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30 November 2022


The Supreme Court rules that a valid gift agreement calls for a good motive for making the gift, in addition to all other conditions of contract validity. Gratuitous transfers made in a commercial context are thus open to challenge. But the test of how good the motive must be is a question of fact, to be argued by the parties and assessed by the court in light of all relevant circumstances.


This case involved three shareholders in a company: A, B and C. Each by law had a priority right to buy shares of the others (on a pro rata basis). B gifted his shares to C. That – since gift transfers are not subject to priority rights of other shareholders - had the effect of denying A an opportunity to acquire the shares.


So A sued B and C to invalidate the gift agreement. He argued that this was a sham contract, with the defendants in fact making a secret sale. The plaintiff asserted the parties to the gift had no good reason to enter into a gift transaction as opposed to a sale.


Both the trial and appeal courts found for the defendants. The plaintiff appealed to the Supreme Court, which upheld the lower courts’ decisions.


The Court noted that the validity of a gift agreement, it being a gratuitous contract, hinges upon the existence of a proper motive supporting the gift. Since a gift is not a commercial transaction, its validity in a commercial context must be specially justified. If the defendant fails to do so, the court may invalidate a gift as a sham contract.


Ukrainian law distinguishes between cause and motive in contracts. Cause is the legal reason why the parties make a contract. All contracts of the same type (sale, lease, work, etc.) have the same cause. For example, in a sale the reason (cause) the seller sells goods is to get a price for them and the buyer buys to get ownership of the goods. These two reasons combine to form the characteristic economic transaction underlying the contract. If the parties declare a transaction a sale but, in fact, they do not contemplate a payment of price, the cause is wrong and the contract may be sham.


By contrast, motive is a practical reason for entering a contract that is specific to each party in each contract. For example, I may buy a book to read or to resell it. The seller has no concern with my motive and is normally unaware of it. If it turns out I cannot resell the book, that is not a ground for my backing out of the contract. So cause affects the validity of a contract while motive, as a general rule, does not. If the parties make a motive part of their agreement, it becomes a condition of the contract (I buy the book on the condition that I will resell it).


In bilateral and onerous contracts, i.e., those involving an exchange of performances (e.g., sale or lease), cause is normally seen as the counter-performance of the other party. Things are trickier with gratuitous contracts, involving no consideration, such as a gift or loan for use. Cause in them is often seen as a liberal desire to confer a benefit on another. Needless to say, such a desire would typically arise due to some special reason – a party’s motive – which can be love or affection for another, a feeling of gratitude or even simply a wish to leave a thing in good hands.


Now, as the Supreme Court says, in gifts, and by extension in all gratuitous contracts, motive can (and should) be a condition of contract validity. In this particular case the Court denied the plaintiff's appeal on the ground that the defendants had in fact cited a motive for the gift (an in-law kinship between the two), the existence of which was not refuted by the plaintiff. On these facts the bar for finding a motive seems not to be very high. The Supreme Court was apparently satisfied with the defendants' showing of at least some - objective - motive. It did not inquire into whether the motive was subjectively good enough under the circumstances.


It is noteworthy that the Supreme Court’s decision is not based on any express statutory rule. Neither the Civil Code nor other laws require a good motive for a gift as a condition of its validity. In fact, the Code’s provisions on contractual mistake stipulate that mistake about a motive is irrelevant, indicating that motive as such does not affect contract. Since the Code’s provisions on gifts do not provide otherwise, it follows that motive should be irrelevant for their validity as well. What the Court has done here is it has by interpretation broadened the applicable rules’ scope, reading into them a (supposedly) implied, but unwritten requirement of motive as a condition of gift validity.

Was the Supreme Court wrong to do so? Probably not, given the very real risk of abuse posed by gifts in hiding commercial transfers. It is only too reasonable to ask why one chooses to gift property to a stranger, if only to exclude fraud. Besides, as is evidenced by this case, the threshold for finding a (good) motive does not seem high. The Court did not find it necessary to consider as a question of law whether the motive offered by the defendants was in fact sufficient (treating it rather as a question of fact established by the lower courts and which the Supreme Court had no power to review). So it follows that at least some plausible motive should do. Finally, the Supreme Court said a court may find a contract invalid in such circumstances, not that it must do so, thus leaving courts free to proceed as justice requires.

What this means in practical terms is that gifts (alongside other gratuitous transactions) in commercial settings are always legally suspect and open to challenge. To achieve legal validity, the parties must always ensure the existence of a proper motive in such contracts.

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