The parties in the contract must respect and comply with the contract. If either party breaches the contract, certain sanctions will be imposed

Legal grounds:

• Commercial Law 2005.

Sanction is a concept to refer to the legal liability that the breaching party has to bear. Sanctions may be applied according to the provisions of law or as agreed between the parties in the contract.

1. Types of trade sanctions

The Commercial Law 2005 provides for various types of sanctions in trade, including:

• Forcing the correct performance of the contract
• Penalties for violations
• Forcible compensation for damage
• Paying interest due to late payment
• Suspension of contract performance
• Stoppage of contract performance
• Cancellation of contract

In addition, the parties to the contract may agree to add other sanctions that are not contrary to the basic principles of Vietnamese law, international treaties to which the Socialist Republic of Vietnam is a signatory, and international trade practices.

2. Sanctions for forcing the correct performance of the contract

Pursuant to Article 297 of the Commercial Law 2005, forcible performance of a contract means that the aggrieved party requires the contract-breaching party  to properly perform the contract or use other measures for the contract to be performed and the violating party must bear costs incurred. Specifically:

For the breaching party:

• If the breaching party fails to deliver goods or provide services not in accordance with the contract, it must deliver the goods or provide services as agreed in the contract.
• If the breaching party delivers goods or provides services of poor quality, it must eliminate defects in goods or services, or deliver replacement goods or provide services in accordance with the contract.
• The breaching party may not use money or goods of different types or services to replace without the consent of the aggrieved party.
• If the breaching party is the buyer, the seller has the right to request the buyer to pay, receive the goods or perform other obligations of the buyer as stipulated in the contract and in the Commercial Law.

For the aggrieved party:

• The aggrieved party must receive goods, receive services and pay for goods and services, if the violating party has fully performed the above-mentioned obligations.
• If the violating party fails to comply with the above provisions, the aggrieved party has the right to:
  • Purchase goods or provide services from others to replace them according to the type of goods and services stated in the contract and the violating party must pay the difference and related expenses, if any;
  • Self-repair defects of goods, deficiencies of services and the violating party must pay actual and reasonable costs.

Besides:

• The aggrieved party may extend a reasonable period of time for the breaching party to perform its contractual obligations.
• During the period of application of sanctions to force the correct performance of the contract, the aggrieved party has the right to claim compensation for damage and fines for breach but may not apply other sanctions.
• If the breaching party still fails to implement the correct performance of the contract, the aggrieved party may apply other sanctions to protect its legitimate interests.

3. Sanctions for violations

Penalty for breach is in the case of the aggrieved party requires the breaching party to pay a fine for breach of contract.

Pursuant to Article 301 of the Commercial Law 2005, the fine rate for violation shall be agreed upon by the parties, but must not exceed 8% of the value of the breached contractual obligation, except in the case of a contract for the performance of commercial assessment services.

Noted: the aggrieved party can only apply this sanction if the parties have an agreement on sanctions for violations in the contract.

4. Sanctions for compensating damage

Indemnification means the breaching party’s compensation for the loss caused by the breach of contract to the aggrieved party.

The compensation value includes:

• Actual, direct loss value
• Direct benefits that the aggrieved party would have enjoyed if the breach not occurred.

Noted: the liability to compensate for damage arises when the following factors are fully met:

• There is a breach of contract;
• There is actual damage;
• The breach of contract is the direct cause of the damage.

Therefore, the party claiming damages must prove the loss, the extent of the loss caused by the breach, and the direct profit that the aggrieved party would have enjoyed if the breach not occurred.

In addition, in order to claim damages, the requesting party must take reasonable measures to limit the loss caused by the breach of contract, including loss of direct profits that should have been.

5. Sanctions for compulsory payment of interest due to late payment

This sanction is applied when there is a breach of payment obligation.

Pursuant to Article 306 of the Commercial Law 2005, the aggrieved party has the right to demand payment of interest on such late payment amount at the market average overdue debt interest rate at the time of payment corresponding to late payment period, unless otherwise agreed or otherwise provided by law.

6. Sanctions for suspension of contract performance

Suspension of contract performance is the temporarily ceases of a party to perform its contractual obligations in one of the following cases:

• Violation occurs which the parties have agreed as a condition for suspension of contract performance;
• One party has substantially breached a contractual obligation.

Although the contract is suspended, the contract is still valid.

The aggrieved party has the right to claim damages.

Noted: The party suspending the performance of the contract must immediately notify the other party of the suspension of the contract. If failure to notify immediately causes damage to the other party, the party suspending contract performance must compensate for damage.

7. Sanctions for stoppage of contract performance

stoppage of contract performance means the termination of the performance of a contract by a party in one of the following cases:

• The occurrence of a breach that the parties have agreed is a condition for contract termination;
• One party has substantially breached a contractual obligation.

When the performance of a contract is stopped, the contract shall be terminated from the time one party receives the notice of stoppage.

The parties are not required to continue to perform their contractual obligations from the time the contract is stoppage. The party that has performed the obligation has the right to request the other party to pay or perform the reciprocal obligation.

The aggrieved party has the right to claim damages.

Noted: The party stoppage the performance of the contract must immediately notify the other party of the termination of the contract. If failure to notify immediately causes damage to the other party, the party that terminates the contract performance must compensate for the damage.

8. Sanctions for cancellation of contract

Cancellation includes cancellation of the entire contract and a partial cancellation of the contract. In there:

• Cancellation of the entire contract is the complete abolition of the performance of all contractual obligations with respect to the entire contract.
• Partial cancellation of a contract is the cancellation of a part of the contractual obligations, while the remaining parts of the contract are still valid.

Cancellation of the contract is applied if:

• There is a breach that the parties have agreed as a condition for the cancellation of the contract;
• One party has substantially breached a contractual obligation.

After the contract is canceled, the contract will not take effect from the time of signing, the parties are not required to continue to perform the obligations agreed in the contract, except for the agreement on rights and obligations after the cancellation. contracts and on dispute resolution.

The parties have the right to reclaim benefits resulting from the performance of their obligations under the contract; if both parties are obliged to repay, their obligations must be performed simultaneously; in case it is not possible to repay with the benefits received, the obligor must repay in cash.

The aggrieved party has the right to claim compensation in accordance with Commercial Law 2005.

Particularly for contract cancellation in case of partial delivery of goods or provision of services, it is specified in Article 313 of the Commercial Law 2005 as follows:

1. Where there is an agreement on delivery of goods or provision of services in installments, if one party fails to perform its obligation for the delivery of goods or provision of services and such failure constitutes a substantial breach in that time of delivery of goods or provision of services, the other party shall have the right to declare the cancellation of the contract for such delivery of goods or provision of services.

2. Where the failure of a party to perform its obligation for a delivery of goods or a provision of services serves as the basis for the other party to conclude that a substantial breach of the contract shall happen in subsequent deliveries of goods or provisions of services, the aggrieved party shall have the right to declare the cancellation of the contract for subsequent deliveries of goods or provisions of services, provided that such party must exercise that right within a reasonable period of time.

3. Where a party has declared the cancellation of a contract for a single delivery of goods or provision of services, such party shall still have the right to declare the cancellation of the contract for a delivery of goods or provision of services that has been conducted or will be conducted subsequently if the interrelation between the deliveries of goods makes the delivered goods or provided services unable to be used for the purposes intended by the parties at the time they enter into the contract.

Noted: The party canceling the contract must immediately notify the other party of the contract cancellation. If the party does not immediately notify and causes damage to the other party, the party canceling the contract must compensate for the damage.

9. Cases of being exempted from liability even though there is a breach of contract

The breaching party may be exempt from liability for breach of contract (not subject to sanctions) in certain cases specified in Article 294 of the Commercial Law 2005, including:

• There is a case of exemption from liability as agreed by the parties;
• Force majeure events occur;
• The breach by one party is entirely the fault of the other party;
• A breach by one party due to the implementation of a decision of a competent State management agency that the parties could not have known at the time of entering into the contract.

However, it should be noted:

• To be exempt from liability, the breaching party must prove that the breach of contract is in the cases of exemption from liability.
• The breaching party must immediately notify in writing the other party of the exemption from liability and the possible consequences, as well as notify immediately when the exemption from liability terminates.