Nullity of a Contract in Laos

There are three situations in which a contract can be unilaterally terminated by one or the other party to the contract. The first situation was discussed last week in my post on anticipatory breach. That post discussed the situation where certain events are assumed to occur to one party thus allowing the other party to declare the first party in breach and thus terminate the contract.

The second situation in which a contract can be unilaterally terminated is by declaring the contract null.

A contract is considered null if there is an issue with formation, e.g., fraud, duress, incapacity, bad faith, and inequity. A contract is also considered null for public policy reasons if it:

• conflicts with state interests;
• conflicts with the articles of association of a party to the contract;
• is made in concealment;
• is made in an improper form.

A party can invoke nullity in any of the above situations. By successfully invoking nullity the contract is, in effect, cancelled. Any assets that have been applied to performance of the contract are to be returned to both parties.  If the contract is declared null because it was entered into as a result of fraud or threats, the party having committed such acts shall have their assets confiscated by the state. If the contract is declared null for public policy reasons, such as a conflict with national interests, all of the assets of both parties will be confiscated by the state.

If a party other than the one invoking nullity objects it falls upon the party invoking nullity to file suit in the courts to declare the contract null. Of all three situations in which a party can, in essence, cancel a contract, this is the only one in which the onus falls upon the proactive party to pursue cancellation of the contract.This offers some protection to the non-proactive party, but still does not protect the party completely from abuse of the concept of nullity.

Nullity is difficult to guard against in the language of the contract. A contract is either null or it is not, though a contract can be null in part. This allows for the a basic severability clause to limit the damage of a partially null contract. In addition, the parties can prepare language in the representations to specifically declare that the contract was prepared in such a way that none of the triggers for nullity occurred. This is really the only way to build in any protection against a claim of nullity, and even this is subject to the fiat of the courts. It is all too easy, if arguing fraud or threat, to simply say that a representation was also subject to the impropriety. That means, unfortunately, that in practice there is little to do to prevent the possibility of the other party from claiming nullity, particularly as once the claim is made, to successfully defend against it requires the non-invoking party to prove a negative.