The difference between an unconcluded and invalid contract

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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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.

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.

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Quite a few times already, clients who have found themselves in a very difficult situation have turned to us for help: unscrupulous partners offered them illiterately drawn up contracts for conclusion, and then, evading the fulfillment of their own obligations, demanded in court that such an agreement be declared unconcluded. This property of the contract differs from the recognition of a transaction as invalid in the sense of Article 166 of the Civil Code of the Russian Federation, since in this case, by a court decision, not restitutionary (that is, returnable) obligations arise, but completely different consequences, namely the recognition of the absence of obligations under the contract as such for both sides Let us consider under what circumstances it is possible to recognize a contract as not concluded.

Consequences of declaring a contract void

Returning valuables transferred to the counterparty or compensating them for losses in such a situation is somewhat more difficult, since unscrupulous counterparties are trying in this case to apply clause 4 of Article 1109 of the Civil Code of the Russian Federation on unjust enrichment that is not subject to return due to the fact that the person demanding the return of the property knew about the absence of an obligation, based on the presumption of knowledge of the law. In addition, in such situations it is necessary to carefully prove all losses incurred, costs and the very fact of the transfer of certain values. Sad consequences can also arise for former partners who ran an unprofitable business and incorrectly drew up agreements regulating the distribution of losses between them. Read about the consequences of such a discrepancy in our article.

Of course, we can help you solve all these problems, but in this article I would like to talk about how to avoid getting into such situations. The most important thing for this is to correctly draw up the contract so that there is not a single sign of “non-conclusion” in it. What does this mean?

The concept of an unconcluded contract

In accordance with paragraph 1 of Article 432, an agreement is considered concluded if the parties reach an agreement on all essential conditions for this type of agreement. That is, the contract should be as specific as possible. Very often, when helping clients, we see, for example, supply contracts in which the supplier undertakes to supply “goods” that are not described either in the text of the contract or in the specification. The contractors were in a hurry, trusted each other, and then met in court. Or, for example, the deadline for fulfilling obligations is not specified. As a rule, this happens in cases where a trusting contractor has completed all the work a long time ago, and the contract is just being concluded.

The Civil Code lists all the key conditions for the main types of contracts. The entire IV section of part two of the Civil Code of the Russian Federation is devoted to this. Clause 5 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated March 14, 2014 No. 16 “On freedom of contract and its limits” allows the parties to enter into so-called “unnamed agreements”, the content of which does not directly correspond to the agreements provided for by the Civil Code of the Russian Federation or other laws. The same is written in paragraph 2 of Article 421 of the Civil Code of the Russian Federation. Clause 3 of the same article states that an agreement may contain elements of different types of agreements provided for by law, in this case it is called mixed, and the rules about those agreements that are contained in its elements apply to it. In general, such rules do not apply to unnamed contracts; however, the same Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation allows the rules of law to be applied here by analogy.

Terms of the agreement

Accordingly, it is very important that the contract is drawn up for you by a competent lawyer who will understand which elements of contracts are present in this contract and what essential conditions must be spelled out in accordance with the Civil Code. We talk about how to draw up, for example, loan agreements in a separate article. When writing down conditions in contracts, always evaluate your strengths, since they will need to be fulfilled exactly. You can also read about the consequences of violating the deadlines for fulfilling government contracts in our separate article.

Form of the concluded agreement

In accordance with paragraph 1 of Article 434 of the Civil Code of the Russian Federation, it is important to comply with the form established by law for this type of agreement. The most common form is simple written. However, in some cases, compliance with the notarial form of the agreement or its state registration is required. And if the second form is available to you only in cases specified by law, then notarized registration of the agreement can always be carried out.

We also recommend that all our clients immediately go to court if the transaction has already been partially executed, and the other party evades its notarization or state registration. Article 165 of the Civil Code of the Russian Federation allows you to do this, however, there is judicial practice in which the court decided to recognize the contract as not concluded due to the fact that one party evaded proper execution of the transaction, and the second party for a long time was in no hurry to go to court with a demand recognize the transaction as valid.

Moment of conclusion of the contract

In disputes about the recognition of contracts as concluded or not concluded, it is important to determine the moment of conclusion of the contract; Article 433 of the Civil Code of the Russian Federation helps with this, which states that the contract is considered concluded at the moment the person who sent the offer receives its acceptance, and if it is necessary for the conclusion of the contract also transfer of property, the contract is considered concluded from the moment of transfer of property (the so-called real contracts). Clause 2 of Article 432 of the Civil Code of the Russian Federation explains the concept of offer, as an offer to conclude an agreement, and acceptance, as acceptance of an offer by the other party. Thus, it is very important to record the fact of acceptance of the offer, that is, save the relevant official letters, make sure that they are duly signed by authorized persons, you can also save and notarize electronic correspondence. In addition, a significant argument would be the involvement of witnesses - third parties who were present at the negotiations to agree on the terms of the contract. However, witness testimony is not accepted by the court for transactions concluded orally; we, of course, strongly discourage this form of concluding contracts.

If we are talking about a real agreement (for example, a loan agreement), then it is also important to record the fact of the transfer of the relevant property. Article 224 of the Civil Code of the Russian Federation determines what should be understood by the transfer of a thing: the transfer of a thing is the delivery of the thing to the acquirer, and in accordance with paragraph 2 of the same article, if by the time the contract is concluded the thing is already in the possession of the acquirer, the thing is recognized as transferred to him with this moment. This fact is recorded by drawing up documents (transfer and acceptance certificate, receipt, cash receipt order for money), additionally, you can make video recording and invite witnesses.

Only by following these recommendations and turning to professional lawyers will you insure yourself against very risky legal proceedings to recognize the contract as not concluded. Our company can help you draw up any contract correctly.

If your company has developed a fairly complex and competent contract, you will probably be interested in learning how to protect copyright on its text.

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