Generally speaking, contracts are divided into four types according to their validity: valid contracts, invalid contracts, contracts whose validity is pending and contracts that can be changed and revoked. In fact, there is also a fifth type of contract validity widely present in judicial practice, that is, "not in force" contracts.

The so-called non-effective contract refers to a contract that lacks the conditions for validity, including the two situations of lack of agreed effective conditions and statutory effective conditions, which belong to the intermediate state of contract validity. The validity of a contract that lacks the conditions for the effective of the agreement is relatively easy to judge (Article 45 of the Contract Law, Articles 158 and 159 of the Civil Code), and this article mainly discusses the situation of lack of statutory conditions for validity.

1. Changes in laws and judicial interpretations

Summary: The Contract Law clarifies that "laws and administrative regulations" stipulate that the relevant content of "failure to register" has been deleted from the Civil Code), and approval and registration affect the validity of the contract. In practice, the main effective provisions after the "approval" of a contract include the establishment of financial institutions, changes in equity, the establishment of state-owned enterprises, the disposal of major assets, the articles of association of foreign-invested enterprises, and the transfer of prospecting rights and mining rights. It should be noted that in the absence of statutory invalidity, such contracts have been established in accordance with the law, but have not yet gone through the approval formalities, so the contract "has not taken effect".

2. Validity of "non-effective" contracts

From the point of view of expression, it seems more accurate to express "non-effective" contracts as "unapproved" contracts. In the absence of statutory invalidity, an "unapproved" contract has been legally established, but it is not a valid contract because it lacks the statutory conditions for validity. In practice, the situation of equating "non-valid" contracts with invalid contracts is more prominent. From the perspective of legal provisions, there is a clear legal basis for determining the invalidity of a contract (Article 52 of the Contract Law, Article 153 of the Civil Code, etc.), and the legal consequence of an invalid contract is that it is invalid from the beginning, while the validity of the "not effective" contract is in an uncertain state before it is approved, which belongs to the intermediate state of contract validity.

In view of the fact that non-effective contracts and invalid contracts are often confused in practice, which leads to confusion in the understanding of the validity and legal consequences of non-effective contracts, Article 37 of the Minutes clarifies the validity of "non-effective" contracts: where laws and administrative regulations stipulate that certain types of contracts shall go through approval procedures to take effect, such as the Commercial Banking Law, the Securities Law, the Insurance Law and other laws stipulate that the purchase of more than 5% of the equity of commercial banks, securities companies and insurance companies must be approved by the relevant competent authorities, in accordance with the provisions of paragraph 2 of Article 44 of the Contract Law. Approval is a statutory condition for the validity of a contract, while an unapproved contract does not take effect due to the lack of special conditions for entry into force stipulated by law. A prominent problem in practice is that a contract that has not entered into force is regarded as an invalid contract, or that although it is found to be not in force, it is treated as an invalid contract. An invalid contract is essentially a contract that lacks the valid elements of the contract, or has a legal reason for the contract to be invalid, and does not have legal effect from the beginning. However, the uneffective contract already has the valid requirements of the contract, which has a certain binding force on both parties, and neither party may withdraw, rescind or modify it without authorization, but due to the lack of laws, administrative regulations or special effective conditions agreed by the parties, it cannot produce the legal effect of requesting the other party to perform the main rights and obligations of the contract before the effective conditions are fulfilled. From this point of view, the Minutes of the Nine People's Republic of China positively establishes the validity of "non-effective contracts", which is of great breakthrough significance for the relevant theory of contract validity.

3. Remedies for non-entry into force contracts

A contract is formed but not in force, so the main rights and obligations clauses in the contract have not yet become legally binding until the special effective conditions stipulated by laws and administrative regulations are fulfilled. Under this logic, can the non-breaching party be held liable for breach of contract as agreed in the non-effective contract? The answer is obvious, when the requirements for the entry into force of the contract have not been fulfilled, the main rights and obligations clauses of the contract have not yet taken legal effect on the parties, and naturally there will be no liability for breach of contract for breach of contractual obligations that have not yet taken effect. As a non-compliant party, how should you protect your rights and interests under this premise? Article 38 of the Minutes gives the non-breaching party a way to protect its rights: a contract that must be approved and effective by an administrative organ has a special agreement on the obligation to submit for approval and the liability for breach of contract for failure to perform the obligation to submit for approval, and the agreement takes effect independently. Where a party requests to rescind the contract and requests it to bear the corresponding liability for breach of contract stipulated in the contract because the other party does not perform its obligation to submit for approval, the people's court shall support it in accordance with law. According to Article 38 of the Minutes of the Nine People, the obligation to submit for approval and the relevant breach clause in the non-effective contract shall take effect independently. Just as the dispute clause is independent of the contractual rights and obligations clause when the contract is invalid or terminated, the "obligation to submit for approval in the non-effective contract" belongs to the clause "enabling the contract to take effect", so the clause should take effect in advance independently of the contract clause. Accordingly, if the contract clause specifically stipulates the liability for breach of contract for the obligation to submit for approval, such liability for breach of contract will also take effect independently.

4. Relevant provisions of the Civil Code

Article 502 of the Civil Code stipulates that a contract formed in accordance with law shall take effect upon its formation, unless otherwise provided by law or otherwise agreed by the parties. Where in accordance with the provisions of laws and administrative regulations, contracts shall go through formalities such as approval, follow those provisions. If the failure to go through the approval and other formalities affects the validity of the contract, it does not affect the performance of obligations such as approval and the validity of the relevant clauses in the contract. Where a party that should go through formalities such as applying for approval fails to perform its obligations, the other party may request that it bear the responsibility for the breach of that obligation. Where the modification, transfer, or rescission of a contract shall go through approval formalities in accordance with laws and administrative regulations, the provisions of the preceding paragraph apply. We can see that the relevant content of the Civil Code is not achieved overnight, and from the aforementioned judicial interpretations and even the evolution of the Minutes of the Nine People, we can conclude the process of gradual changes in the cognition of the validity and legal consequences of "non-effective" contracts in theory and even practice in China.

5. Lawyer's Advice

As a lawyer, when helping clients draft contracts with statutory entry into force, it is recommended to pay attention to the following three aspects:

First, in the form of independent clauses, stipulate the relevant contents such as "application for approval" to promote the validity of the contract.

Second, such independent clauses should specify the obligor to perform obligations such as "application for approval", especially considering the handling of the situation where the statutory obligor is not the counterparty to the contract.

Third, for obligors who fail to perform their obligation to submit for approval, separately stipulate the liability for breach of contract.

(This article is translated by software translator for reference only.)