Court's decision: The appellate court accepted Company A's position, ruling in favor of the claim. The court's satisfactory decision was based on the fact that, in the actual absence of a contract, the parties were able to come to a common decision regarding the work performed, there were no disagreements and the results were accepted, which means that the right to demand a guarantee of services and their proper quality arises. Accordingly, work to eliminate defects must be carried out.

Indefinite work

Situation: company A signed a contract with company B, which did not clearly define the terms of the work (this is a required condition), while the contract stated that company A would provide an advance payment and after that B would begin performing the work. In fact, company B did not meet the work deadlines and this served as the basis for company A to file a lawsuit in court demanding compensation for losses caused by the delay in work.

Court decision: the court of first instance rejected the claim, since compliance with the essential condition - a specifically defined date - was not specified in the contract, but the appellate court upheld the claim and recognized the contract as concluded, with all mandatory rights and obligations. The court relied on the fact that any action on the part of company A, including making an advance, is the initial moment for the execution of work and it automatically implies the completion of work on time or within a reasonable time. Thus, the period is defined in the contract, which does not give the right to consider such a contract invalid and not compensate for the losses incurred.

State-unregistered lease agreement

Unregistered lease agreement

Situation: company A executed an ownership agreement for a warehouse, which was recorded in the Unified State Register. However, at the time of registration of non-residential premises for company A, contracts with other tenants were not reflected in the information of the Unified State Register. Later it became known that the premises have been rented by company B for several years and the duration of this lease agreement has not yet expired, the tenant regularly pays the rent and, accordingly, he does not intend to vacate the premises. Company A considered it legitimate to file a lawsuit to terminate the lease agreement with company B.

Company B argued that the lease agreement, although not registered, had been executed by the parties for a long period, had not yet expired and Company A's corresponding demand to vacate the premises was unlawful.

Court decision: an unregistered lease agreement is not considered valid and in this case the very idea of ​​registration is violated - with respect to an interested third party (company A), the fact of the existence of a long-term lease that was in effect before the third party’s interests in relation to the lease of this property was hidden, which can be said to violate rights of company A. Since from this situation it followed that company A did not know about the existence of the lease agreement when concluding the transaction (there were no records in the Unified State Register of the lease agreement), then the previously valid lease agreement with the former lessor and company B is considered invalid.

Situation: company A knew that the premises being sold were leased on the basis of an unregistered agreement - the seller of the building told him about this. However, company A, knowing about the existence of the lease agreement, nevertheless filed a lawsuit against the tenant with a demand to declare this agreement invalid and thereby evict the tenant.

Court decision: the court of first instance took the position of company A, the new owner of the premises, due to the fact that a lease agreement that has not been registered is not considered concluded, since the interests of a third party are affected. The appellate court also referred to this argument, related to the purposes of state registration, to protect the interests of third parties, but with the amendment that third parties could also be former tenants who previously received rights to this property. The court also recognized the fact that the statement of the new owner of real estate - company A - about the invalidity of the lease agreement due to lack of registration, is equivalent to an abuse of his rights, since the owner of company A at the time of the transaction knew about the existence of the tenant, which means he gave his consent to maintain the contractual relationship.

Lease payments for tax purposes

Situation: Company A enters into a lease agreement for a period of more than 1 year. The leased object, the amount of rent, and the terms of payment are agreed upon by the parties. At the time of reporting to the tax office, the long-term lease agreement was just undergoing the registration procedure. To what extent is it legal for the tax inspectorate to exclude these expenses from expenses for tax purposes?

Court decision: even if the lease agreement is at the registration stage, i.e. it is unintentionally not registered, for the tax office this is not a basis for accepting rental expenses. However, the arbitration court takes into account the actual expenses incurred, supported by documents, even until the state registration of the contract is received. In addition, the Tax Code of the Russian Federation does not directly indicate that only expenses under registered lease agreements can be included in the tax base.

Accordingly, it is unlawful to equate a lease agreement that is at the registration stage to an unconcluded one and exclude expenses on it from the tax base.

Recognition of an agreement as invalid is fraught with consequences for the enterprise from a legal and tax point of view. Such an agreement is akin to a “powder keg”, when instead of creating business, partnership, legally protected relationships, trust relationships appear, where everyone expects and hopes that the outcome will be in his favor.

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Procedure for invalidating a contract

The procedure for invalidating a contract is carried out in court. It is extremely important to comply with legal requirements regarding who is authorized to file a claim.

Important: Not in all cases there are legal grounds for invalidating a contract. Clause 2 Art. 431.1 of the Civil Code of the Russian Federation: “A party that has accepted performance from a counterparty under an agreement related to the implementation of business activities by its parties, and at the same time has not fully or partially fulfilled its obligation, has no right to demand recognition of the agreement as invalid, except in cases where the agreement is recognized as invalid on grounds provided for in Articles 173, 178 and 179 of this Code, as well as if the performance provided by the other party is associated with deliberately dishonest actions of this party.”

Based on the results of the consideration of the case, the court makes a decision to declare the transaction invalid or refuses to satisfy the plaintiff’s claims. Recognizing a transaction as invalid entails the following consequences.

Correlation of concepts

The practice of civil legal relations, as well as judicial practice, has developed the main aspects of the relationship between the concepts of an unconcluded and invalid contract.

An agreement that was not concluded due to the absence of all essential conditions provided for by law or the requirements of the parties cannot be declared invalid.

Despite the parties expressing their intention to formalize an agreement in this case, it has not actually been concluded, no agreements have been reached on it, and therefore there is nothing to invalidate. For example, the Supreme Arbitration Court of the Russian Federation, refusing by its ruling dated 02/04/2009 No. 114/09 in case No. A07-17159/2007-G-PAV to transfer the case for review by way of supervision, pointed out the inability of the applicant to use the method of defense provided for Art. 167 of the Civil Code of the Russian Federation, due to the fact that the agreement is not concluded.

An invalid contract cannot be unconcluded, since the legal fact of concluding the transaction has taken place.

This position is confirmed by judicial practice. In particular, the Supreme Court of the Russian Federation, by its ruling dated April 10, 2018 No. 81-KG17-31, sent the case for a new trial on the basis that the court of the previous instance declared the agreement invalid and unconcluded. In reality, these concepts are mutually exclusive.

Consequences of invalidating a contract

According to paragraph 1 of Art. 167 of the Civil Code of the Russian Federation, an invalid transaction does not entail legal consequences, except for those related to its invalidity, and is invalid from the moment of its completion.

What if part of the obligations under such an invalid transaction have already been fulfilled? In this case, the rules on restitution apply: Art. 167 of the Civil Code of the Russian Federation - “If the transaction is invalid, each party is obliged to return to the other everything received under the transaction, and if it is impossible to return what was received in kind (including when what was received is expressed in the use of property, work performed or service provided) to reimburse its value, unless other consequences of the invalidity of the transaction are provided for by law.” In this way, the original property status of the parties to the contract is restored, which existed before its conclusion and execution.

Interesting: The Resolution of the Plenum of the Armed Forces of the Russian Federation dated March 24, 2016 No. 7 states that the invalidity of the contract from which the main obligation arose, as a general rule, entails the invalidity of agreements on measures of civil liability for violation of this obligation, including penalties (p. 64).

Tax consequences

Agreements recognized as unconcluded or invalid create tax risks for organizations in addition to legal risks. As a rule, such problems arise with long-term unregistered lease agreements and they consist in the fact that the tax inspectorate, during inspections, does not recognize the expenses incurred for the payment of lease payments as an object of taxation, since the agreement, according to general rules, is considered unconcluded. This increases the amount of income tax payable to state tax authorities.

Nuances with taxes

However, arbitration courts take a completely different position and are guided by the principle of dominance of economic content over legal content. This means that for expenses to be accepted for tax purposes, it is important that they are documented, and the lease may be unregistered or in the process of being registered, not renewed for a new period of validity, or may not have clearly stated essential terms, but if If there are actual documents, for example, executed payment orders, signed acceptance certificates, then the exclusion of such expenses for renting property from the actual costs incurred is considered impossible.

In addition to the availability of documents confirming expenses, the arbitration court also takes into account the fulfillment of the terms of the contract by both parties without objections and disagreements, i.e., as indicated above, when all the required terms of the contract are accepted by the parties and properly executed, for example, the tenant pays rent monthly, and The lessor receives monthly income under the lease agreement. This fact will also testify in favor of the tenant.

How to protect your rights in court

Improper fulfillment of obligations is always accompanied by financial losses. To minimize such costs, parties to a contract often abuse their rights and go to court to terminate the legal existence of the transaction. For example, in order to reduce the amount of penalties, customers recognize the contract as not concluded; this procedure has a general judicial procedure. To do this, you must adhere to the following steps:

1. Draw up a statement of claim, substantiating your arguments with evidence.
2. Send all documents to the court by mail, by hand, or in the form of an electronic document.
3. Take part in the preliminary court hearing, presenting your information on the case.
4. Take part in a court hearing, at the end of which a court decision will be made to recognize the contract as not concluded or to refuse to satisfy the claims.
5. Wait until the judicial act comes into force and receive a writ of execution.
6. Send a writ of execution to the bailiff service if the defendant refuses to voluntarily satisfy the claims.

Articles 168 – 171, 173 – 174.1, 176 – 179 of the Civil Code of the Russian Federation are used as the legal basis to recognize a contract as not concluded; Judicial practice on the disputes under consideration is published on the official website in the e-justice system.

Material on the topic Review of judicial practice on the application of the consequences of invalidity of transactions initiated by the court

Reasons

In order to recognize a loan agreement as not concluded, the following grounds are required:

• The essential terms of the contract have not been agreed upon. This means that the agreement must clearly indicate the item, its quantity to be transferred and returned;
• The transaction is sham or void;
• The Agreement directly or indirectly violates laws and other legal acts;
• The contract does not correspond to moral and social concepts;
• The imaginary and pretense of the transaction;
• The counterparty under the contract is incapacitated or has limited legal capacity;
• The transaction was completed with violations related to the law;
• The subject of the agreement is the seized property;
• Impact on one of the parties psychologically or physically;
• Hopelessness.