Dr. Giang Bui Duc[1]
Hanoi School of Business and Management (HSB)
Vietnam National University, Hanoi
A contract may come to an end naturally on the expiry of its term. But there are other circumstances in which termination may occur. The current legal framework deals with various aspects of contract termination in those cases but remains incomplete or unclear with regard to certain important issues. This note is confined to giving an overview (but not a full account) of lawful contract termination grounds provided by Vietnam’s law with some comments from practice as well as drafting notes.
General
Article 422 of Civil Code 91/2015/QH13 dated November 24, 2015 (the Civil Code) enumerates circumstances in which a contract is terminated, as listed below:
· The contract performance has been completed.
· The contract parties so agree.
· The contract can only be performed by a particular individual or legal entity that has entered into the contract, and that particular individual dies or that legal entity ceases to exist.
· The contract is rescinded or early terminated.
· The contract cannot be performed because the subject matter of the contract no longer exists.
· The contract is terminated in case of a force majeure event.
· Others circumstances as provided by law.
Articles 423 thru 427 specifically deal with contract rescission while Article 428 addresses early termination of a contract.
Those articles constitute the general law of contract termination.
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Commercial Law 36/2005/QH11 (as revised in 2017 and 2019) (the Commercial Law) deals with early termination and rescission of contracts as remedies available to the non-breaching party to a commercial contract (Articles 292 of the Commercial Law). This point is important as the Civil Code is understood to constitute the general framework for contract termination as mentioned above while the Commercial Law handles part of the big picture. One of the consequences of this is that the contract parties may early terminate the contract or the contract is automatically terminated in accordance with the Civil Code in case there is no breach.
It is noteworthy that either set of rules has its own pros and cons. The Civil Code is generally viewed as being better drafted than the Commercial Law. Having said that, the Civil Code’s wording is vague or is not pragmatic in connection to certain points compared to that of the Commercial Law.
With regard to the scope of application of the texts, if a discrepancy between the rules of those texts subsists in relation to a contract between two companies, the rules of the Commercial Law prevail (Article 4 of the Commercial Law and Article 4 of the Civil Code).
Termination by completed performance
In practice, most contracts are performed without any problems arising. The usual way in which a party to a contract ceases to have any obligations under this contract is doing exactly what the contract requires. Where the contract performance has been completed, the contract is deemed to have terminated (Article 422.1 of the Civil Code).
Termination by agreement
Article 422.2 of the Civil Code allows the parties to agree on the termination of the contract. In practice, this often first comes from the initiative of one party to the contract. This usually takes the form of a termination agreement by the parties. Such document is required to specify the effective date and consequences of the contract termination.
Termination by breach
Early termination
Article 310 of the Commercial Law provides that a party to a contract may early terminate it:
· Upon occurrence of a breach which has been agreed by the parties as a ground for termination;
· In case a party commits a material breach of a contract obligation.
A material breach of a contract obligation is defined vaguely by Article 3.12 of the Commercial Law as “a breach by one party causing damage to the other party to the extent that such other party is not able to achieve its objectives of entering into the contract”.
Article 428.1 of the Civil Code has a similar approach regarding the circumstances of early termination of a contract for breach by providing: “A party has the right to early terminate a contract and is not required to pay damages if the other party commits a serious breach of the obligation(s) stipulated in the contract or if so agreed by the parties or so provided by law”.
An early termination notice is required in order for the termination to be effective (Articles 311.1 and 315 of the Commercial Law and Article 428.2 of the Civil Code).
Regarding consequences of the contract termination, Article 311 of the Commercial Law says:
· The parties will not continue to perform their contractual obligations. The party having performed its obligations may request the other party to make payment or perform the latter’s contractual obligations.
· The aggrieved party may claim damages.
Likewise, Article 428.3 of the Civil Code provides: “In case of early termination, the parties are not required to continue to perform their obligations, except agreements on penalties for breach and payment of damages, and agreements on dispute resolution. A party that has performed its obligation may demand the other party make payment for the portion of the obligation which has been fulfilled”.
Article 428.4 of the Civil Code further provides: “The party suffering damage caused by failure to properly perform contractual obligations by the other party shall be indemnified”.
Rescission
Article 312.4 of the Commercial Law provides that a party to a contract may rescind it:
· Upon occurrence of a breach which has been agreed by the parties as a ground for rescission;
· When a party commits a material breach of a contract obligation.
Likewise, under Article 423.1 of the Civil Code:
“A party has the right to rescind a contract and is not liable to indemnify the other party for damage in the following cases:
(a) The other party breaches the contract and its breach has been agreed by the parties as a ground for rescission.
(b) The other party commits a serious breach of contractual obligation(s);
(c) Other circumstances as provided by a law.”
A rescission notice is required in order for the rescission to be effective (Article 315 of the Commercial Law and Article 423.3 of the Civil Code).
Regarding consequences of the termination, Article 311 of the Commercial Law provides:
· The parties will not continue to perform their contractual obligations. The party having performed its obligations may request the other party to make payment or perform the latter’s contractual obligations.
· The aggrieved party may claim damages.
Regarding consequences of rescission, Article 314 of the Commercial Law provides:
· The contract would no longer be effective as from the time it was entered into, and the parties are not required to continue the performance of their contractual obligations, except agreed provisions on rights and obligations applicable after rescission (i.e., all provisions surviving rescission of the contract such as confidentiality or intellectual property protection) or on dispute resolution.
· Each party may claim benefits attributable to the performance of its obligations under the contract. If both parties are obliged to make a refund, these obligations must be performed concurrently. If it is impossible to refund exact benefits which a party has gained, such party is obliged to make a monetary refund.
· The aggrieved party may claim damages.
· Likewise, Article 427 of the Civil Code states:
· Where a contract is rescinded, it will be deemed to be ineffective as from the time it was entered into and the parties are not required to perform the agreed obligations, except agreements on penalties for breach and payment of damages, and agreements on dispute resolution.
· Each party is required to return anything it has received from the other party upon deduction of reasonable costs during the contract performance and costs of the property preservation and development.
· The aggrieved party may claim damages.
Termination by operation of law
A law may provide for termination of a contract (Article 422.7 of the Civil Code). For instance, the declaration of bankruptcy of a company will result in the termination of all contracts signed by the company (Article 108.1.e of Law 51/2014/QH13 on Bankruptcy dated June 19, 2014).
A contract may also be terminated in case:
· It is incapable of being performed because its subject matter no longer exists (Article 422.5 of the Civil Code); or,
· It is only able to be performed by a particular individual or legal entity that has entered into the contract, and that particular individual dies, or that legal entity ceases to exist (Article 322.3 of the Civil Code).
The first case happens for instance when a bank has taken a charge over a future house built by a real estate developer but that developer fails to complete the project including the house subject to the charge and the land on which the house is built is taken back by the State following the developer’s failure to pay the land use levy. In this circumstance, the charge is deemed to be terminated because the house will never come into existence. It should be kept in mind that this provision may be made subject to certain rules aimed at protecting good-faith third parties provided by the Civil Code and completed by the People’s Supreme Court.
With regard to the second bullet point, where the contract is of a personal nature, it will be terminated by the death of any party to it whose personal characteristics may be regarded as an important element in the contract.
In addition, such specialized laws as the construction law and housing law may provide specific termination circumstances.
Other cases in which a contract is terminated
In case of a force majeure event, a court may order termination of a contract upon a party’s request (Article 420 of the Civil Code).
Likewise, subject to certain conditions, a party may early terminate a contract in case of occurrence of a force majeure event (Article 296 of the Commercial Law).
The above analysis shows that Vietnam’s law provides for contract termination in different circumstances which are overall appropriate. Nevertheless, the solutions are not always consistent between the Civil Code and the Commercial Law or other specialized laws, which creates difficulties in practice. In addition, consequences of termination are not specified in all cases. Careful contract drafting is therefore needed to avoid possible disputes.-
[1] The author can be contacted at: buiducgiang@hsb.edu.vn.
