Bui Duc Giang
Attorney at law and Ph.D in law
- The 2015 Civil Code is not as clear as the 2005 Commercial Law with regard to recoverable loss;
- For a successful claim for damages for loss there must be a breach of contract, an actual loss and a causal link between them;
- It seems that liquidated damages clauses are not effective under both the 2015 Civil Code and the 2005 Commercial Law; and
- Under the 2015 Civil Code where the parties have agreed on a fine but have not agreed that the breaching party will have to pay both the fine and damages, the breaching party will have to pay the fine only while in accordance with the 2005 Commercial Law, the victim of the breach may also claim damages.
Damages are a type of claim recognized by Vietnamese law. Article 302 of the Commercial Law defines “damages” as the act whereby the party in breach of a contract (the contract breaker) compensates for loss caused by that party’s breach to the victim of that breach (the claimant). The regime for damages is provided in the Civil Code and the Commercial Law with notable differences between those texts. As the new Civil Code enacted by the National Assembly of Vietnam on November 24, 2015 (the 2015 Civil Code), will take effect from January 1, 2017, this article will provide comment on the relevant rules of this text. It will also give some drafting notes in respect of damages clauses. Please note that this article deals only with damages in contract and not in tort (i.e. when there is no direct contractual relationship between the parties).
Types of recoverable loss
Article 419 of the 2015 Civil Code provides that recoverable losses caused by a breach of a contractual obligation can be determined in accordance with Clause 2, Article 419, and Articles 13 and 360.
Article 13 of the 2015 Civil Code prescribes: “Individuals and legal entities whose civil rights are breached are entitled to full reparation of their loss, unless otherwise agreed by the parties or otherwise provided by a law”.
Likewise, under Article 360 of the 2015 Civil Code, “In case there is any loss caused by a breach of an obligation, the obligor must fully repair such loss, unless otherwise agreed or provided by a law”.
Pursuant to Clause 2, Article 419 of the 2015 Civil Code, “An obligee may demand compensation for loss in respect of benefits from the contract which the obligee would have enjoyed. The obligee may also request the obligor to pay any expense resulting from failure to fulfill the contractual obligation which is not overlapping with the amount of damages in respect of the benefits from the contract”.
It is difficult to make a list of recoverable losses from those articles because both Articles 13 and 360 set forth a general principle that unless otherwise agreed by the parties or otherwise provided by a law, the victim of a breach of a contract has the right to full reparation of his loss but they don’t expressly address what type of loss will be repaired.
It is noteworthy that Clause 3, Article 419 of the 2015 Civil Code allows also for the reparation of moral damage provided that such reparation is ruled by a court.
Commercial Law No. 36/2005/QH11 dated June 14, 2005 (the Commercial Law) opts for a clearer and more direct approach. Its Article 302 stipulates: “Damages for loss means the defaulting party pays compensation for the loss caused to the aggrieved party by a breach of the contract; the value of damages for loss comprises the value of the actual and direct loss, which the aggrieved party has borne due to the breach of the defaulting party, as well as the direct profits that the aggrieved party would have earned in absence of such breach”.
As such, the claimant may receive damages for actual and direct loss as well as direct profits that it would have earned in absence of the breach.
In practice, the court has recognized recovery on the basis of loss of a chance on a number of occasions, notably loss of earnings.
It is a pity that the Commercial Law’s approach has not been incorporated into the 2015 Civil Code.
|Social insurance participants at a “single-window” division of Hai Duong province’s social insurance agency __Photo: Duong Ngoc/VNA|
Pursuant to Article 303 of the Commercial Law, for a successful claim for damages for loss there must be:
- an act in breach of the contract;
- an actual loss; and
- a causal link between the act in breach of the contract and the loss (the act in breach of the contract being the direct cause of the loss).
Likewise, Clause 1, Article 419; Article 360; and Clause 1, Article 275 of the 2015 Civil Code implicitly require that there be a loss, a breach of an obligation and a causal link between them.
The claimant bears the burden of proving the loss and the amount of loss caused by the breach as well as direct profits that the claimant would have earned in absence of the breach, if any (Article 304 of the Commercial Law).
Normally, the damages fall to be assessed by a court on the basis of the loss suffered by the claimant.
Nevertheless, rather than leaving the assessment of damages to a court or an arbitrator, it is common practice for the parties to anticipate this by stating in the contract or by way of some formula, the amount of compensation payable in the event of some or all breaches. Clauses of this type are known as “liquidated damages clauses”. They aim at saving negotiation and litigation costs, limiting the potential exposure of the contract-breaker, deterring breach by imposing a substantial liquidated liability or for a combination of these purposes. Are those clauses effective under Vietnamese law?
Article 360 of the 2015 Civil Code prescribes: “In case there is any loss resulting from a breach of an obligation, the obligor shall fully repair such loss, unless otherwise agreed or provided by a law”. Some take the view that this text would allow the parties to agree that a particular sum is payable in respect of a breach without the need for any further assessment. However, it seems that the agreement mentioned in this article relates only to whether the loss is repaired partially or in full.
Furthermore, under Article 302 of the Commercial Law mentioned above, only actual and direct loss suffered by the claimant and direct profits that the claimant would have earned in absence of such breach may be repaired. In other words, the parties cannot fix a specific amount of compensation in their contract.
It is noteworthy that it may happen that specific regulations recognize the effectiveness of liquidated damages clauses. For instance, Clause 1, Article 28 of the Ministry of Industry and Trade’s Circular No. 27/2013/TT-BCT dated October 31, 2013, on the control over electricity activities, use of electricity, and settlement of disputes arising from electricity purchase and sale agreements, as amended in 2015 and 2016, expressly provides that “the amount of compensation in respect of a breach of a contractual obligation shall be based on the agreement in the contract; in absence of such an agreement, it shall be determined in compliance with law”. However, this position appears to breach the principles of the general law mentioned above.
Claimant’s duty to mitigate loss
Article 305 of the Commercial Law provides that:
- the claimant must take all reasonable measures to mitigate the loss, including the loss of direct profits which would have been earned in absence of the breach of the contract; and
- if the party claiming damages fails to take such measures, the contract-breaker has the right to require a reduction in damages equal to the amount of loss that could have been mitigated.
For instance, in a sale of goods, it may be the claimant’s duty to accept an offer by the contract-breaker to supply the goods on different terms, reserving the right to damages. The claimant may be also required to spend some money in mitigating its loss, as for instance in carrying out a swift repair to a damaged goods item to avoid having to hire a substitute.
Furthermore, in principle, the duty to mitigate the loss only arises upon the actual commission of a breach. However, Article 362 of the 2015 Civil Code requires that the claimant take necessary and reasonable measures to ensure that the loss will not occur or to mitigate the loss. As such, the claimant has not only the duty to mitigate the loss but also the duty to prevent the loss from arising. This would be difficult in practice!
It is regretful that the law remains quite brief on the standard of conduct required of the claimant. On principle, the claimant is required only to act reasonably, and whether it has done so is a question of fact in the circumstances of each particular case. The claimant is required to act not only in its own interests but also in the interests of the contract-breaker and keep down the damages, so far as it is reasonable and proper, by acting reasonably in the matter.
In addition, where a contract-breaker alleges that the claimant has failed to take reasonable measures to mitigate loss, the burden of proof will be on it.
Where loss was caused to a claimant partly as a result of a contract-breaker’s breach and partly owing to the claimant’s own fault, the contract-breaker will have to compensate only for the loss which corresponds to the extent of its own fault (Article 363 of the 2015 Civil Code).
Combination of damages and fine
As a matter of principle, in case the parties have not agreed on a fine, the claimant may only claim damages (Clause 1, Article 307 of the Commercial Law).
Under Clause 3, Article 418 of the 2015 Civil Code, the parties may agree that the breaching party will only pay a fine without having to compensate for loss, or will pay both a fine and damages. However, if the parties have agreed on a fine but have not agreed that the breaching party will have to pay both the fine and damages, the breaching party will be required to pay the fine only.
In this regard, it should be noted that the approach of the 2015 Civil Code conflicts with that of Clause 2, Article 307 of the Commercial Law under which in principle, “if the parties have agreed on a fine, the claimant may apply both the fine and damages”.
As such, if the claimant wishes to be awarded both fine and compensation amounts, this must be clearly stated in the contract.-
“- Loss caused by a breach of an obligation comprises physical loss and moral damage.
- Physical loss is actual physical loss which can be determined, comprising damage to property, reasonable expenses incurred to prevent, mitigate or remedy damage, and the actual loss or reduction of income.
- Moral damage is moral loss caused by harming life, health, honor, dignity, reputation and other personal interests of a person”.