One of the major issues we face as lawyers in Vietnam is protecting our clients in drafted contracts. There are numerous elements that go into such drafting, but one major element is the inclusion of penalties for breaches of the contract. While Vietnam does not recognize liquidated damages, there are a number of other penalties that can be included in a contract to ensure that the parties perform in accordance with their commitments. This blog post looks at six statutorily provided remedies available to drafters in planning contract agreements.
Six Regulatory Remedies
According to the Commercial Law 2005, there are six regulatory remedies that an aggrieved party may impose to protect their legal rights and interests in case of a breach of contract by a defaulting party, including:
Specific performance (a right to force the party in breach to perform the relevant obligation)
- The aggrieved party can request the defaulting party to (i) properly implement obligations as stated in the contract; or (ii) take other measures to cause such obligations to be performed. Any costs arising due to utilization of other measures shall be borne by the defaulting party.
- A right of claim for specific performance is a statutory right that does not require the parties to make a prior agreement under the contract.
Penalty for breach
- The aggrieved party can require the defaulting party to pay a penalty for a specific breach of contract provided that such agreement is regulated under the contract.
- The parties are allowed to agree on the level of penalty for a particular breach of contractual obligation or the total amount of penalty for multiple breaches, provided that not exceeding eight percent (8%) of the value of the breached obligation.
- Legal grounds for claims relying on the remedy of penalty for breach include (i) occurrence of an act in breach of the contract; and (ii) existence of a penalty agreement in the contract for such breach of the contract.
Compensation for damages (a right to compensation)
- Compensation for damages is a remedy where the defaulting party is responsible for making compensation for actual damages/losses directly arising from its breach of a contractual obligation to the aggrieved party.
- The value of compensation includes the value of (i) the direct and actual damages/losses borne by the aggrieved party due to the breach of contractual obligation of the defaulting party, and (ii) the profits which the aggrieved party would have earned in the absence of such breach.
- Legal grounds for the claim based on the remedy of compensation for damages includes (i) occurrence of an act in breach of the contract; (ii) occurrence of actual loss; or (iii) the act in breach of the contract is the direct cause of the loss.
- A right of claim for compensation for damages is a statutory right that does not require the parties to make a prior agreement under the contract.
Temporary cessation of performance of contract
- Temporary cessation of performance of a contract is a remedy whereby a party has the right to pause the implementation of its contractual obligation upon (i) occurrence of a breach of contract by the defaulting party which is agreed in the contract as a ground for cessation of performing the contract; or (ii) occurrence of a fundamental breach of contract.
- Save for fundamental breaches, an agreement on breaches deemed to be a condition for applying the remedy of temporary cessation of performance must be contained in the contract prior to exercising this remedy.
- The validity of the contract remains unchanged when the aggrieved party applies the remedy of temporary cessation of performance of contract.
Termination of performance of contract (a right to end the contract)
- Termination of performance of contract is a remedy whereby a party has the right to stop the implementation of its contractual obligation upon (i) occurrence of a breach of contract by the defaulting party which is agreed in the contract as grounds for termination; or (ii) a fundamental breach of contract.
- Similar to the condition applicable to temporary cessation of performance of contract, the requirement of having an agreement on breach as grounds for termination of performance in the contract is only applied to non-fundamental breaches.
- The validity of the contract is terminated upon a notification of termination by the innocent party.
Rescission of contract
- Recission of a contract is a remedy whereby a party has the right to (i) rescind a part of the contract (annulment of the performance of a part of the contractual obligation / numerous contractual obligations), or (ii) rescind the entire contract (annulment of the performance of all contractual obligations).
- The requirement for using the remedy of rescission is equivalent to the two previously mentioned remedies, particularly, in terms of non-fundamental breaches, there must be an agreement on specific breaches deemed to be a condition for rescission of the contract.
- The validity of the contract is considered as non-effective as from the time that the contract is entered into by the parties. It is further noted that the remaining part of the contract still remains valid for the scenario of recission of part of the contract.
Other remedies as agreed by involved parties
In addition to the aforementioned regulatory remedies, the laws also recognize other agreed remedies of the parties provided that such agreed remedies are not contrary to (i) the fundamental principles of the local law; (ii) international treaties of which Vietnam is a member; or (iii) international commercial practice. However, it is extremely rare that the competent courts acknowledge agreed remedies between the parties.
These remedies are available in the contracting phase and should be included in the language of an agreement if the parties so desire. It is important to provide for penalties for breach as, in Vietnam, the damages that may be imposed on a breaching party are limited and do not include a wide range of damages that may be available in other countries. As such, the parties should do everything within their power to dissuade breach of performance.
This article is an excerpt from a larger piece prepared by Indochine Counsel lawyers for the Asian Business Law Institute based in Singapore.