In nowadays business and commercial activities, when it comes to high-value transactions in which the obligator’s financial capacity is not well assessed by the right holder, the involvement of a renowned financial institution is often needed. Bank guarantee is the form of credit granting in which the guarantor (being a credit institution) commits with the beneficiary that it shall perform finance obligation of the guaranteed party being the principal upon the principal’s failure to duly perform the obligation committed with the beneficiary. By such a way, bank guarantee proves to be a preferable instrument of security payments due to its reliable and effective nature. However, recent incidents regarding denial of the validity of guarantee letters from many local banks have caused negative impact on the utilization of this notably convenient security instrument in business practice in Vietnam.1 Thus, an intriguing question popped to the mind of businesspeople: “What should we know to play it safe with regards to the validity of civil transaction in general how this knowledge applies to business contract in particular?”

Besides the conditions for the validity of the contract which are expressed in the contract itself, conditions for the contract to become effective are also regulated the statutory provisions which should be clearly understood by businesspeople. General conditions are that the persons establishing the transaction have the civil act capacity and act voluntarily, the purpose and contents of the transaction do not violate prohibitory provisions of law and are not contrary to social ethics, the form of the contract must be complied with applicable regulations where it is so provided for by law,2 and notably, in the case of establishing contracts via representation which is commonplace in daily business activities, the representative must act within his/her authority of representation.

The question of the authority of the undersigned must be taken into the utmost consideration because failing to satisfy this requirement may result in unfavorable consequences, i.e. contracts/transactions established and/or performed by persons without the authority of representation or ultra vires by representatives shall not give rise to rights and obligations of the represented persons fully or for the portions of transactions performed ultra vires respectively.3 In other words, such contracts/transactions may be wholly or partially annulled. Therefore, the question is how to know whether the undersigned is acting within his/her authority when the contract is made in the name and on behalf of an organization.

Basically, the legal representative as prescribed by the charter and the certificate of incorporation is the only one to establish transactions in the name of an enterprise under law.4 If the undersigned of the contract is not the legal representative, then a duly issued power of attorney or letter of authorization is required to have clear authorization for the content, scope and duration of authorization. If the power of attorney does not specify the term of authorization, this authorization is only valid for one year as per regulations of default law. It is also noteworthy that a branch is not a legal person, therefore the head of the branch signing contract with other entities must have an appropriate POA too and it is essential to look over certificate of incorporation of the branch to ensure that the scope of work of the contract falls within the capacity of the branch.

It is provided by the law that a company, being legal person, shall be liable for the performance of its civil obligations established and performed by its representative in the name of the legal person.5 However, in order to avoid possible disputes and for the sake of an undeniable effect of the contract, internal regulations of the partner regarding decision rights of each link of the chain in its organizational system should be taken into due attention. As per the applicable enterprises laws, the transaction which is worth more than 50% (or a smaller ratio stipulated by the company charter) of total value of assets according to the most recent financial statement of the company shall be approved by the Board of Directors (in shareholding companies) or the Members’ Council (in limited liability companies). Therefore, when the contract value is considerable, it is worth asking the other party for its registered charter and the incorporation certificate together with, if it is required by the charter or the default law, the resolution of the Board of Directors/Members’ Council passing through the transaction in question. Ideally, the conditions related to their internal regulations defining the validity of the contract, if the parties wish to apply the same to the contract, should be expressly stated or informed in writing to the other.

In conclusion, in the unsettling economic environment nowadays, businesses should be more aware of conducting due diligence on the transaction with respects to the legal capacity of the other parties and their representatives. When facing with complex high-value transactions, especially the ones which are accompanied by the issues of transfer of assets, merger and acquisition or having the involvement of a multiple of parties, using professional legal consulting services is highly recommended to ensure the validity of the transaction in particular and to mitigate legal risk in general.