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Monday, July 22, 2019

Remedies for breach of contract under the Civil Code: a comparative analysis

Updated: 17:50’ - 01/11/2017
Nguyen Thuy Trang, LL.M
Lawyer, Mining Chemical Industry Holding Corporation Ltd., Vinacomin

A contract, once lawfully entered into, is binding on, and gives rise to legal rights and obligations of, the contracting parties. However, the entry into contract merely creates the legal form for the established relation, while whether the parties’ rights and obligations can be realized depends on their performance of the contract. According to the book Scientific Commentary of the 2005 Civil Code, “performance of a contract means the exercise of rights and performance of obligations that arise under the contract.”[1] In our opinion, performance of a contract should be construed as performance of its contents, covering not only obligations agreed upon “in” the contract but also obligations arising “from” the contract (which may not be stated in the contract but are binding on the parties). The breaching party is subject to one or more than one remedy for breach of contract.

Forced performance of obligations

Forced performance of obligations is defined in Article 351 of the 2015 Civil Code as follows:

“1. Breach of an obligation means that the obligor fails to perform an obligation on time, incompletely performs an obligation, or improperly performs an obligation.

2. In case the obligor improperly performs an obligation due to a force majeure event, he is not required to bear civil liability, unless otherwise agreed upon or prescribed by law.

3. The obligor is not required to bear civil liability if he can prove that his failure to perform the obligation is entirely due to the fault of the obligee.”

Article 352 additionally stipulates: “When the obligor improperly performs his obligation, the obligee may request the obligor to continue performing such obligation.”  

Under Article 297.1 of the 2005 Commercial Law, forced performance of contract (obligation) means that the non-breaching party requests the breaching party to properly perform or apply other measures to perform the contract. This remedy aims to protect the contractual relation and enable the parties to get the benefit they wish to reap upon entering into the contract. With this remedy, the non-breaching party needs not to prove that it suffers damage, because forced performance of contract is simply a corollary of the binding effect of a contract.[2]

Forced performance of contract is applied when a party fails to perform or improperly performs the contract, while liability to compensate arises only when some damage is caused,[3] and penalty for breach of contract is imposed only if it is agreed upon in the contract.[4]

Regarding enforcing the performance of obligations under a legally effective judgment or ruling, Article 118.1 of the 2008 Law on Enforcement of Civil Judgments (revised in 2014) states:

“a/ In case the job can be assigned to another person for performance, the enforcer shall assign it to the capable person and the judgment debtor shall bear expenses therefor;

b/ In case the job is to be performed by the very judgment debtor, the enforcer shall request a competent agency to examine the debtor’s penal liability for failure to abide by the judgment.”

So, the judgment enforcement body has not only the task to “enforce judgments” but also the power to impose sanctions (in addition to the court’s verdict) on the judgment debtor and related persons (assigning a capable person to perform the contract and requesting a competent agency to examine the debtor’s penal liability.) 

Contract signing ceremony for the sixth bidding package to build the first urban railroad from Nhon to Hanoi station __Photo: An Dang/VNA

Compensation for damage

Failure to properly perform a contract or breach of obligations often causes damage. If ineligible for exemption from application of remedies as prescribed by law or agreed upon by the parties, the breaching party must compensate for the damage. Article 303 of the 2005 Commercial Law specifies grounds for giving rise to the liability to compensate. Meanwhile, Article 307 of the 2005 Code, which states that the liability to compensate for damage is applied to failure to properly perform obligations, does not clarify conditions for giving rise to such liability.[5] Clause 2 of this Article states: “Liability to compensate for material damage means the liability to offset actual material losses caused by the breaching party that can be valued in money, including property loss, reasonable expenses for prevention, limitation and remediation of damage, and actually lost or reduced incomes.” Regarding this remedy, Article 360 of the 2015 Civil Code is more specific: “In case of damage caused by breach of an obligation, the obligor shall compensate for the entire damage, unless otherwise agreed upon or prescribed by a law.”

Regarding civil liability in civil transactions, Article 308.1 of the 2005 Civil Code says it must be determined based on the “fault” factor: “A person who fails to perform or improperly performs a civil obligation must bear civil liability for his intentional or unintentional fault, unless otherwise agreed upon or prescribed by law.” However, the 2015 Civil Code does not retain the above provisions. This means that from the effective date of the 2015 Civil Code, “fault” is no longer taken into account for determining the liability to compensate for damage in commercial as well as civil transactions

Penalty for breach of contract

Both the Civil Codes do not put penalty for breach of contract in the category of civil liability (although it is in essence a type of civil liability) but mention it in the part on contract. Unlike general types of civil liability, a penalty is applicable only to a breach of a contractual obligation upon the availability of two grounds: (i) there is a breach of contract and (ii) the penalty for breach is stated in the contract. The second ground helps distinguish penalty for breach of contract from compensation for damage. Specifically, compensation may be applied even in the absence of an agreement while penalty applied only when so agreed upon by the parties.[6]  Penalty for breach of contract under the civil law is a “fine”, so the agreement on such penalty must specify the “fine levels”.

Some current legal documents provide the maximum penalty levels, e.g., 8 percent for commercial contracts or 12 percent for construction contracts.[7] In our opinion, these provisions are inappropriate for two reasons: (i) It restricts the right to self-decision, self-disposition and agreement of involved parties; and (ii) the way of calculation of fine amounts based on the value of “the breached obligation”  is appropriate only in case the breached obligation can be monetarized, while it is hard to apply to other obligations such as “obligation to hand over assets” or “obligation to supply dossiers and documents” that cannot be valued in money. Therefore, Article 422.2 of the 2005 Civil Code, which says: “The levels of penalty for breach of contract shall be agreed upon by the parties”, supplemented under Article 418.2 of the 2015 Civil Code with: “unless otherwise prescribed by a relevant law” conforms with the general principle of civil law regarding the right to self-disposition and agreement of the parties.

Regarding agreement on penalty for breach of contract, Article 418.2 of the 2015 Civil Code says: “In case the parties have an agreement on payment of a penalty for breach of contract but have no agreement on payment of both penalty and compensation for damage, the breaching party shall only be liable to pay the penalty.”

The above provision has two flaws. First, agreement is not a ground giving rise to the liability to pay compensation. Second, compensation and penalty for breach of contract are two different remedies based on different grounds. The lawful rights and interests of the injured party would be affected in case the actual damage is bigger than the agreed penalty level.

That’s why the 2015 Civil Code should follow the provision of Article 307.2 of the 2005 Commercial Law: “2. In case the parties reach agreement on penalty for breach of contract, the breached party may apply both penalty for breach of contract and compulsory compensation for damage, unless otherwise prescribed by this Law,” or abolish the above provision in Article 418.3.

Unilateral termination of contract

 This is a new remedy for breach of contract under the 2015 Civil Code. According to Article 426.1 of the 2005 Civil Code, a party may unilaterally terminate the performance of the contract when the other party commits a serious breach of contractual obligations if it is so agreed upon by the parties or as prescribed by law.

Meanwhile, Article 428.1 of the 2015 Civil Code says that a party has the right to unilaterally terminate the performance of the contract without having to compensate for damage in case the other party commits a serious breach of contractual obligations or it is so agreed upon by the parties or prescribed by a law. Also, Article 423.2 of this Code defines serious breach of a civil obligation as failure to properly perform the obligation of a party, thus making the other party unable to achieve the purpose of contract entry. This definition is similar to that of “basic breach” in the 2005 Commercial Law.

The consequences of “basic breach” and “serious breach of obligation” are the same, which “make the other party unable to achieve the purpose of contract entry.” So, we propose the civil law and commercial law use the same term “serious breach of obligation”.

Entrepreneurs, distributors and cooperatives sign a cooperation agreement for sale of major farm produce of Long An province __Photo: Internet

Cancellation of contract

Like the case of unilateral termination of contract, the 2005 Civil Code says that a contract will be cancelled on either of two grounds: breach of contract is a condition for contract cancellation as agreed upon by the parties; and it is prescribed by law. The 2015 Civil Code adds the third ground: A contract will be cancelled when the other party commits a serious breach of contractual obligations.[8] The obligee’s right to cancel a contract helps ensure proper performance of the contract:

“1. When a contract is cancelled, it will cease to be valid from the time of its entry and the parties are not required to perform the obligations already agreed upon, except the agreements on penalty for breach of contract, compensation for damage and dispute settlement.

2. The parties shall return to each other what they have received after deducting reasonable expenses arising in the contract performance and expenses for property preservation and development…

3. The party suffering damage caused by breach of obligation by the other party shall be compensated.”[9]

Notably, legal consequences of contract cancellation are different under the 2015 and 2005 Civil Codes[10], while legal consequences of invalid contracts under the 2015 Civil Code are similar to those of invalid contracts and contract cancellation under the 2005 Civil Code.[11] However, under the 2015 Civil Code, contract cancellation seems to affect only agreements related to the exercise of rights and performance of obligations of the parties. Meanwhile, agreements on remedies for breach of obligations or failure to properly perform contract (penalty, compensation for damage, etc.) and on dispute settlement remain effective.

 Contract cancellation is different from unilateral contract termination in terms of validity of contract and consequences. When a contract is unilaterally terminated, it remains legally effective, while a cancelled contract becomes null and void from the time of its entry. Regarding consequences, a unilaterally terminated contract becomes null and void from the time the other party receives a notice of termination. The parties are not required to continue performing their obligations, except their agreements on penalty for breach of contract, compensation for damage and dispute settlement. The party that has performed its obligation may request the other party to pay for what has been performed.[12] For a cancelled contract, its legal consequences are the same as those of an invalid contract (the parties have to return to each other what they have received) and as those of unilateral termination of contract (the parties may exclude reasonable expenses arising in the contract performance and expenses for property preservation and development.)[13] With this provision, its seems that Article 427 of the 2015 Civil Code still acknowledges the parties’ performance of contract even when the contract has been cancelled.

The 2015 Civil Code recognizes the right to unilaterally terminate and the right to cancel a contract as remedies for breach of contract. At the same time, its provision on the continued validity of such remedies as penalty for breach of contract and compensation for damage after the contract is cancelled or unilaterally terminated helps protect the interests of the obligee and raise the responsibility of the obligor.-


[1]  Assoc. Prof, Dr. Hoang The Lien, Scientific Commentary on the 2005 Civil Code, Volume II, National Political Publishing House, 2010, p. 249.
[2]  See “Remedies for breach of contract under Vietnam’s laws”, Assoc. Prof., Dr. Do Van Dai, National Political Publishing House, 2010, p. 49.
[3]  See Articles 302 and 303 of the 2005 Commercial Law; Article 307 of the 2005 Civil Code; and Articles 360 and 361 of the 2015 Civil Code.
[4]  See Articles 300 and 301 of the 2005 Commercial Law; Article 422 of the 2005 Civil Code; and Article 418 of the 2015 Civil Code.
[5]  See “Remedies for breach of contract under Vietnam’s laws”, Assoc. Prof. Dr. Do Van Dai, National Political Publishing House, 2010, p. 75.
[6]  See “Vietnam’s laws on contract: cases and commentary of cases”, Assoc. Prof., Dr. Do Van Dai, National Political Publishing House, 2010, p. 639.
[7]  Article 146.2 of the 2014 Law on Construction.
[8]  See Article 423.1.b of the 2015 Civil Code.
[9]  See Article 427 of the 2015 Civil Code.
[10]  See Articles 131 and 427 of the 2015 Civil Code.
[11]  See Article 137 and Article 425.3 of the 2005 Code, and Article 131 of the 2015 Civil Code.
[12]  See Article 428.3 of the 2015 Civil Code.
[13]  See Article 427.2 of the 2015 Civil Code.

 

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