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13 July 2022

Supreme Court says that choosing a wrong remedy leads to a claim’s dismissal. Since a contract void by operation of law cannot be declared invalid by a court, a claim seeking such a declaration is improper. 

This decision is significant in that it shows the importance of choosing a correct remedy when seeking to enforce a legal right. 

A borrower sued a bank to invalidate a loan agreement. The claimant argued that the agreement authorized the bank to charge a fee for providing information about the debt’s status, something that the defendant was required to do free of charge under the law. 

Both the trial and appeal courts ruled for the bank. They found that charging the fee was lawful. The claimant brought a cassation complaint to the Supreme Court, which ruled that the lower courts reached a correct result, but for the wrong reasons. 

The Court found that the fee clause (not the whole agreement) was against the law and so void. But the claimant sought a wrong remedy, that of invalidating a void contract, rather than reversing its effects. The Court, therefore, ordered the claim dismissed. 

Which remedy to seek normally follows from the law. Statutory language authorizing enforcement of a right should make it clear what specific remedy, possibly one out of several, is a proper one to pursue. In the case of invalid contracts, Ukrainian law provides for two kinds of remedies, depending on whether a contract is voidable or void: (1) declaring a voidable contract invalid and (2) applying the consequences of a void contract (e.g., restitution). 

Void contracts are invalid by operation by law and so require no court intervention to invalidate them. By contrast, voidable contracts are valid until and unless successfully challenged in court by an interested party. The two are distinguished by statutory language. Depending on the vitiating factor, it either declares a contract invalid outright or entitles a party to have a contract declared invalid by court. 

Void contracts include, in particular, those which breach express or implied statutory prohibitions. Since public policy issues are involved, such contracts are invalid absolutely. By contrast, voidable contracts are those that affect only private interests (e.g., contracts made by mistake). These are said to be relatively invalid, i.e., effective until successfully challenged.

Since in the present case, the Supreme Court found, charging the fee was against the law, the fee clause was void by operation of law. That left the borrower only able to pursue a claim for undoing the provision’s legal effects, if any.

As explained by the Supreme Court, a remedy is proper where it corresponds to the nature and contents of a breached right, and to the nature of the breach. The underlying principles are those of completeness (adequacy) of a remedy and of judicial economy. A complete remedy enables a claimant to be fully restored in his rights at once, without having to seek additional relief. Juridical economy requires that the court be spared the unnecessary work of giving a remedy that is otherwise available by operation of law. In combination, these two are the characteristics of an effective remedy.

Where a void contract has not yet been performed or the performance is of a nature that precludes restitution, it follows that a party has no invalidity action at all. In such situations, the Supreme Court indicated, a contractual party, if sued for performance, may assert contract invalidity as a defense. There is no need then specifically for a court decision invalidating the contract. The court trying the case must itself consider the issue, and, if it finds the contract invalid, deny the performance claim. 


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