As a manager of an FDI enterprise in Vietnam, before signing a contract, you have likely questioned its legal validity on multiple occasions. Is the contract that your company has just executed truly secure and protected under Vietnamese law? To help you stay in control in all circumstances, KMC below provides a detailed analysis of the conditions for contract validity. A clear understanding of the criteria for a valid contract will help avoid unforeseen risk exposures and ensure the rights and obligations of both parties are safeguarded.
What is a contract?
Pursuant to Article 383 of the 2015 Civil Code, a contract is an agreement between parties on the establishment, modification, or termination of civil rights and obligations.
Conditions for Contract Validity:
As a contract is a form of civil transaction, pursuant to Article 116 of the 2015 Civil Code, the conditions for contract validity are also the conditions for the validity of a civil transaction.
Pursuant to Article 117 of the 2015 Civil Code, the conditions for a contract to be valid include:
- The parties have civil legal capacity and civil act capacity appropriate to the established contract
- The parties participating in the contract act entirely on a voluntary basis
- The purpose and contents of the contract do not violate prohibitions of the law and are not contrary to social ethics
- The form of the contract is a condition for its validity in cases where the law so prescribes
To gain a more specific understanding and to be proactive when entering into contracts, especially for corporate entities, particularly Japanese FDI enterprises, KMC’s experts below provide a detailed analysis of each specific condition. In addition, important notes and solutions for each case are also provided to help FDI enterprises ensure the validity of contracts and secure protection under Vietnamese law.
Condition 1: Parties Have Appropriate Civil Legal Capacity
The first and most fundamental condition for contract validity is that the participating parties must have the capacity to enter into the transaction. For individuals, this refers to age and cognitive capacity. However, for FDI enterprises, the key issue lies in legal status.
- Investment Registration Certificate & Enterprise Registration Certificate: Your enterprise must possess valid Investment Registration Certificate and Enterprise Registration Certificate. These serve as legal evidence of the company’s existence and its authority to enter into contracts in Vietnam.
- Legal Representative: The signatory to the contract must be the legal representative stated in the Enterprise Registration Certificate (General Director, Director) or must have a valid Power of Attorney issued by such legal representative. A common mistake is that a branch manager (which is not a legal entity) signs contracts beyond the scope of authorization stated in the branch establishment license.
Note for Japanese FDI enterprises: The “Board of Directors – Director” management structure in Japan may not fully correspond to the “Chairman of the Members’ Council/Board of Directors – General Director” model in Vietnam. Verifying the exact title and authority of the signatory is an essential step that must not be overlooked before executing a contract.
Condition 2: Parties Enter the Transaction Entirely on a Voluntary Basis
Voluntariness is a core principle of contract formation. A contract established under coercion, fraud, or material mistake shall be invalid.
- Fraud & coercion: Acts of providing false information regarding financial capacity, product quality, or ownership rights over assets may render the contract void. Similarly, forcing a party to enter into a contract under economic or psychological pressure also constitutes a violation of this condition.
- Mistake: This is a sensitive issue in cross-border transactions. A mistake may arise when the parties misunderstand the main subject matter of the contract (e.g., technical specifications of machinery) or the counterparty (e.g., confusing one company with another with a similar name). Language and cultural differences increase this risk.
Challenge for Japanese enterprises in Vietnam: Japanese business culture places strong emphasis on harmony (wa), and direct confrontation is sometimes avoided. This may lead to implicit agreement (haragei) or contract signing without fully clarifying all concerns, inadvertently creating a situation of “lack of true voluntariness” when disputes later arise. As a business leader, it is essential to proactively clarify all unclear or questionable points in writing and to use professional legal interpretation services.
Condition 3: The Purpose and Content of the Contract Do Not Violate Legal Prohibitions and Are Not Contrary to Social Ethics
A contract is only valid when its purpose and content are permitted by law. Situations that may render a contract invalid include:
- Legal prohibitions: A contract shall be void if its purpose involves investment in prohibited business lines (as stipulated under the Law on Investment) or violates regulations on environmental protection or national security. For example, a contract for the transfer of an investment project located within a national defense and security zone without approval from a competent authority.
- Contrary to social ethics: This concept may be difficult to quantify. However, contracts containing provisions imposing excessive labor conditions, discrimination, or implicitly involving bribery elements such as “illegal commissions” may be at risk of being declared invalid.
Note for FDI enterprises: Investors should exercise particular caution with clauses such as “brokerage service fees” or “administrative support fees” that are not clearly defined. These may be interpreted as contrary to social ethics if they lack transparency or are not linked to specific, substantiated services with real commercial value. A contract that satisfies all validity conditions must ensure absolute transparency in all payment terms.
Condition 4: The Form of the Contract Complies with Legal Requirements
The form is an indispensable element of contract validity. Vietnamese law stipulates that certain types of contracts must be made in writing, and in some cases, notarization or certification is required.
- Ordinary written contracts: Most commercial contracts should be made in writing to serve as clear evidence. This is particularly important for contracts with high value or long-term duration.
- Contracts requiring notarization or certification: This is a critical point that many FDI enterprises may overlook, which may result in contract invalidity. The following transactions typically require such formality:
- Contracts for transfer, lease, or mortgage of land use rights.
- Contracts for transfer of investment projects (under the Law on Investment).
- Capital contribution contracts involving real estate assets into limited liability companies or joint-stock companies.
A share transfer contract or a real estate project transfer contract signed only on A4 paper between parties without notarization shall have no legal validity, regardless of how complete its content may be. Once a dispute arises, it will lead to complex issues and significant time and cost for resolution. Therefore, as the person directly executing contracts, it is essential to fully understand the legal requirements regarding contract form.
KMC – Professional Advisory and Support Services for FDI Enterprises
A Valid Contract Is Only the First Step—Turning It into Real Value Requires a More Complex Process
Ensuring contract validity is only the first step. Making a contract deliver practical value, securing the rights and obligations of both the enterprise and its partners, is a far more complex issue.
If you are a manager of an FDI enterprise in Vietnam and want to maintain full control in all situations—especially when signing investment or cooperation contracts—working with a unit or expert with in-depth knowledge of Vietnamese legal regulations is extremely important.
Proud to be a reputable and professional provider of tax, accounting, legal, and HR services for FDI enterprises, particularly Japanese FDI companies in Vietnam, KMC brings together a team of lawyers and experts with deep understanding of the latest laws and regulations. With extensive experience in consulting and handling numerous contracts, KMC is confident in accompanying enterprises professionally and providing optimal solutions for FDI businesses.
KMC helps you:
- Identify legal validity—understand clearly the conditions for contract validity and legal enforceability under applicable laws
- Ensure transparency and binding effect of each contractual clause
- Ensure legal compliance of contracts and minimize business risks
- Clearly understand the rights and obligations of each party, with professional support in handling arising issues
We carefully review each condition and provide detailed legal consultation to protect enterprises from immediate legal risks while building a foundation for sustainable and trustworthy partnerships in the Vietnamese market.
For in-depth consultation from experts and to sign contracts with confidence, you may contact KMC experts via hotline: 081 489 4789.
