When entering into contracts, enterprises can freely add binding mutual obligations. However, Vietnamese law still has regulations on agreements exceeding certain limits, which can nullify such contracts.
Depending on the nature and extent of the invalid sections, null and void contracts can be divided into two categories: invalid civil transactions and partially invalid civil transactions.
In a partially invalid transaction, the invalidity of certain terms and conditions in the contract does not affect the validity of the other parts of the contract.
Under a penalty for breach, the aggrieved party requests the offending party to pay a fine for breach of contract if so agreed in the contract, except in cases of liability exemption, provided for by the Commercial Law.
The penalty level for a breach of contractual obligations or the aggregate penalty level for more than one breach is agreed upon in the contract by the signatory parties, but it must not exceed 8 per cent of the value of the breached contractual obligation, except in the case of assessment services contracts, where incorrect assessment certificates were issued by those who handled the assessment in accordance with the Commercial Law.
The aggrieved party is not always entitled to request a penalty from the offending party. If the parties do not have any agreements on fines for breaches, the aggrieved party can only claim damages, unless otherwise provided for by the Commercial Law.
Only when there is an agreement on penalty for breach between parties does the aggrieved party have the right to apply both remedies for a breach of contract, that is, penalties and damages, unless otherwise regulated by the Commercial Law.
The damages must cover the value of the material and direct loss suffered by the aggrieved party and caused by a contract-breaching act by the offending party, as well as the direct profit the aggrieved party would have earned if such a breach had not been committed.
The liability to compensate for damages will arise when all of the following elements exist:
- · Breach of contract;
- · Material loss;
- · Breach of contract is the direct cause of the loss.
In reality, making damage claims is rather difficult. Even when the aggrieved party has succeeded in proving that the breach of contract was caused by the breaching party, it is still required by the Vietnamese Commercial Law to prove and specify the extent of material loss and direct profit the aggrieved party would have earned if such a breach had not been committed.
Therefore, when conducting civil transactions, both parties should define the rights and obligations of each party, the terms of penalties and damages when loss occurs and what constitutes material loss under the agreement.