When drafting a
contract, especially a commercial business contract, in addition to basic
provisions such as the object, scope of the contract, value and payment method,
rights and obligations of the parties, dispute settlement, information
confidentiality, and the regulations on the penalty for a breach of the contract and damage compensation are also very important.
Penalty for a breach of
the contract
Under the provisions of
the Commercial Law 2005, penalty for a breach means that the breaching party
must pay a sum of money to the aggrieved party due to the breach of the
violating party if the parties agree in the contract on the fine for a breach.
Thus, the penalty for a breach only arises when there is a breach of the
contract by the violating party and the parties have agreed on the penalty.
The law gives the right
to agree on sanctions for violations to contractual parties, but this freedom
to negotiate is limited. Specifically, the parties are only allowed to agree to
a maximum penalty of 8% of the breached contractual obligation value, except
traders providing assessment services issue assessment certificates showing
incorrect results caused by their unintentional faults, they must pay penalty
therefor to customers. The penalty level shall be agreed upon by the parties
but must not exceed ten times the assessment service charge. In fact, the
dispute settlement agency also bases on the prescribed limit of the law to
handle; therefore, even if the parties agree to a higher penalty for a breach,
it is not applicable in practice.
Compensation for damage
Compensation for damage
means a remedy whereby the breaching party pays compensation for the loss
caused by a contract-breaching act to the aggrieved party. The basis for
arising damages is a breach of the contract; there is material loss and act of
breaching the contract is the direct cause of the loss. Difference from penalty
for a breach, liability to compensate for damages caused by breaches of
contract performance obligations arises even in cases where the parties do not
have an agreement on this matter. Besides, the law does not provide any
regulation to limit the amount of compensation; it is based on the actual
damages that the aggrieved party can prove.
When participating in
the transaction, if both types of sanctions are specified in the contract, they
should clearly specify the basis for the amount of compensation for the damages
and the penalty for violation.
In fact, there are many
cases where the parties do not agree clearly or agree on the penalty but the
amount of the penalty exceeds the prescribed level, the excess could be
considered invalid. The parties should also note that there will be no
agreement on late payment interest on the infringement penalty and the amount
of compensation damages.
We help clients overcome
cultural barriers and achieve their strategic and financial outcomes, while
ensuring the best interest rate protection, risk mitigation and regulatory
compliance. ANT lawyers have Dispute Attorneys in Hanoi, Ho Chi Minh City and Danang, will help customers conveniently drafting contracts and assist in
resolving contract disputes in Vietnam.
Source ANT Lawyers: https://antlawyers.vn/library/how-to-determine-penalty-and-compensation-for-damages-from-breach-of-commercial-contract.html
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