Nguyen Hong Hai
Department of Civil-Economic Laws, Ministry of Justice
In both legal theory and civil transaction practice, regulations on liability to compensate for contractual damage always play an important role. Theoretically, it is the concretization of the principles of equality, free will, good will, binding of contract, and theories of fault and damage in civil liability. Practically, it is a legal mechanism aiming to heighten the responsibility of parties to fulfill their commitments, prevent infringements and concurrently ensure remediation of damage or other legal risks arising upon breach of contract.
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The liability to compensate for contractual damage is in substance the concretization of the legal nature of a contract - the exchange and agreement between the parties, which creates a legal consequence and gives rise to civil rights and obligations. Specifically:
(i) Like other contractual civil liabilities, the establishment, performance or termination of compensation liability will be agreed upon and decided by the contracting parties. However, this principle is not absolute but can be limited by and must comply with a law in certain cases, such as when the agreement contravenes the basic principles of Vietnamese civil law; rights are restricted for the reason of national defense and security, social order and safety, social morality, or community well-being; application of the liability to compensate for contractual damage according to a model contract and general transaction conditions, or performance of contracts upon fundamental change of circumstances, etc.;
(ii) Compensation liability aims to ensure performance of civil obligations. From the time a contract becomes valid, the parties must exercise rights and perform obligations toward each other as committed and, if committing breaches, each party will take responsibility for its failure to fulfill or properly fulfill the commitments. Compensation will be paid when breach of contractual obligations (breach of contract) causes damage to the obligee. In this case, the damaged party may request the breaching party to pay compensation or the court to enforce the damaged party’s right to compensation and force the breaching party to remediate consequences caused by its breach.,
Bases giving rise to compensation liability
The Code has no separate provisions on bases that give rise to the liability to compensate for contractual damage. However, through its general provisions on compensation liability and specific provisions on compensable damage due to breach of contract, a general principle can be drawn out, that is in case of damage caused by breach of contract, the obligor must pay compensation to the obligee. According to this approach adopted by the Code, the liability to compensate for contractual damage will arise in the presence of all three conditions: (i) There is a breach of contract; (ii) There is actual damage; and (iii) There is a causal relationship between the breach of contract and the damage caused.
The obligor will be considered breaching the contract if it fails to perform an obligation on schedule, completely or properly. On that basis, in its specific provisions on civil liability and contract, the Code lists specific cases in which the parties are regarded breaching contracts. Below are some of these cases:
- The obligor is late in performing an obligation (Articles 353, 354.1, 482.4, 548, 550, etc.);
- The obligee is late in accepting performance of an obligation (Articles 355, 359, 550, etc.);
- The obligor fails to perform the obligation to deliver an object, or fails to properly or completely deliver an object (Articles 356, 436.2, 437.2.c, 439, 445.1, 449, etc.);
- The obligor is late in performing the payment obligation (Articles 357, 440, 466, etc.);
- The obligor fails to perform a task or performs a task which it should refrain from performing (Articles 358, 545.3, etc.);
- The obligor is unable to perform an obligation (Article 425);
- The obligor violates the obligation to provide information (Articles 387.3, 443, etc.);
- The obligor causes loss of or damage to the property being the object of the contract (Articles 426, 490.1, 541.3, etc.);
- Either party groundlessly cancels or terminates the contract (Articles 427.5, 428.5, etc.).
In case there is a claim on a breach of contract but the contractual term on the relevant obligation is unclear and the parties cannot reach agreement to clarify it, whether there is a breach of contract should be determined on the principles of contract interpretation laid down in the Civil Code.
Under Articles 13 and 360, compensable damage should be identified first of all based on the agreement of the parties or provisions of a law. If such basis is unavailable, general provisions on damage caused by breach of obligation and specific provisions on compensable damage due to breach of contract will apply. Accordingly, compensable damage includes material damage and spiritual damage.
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Material damage is defined by the Code as assessable actual material losses, including property loss, reasonable expenses for prevention, limitation and remediation of damage, and actually lost income. The obligee may also request the breaching party to compensate for benefits it should have received from the contract; the breaching party will pay expenses arising due to its failure to fulfill contractual obligations other than amounts compensated for the benefits that would have been brought about by the contract.
Moreover, the Code’s specific provisions on contracts also deal with the identification of material damage for which the obligee can claim compensation. For instance, the breaching party must pay a compensation amount equal to the value of lost or damaged property which is the object of the contract and cannot be returned or compensated with another property or cannot be repaired or replaced with another property of the same type (Article 426); the lessor of a property may request the lessee to compensate for the reduction in the value of the leased property, except natural wear and tear (Article 482.1); the trial user or borrower of a property must compensate for the loss or damage of the property (Articles 452.3 and 496.4); or the processor must compensate for damage caused to the ordering party if it delivers processed products late, causing risks to the products (Article 548), etc.
Regarding spiritual damage, the Code says that in case of suffering spiritual damage due to breach of contract, the obligee may request the court to force the obligor to compensate for such damage. If the parties cannot reach agreement, the court will decide on the level of compensation based on the details of the case. This new, reasonable and humane provision enables full compensation for losses incurred by the obligee and ensures fairness in identifying civil liability in general and compensation liability in particular.
Causal relationship between breach of contract and damage
This application condition means that the obligee must prove that the material or spiritual loss it suffers arises directly from the breach of contract. The obligor is not required to compensate for damage that is not a consequence of its breach of contract, such as damage caused due to the obligee’s failure to apply necessary and reasonable measures to prevent damage from occurring or failure to limit damage caused to itself.
The provisions on fault in the application of compensation liability are perhaps the biggest change in the 2015 Civil Code compared to the 2005 Civil Code regarding application conditions. Specifically, the fault of the breaching party is determined on the principle of presumption and is used as a basis for the breaching party to request exemption from part or the whole of the compensation liability.
On the obligee’s part, if the obligor breaches the contract and causes adverse consequences to the obligee, the breaching party will be presumed to be at fault and must perform civil liability toward the obligee. This principle has created a fundamental change in the burden of proof in legal proceedings, that is the obligee needs only to prove that the damage is actual and caused by a breach of contract, without having to prove the fault of the obligor.
On the obligor’s part, fault is applied on the principle that there is no fault, there is no liability for compensation, unless otherwise agreed upon or prescribed by a law. If managing to prove that its breach of contract is due to a force majeure event or entirely due to the obligee’s fault, the obligor is not required to pay compensation. In addition, with the Code adding the obligee’s responsibility to limit damage for itself, the obligor may also base on the obligee’s failure to apply necessary and reasonable measures to prevent damage from occurring or failure to limit damage to itself to state that the obligee is at fault and not entitled to claim compensation for the damage which it could have prevented or limited.,
Scope of compensation
Under Articles 13, 360 and 419 of the Code, the scope of compensation can be determined on the principle of giving priority to the agreement of the parties or to cases in which it is otherwise prescribed by a law.
Agreement may fall into two cases: (i) the parties reach a prior agreement on the scope of compensation in the contract, regardless of actual damage caused (i.e., the parties may reach a specific agreement on the type of compensable damage, level of compensation, grounds for exemption from compensation liability, etc.); and (ii) the parties will, based on the actual damage and breach of contract, reach agreement on the obligor’s compensation for part or the whole of the damage caused, and on the one-off or installment payment of compensation, etc.
In case the parties have no relevant agreement or the law does not otherwise provide, the obligor must compensate for the whole damage caused to the obligee.
Relationship between compensation liability and sanction for breach of contract
Respecting the parties’ will under contracts, the 2015 Civil Code basically inherits all of the 2005 Civil Code’s provisions on the relationship between sanction for breach of contract and liability to compensate for damage caused by breach of contractual obligations. Accordingly, the contracting parties may reach agreement that the breaching party is only subject to sanction but not compensation or is subject to both sanction and compensation. If the parties reach agreement on sanction but not on both sanction and compensation, the breaching party is only subject to sanction.
Termination of compensation liability
The Code contains no separate provisions on termination of the liability to compensate for contractual damage. However, during the application of law, the Civil Code’s relevant provisions on termination of obligations in specific cases may be invoked. For instance, the compensation liability will terminate as agreed upon, when the compensation obligation is fulfilled, or when the obligee exempts the obligor from performing the compensation liability or allows this liability to be replaced or compensated with another civil obligation, etc.- (VLLF)