How does the law regulate sanctions in commerce?

As our country's economy continues to grow, commercial activities are becoming increasingly common, accompanied by numerous commercial contracts. Besides, there are also many cases of breaching commercial contracts. To protect the rights and interests of the injured party, the Law has promulgated sanctions in commerce. So, what are these sanctions in commerce? Let’s explore this topic with NPLaw in the article below.

1. What Are Sanctions in Commerce?

Commercial sanctions are State’s enforcement measures against individuals or entities that violate commercial laws. These sanctions determine the adverse legal consequences imposed on a party who breach a contract.

Breaching a contract can involve acts failing to perform, improperly performing, or incompletely performing obligations agreed upon by the parties in a commercial contract or as prescribed by law.

- Characteristics of commercial sanctions:

+ Firstly, commercial sanctions are stated in legal documents regulating commercial activities, specifically in Section 1, Chapter VII of the Commercial Law 2005. These sanctions are applied only when there is sufficient legal basis, and they are implemented uniformly for the same types of violations, regardless of the violator's identity. This ensures the equal principle of among subjects in commercial legal relations.

+ Secondly, commercial sanctions are State’s coercive measures applied against individuals or entities violating commercial laws. These measures only target businesses and those in contractual relationships with them, particularly when contractual or legal obligations are breached.

+ Thirdly, commercial sanctions state one party’s liability in a commercial contract toward the other. Commercial contracts are founded on the equal principle between parties. When one party breaches its main obligations, it directly violates the rights of the other party, and vice versa. These sanctions can only be applied if requested by the injured party, which is the first condition for considering the application of such measures.

+ Fourthly, commercial sanctions primarily have a financial nature. Since relationships governed by commercial law are property-based, commercial sanctions foremostly apply functions affecting financial matters on the breaching party, leading to suffering adverse financial consequences of such a party. In addition to financial sanctions such as fines for breaches, compensation for damages, etc., there are also non-financial sanctions such as requiring proper performance, suspension of performance, or termination of a contract.

- Example of commercial sanctions:

Company A and Company B enter into a purchase and sale contract of goods. Company A agrees to buy 1 ton of agricultural products from Company B at a price of 20,000 VND/kg, with agreed delivery time and location. The contract includes a fine clause stating, "If either party breaches a contractual obligation, they will be fined 5% of the value of such a breached obligation." At the delivery deadline, Company B delivers only 800 kg of agricultural products, falling short by 200 kg. Company B notifies transportation delays and requests an extension of 3 days, which Company A agrees to. However, Company B fails to deliver the remaining 200 kg despite multiple reminders from Company A. In this case, Company B has breached the contract and must pay a fine equivalent to 5% of the value of the unfulfilled obligation, i.e., 5% of the value of 200 kg of agricultural products, as agreed upon in the contract.

2. Types of commercial sanctions

Pursuant to Article 292 of the Commercial Law 2005, there are following types of commercial sanctions:

- Requirement to perform the contract correctly

This sanction means the injured party requires the breaching party to fulfill the contract as agreed or take other measures to ensure the contract is performed. The breaching party must bear any additional costs incurred.

- A fine for a breach

A fine for a breach is when the injured party requires the breaching party to pay a fine amount for breaching such a contract, provided such a fine is stated in the contract. This excludes cases where the breaching party is exempt from liability under Article 294 of the Commercial Law 2005.

- Requirement to compensate for damages

A compensation for damages means the breaching party compensates the injured party for losses caused by breaching a contract. The compensation amount includes actual and direct losses suffered by the injured party and direct benefits would have been received if the breach had not occurred.

- Temporary suspension of contract performance

Temporary suspension of performing a contract occurs when one party temporarily halts the fulfillment of its obligations under such a contract in one of the following cases:

+ A violation occurs that the parties have agreed is grounds for temporary suspension of the contract.

+ One party commits a fundamental breach of contract obligations.

- Suspension of contract performance

Suspension of performing a contract occurs when one party completely terminates the fulfillment of its obligations under such a contract in one of the following cases:

+ A violation occurs that the parties have agreed is grounds for suspension of the contract.

+ One party commits a fundamental breach of contract obligations.

- Contract cancellation

Contract cancellation includes cancellation of the entire contract or a part of it.

+ Full contract cancellation means the complete annulment of all contractual obligations related to such an entire contract.

+ Partial contract cancellation means the annulment of only a portion of contractual obligations, while remaining parts of such a contract remain in effect.

- Other measures agreed upon by the parties, which do not contradict the fundamental principles of Vietnamese law, international treaties to which the Socialist Republic of Vietnam is a member, or international commercial practices.

- Cases where commercial sanctions do not apply:

Pursuant to Article 294 of the Commercial Law 2005, liability is exempted in the following cases:

+ Exemption from liability as agreed upon by the parties.

+ Force majeure.

+ One party’s breach is entirely caused by the other party.

+ One party’s breach is due to the enforcement of decisions by competent state authorities, which the parties could not have foreseen at the time of contract conclusion.

To be exempt from liability, the breaching party is required to provide evidence proving that they fall under the circumstances for exemption.

3. Regulations on applying commercial sanctions

- Application of sanctions requiring contract performance

Pursuant to Article 297 of the Commercial Law 2005, this sanction is applied when there is breach of a contract. The injured party has the right to apply sanctions requiring contract performance through the following methods:

+ Requesting the breaching party to perform a contract as agreed.

+ Taking other measures to ensure a contract is performed, with the breaching party bearing the incurred costs.

- Application of sanctions requiring compensation for damages

Pursuant to Article 303 of the Commercial Law 2005, this sanction is applied if the following conditions are met:

+ There is a breach of a contract.

+ There is actual damage.

+ The contractual breach is a direct cause of damages.

The party requesting compensation is required to prove losses and its extent caused by a breach, and direct benefits would have been received if such a breach had not occurred.

- Application of sanctions for fines

Pursuant to Articles 300 and 301 of the Commercial Law 2005, this sanction is applied if:

+ A contract includes an agreement on fines for contractual breaches.

+ There is a breach of a contractual obligation.

The fine rate for a contractual breach or total fines for multiple breaches, as agreed by the parties, does not exceed 8% of the value of a breached contractual obligation, except as specified in Article 266 of the Commercial Law 2005.

- Application of sanctions for temporary suspension of contract performance

Pursuant to Article 308 of the Commercial Law 2005, except in cases of liability exemption, this sanction is applied when one of the following cases occurs:

+ A breach occurs that the parties agreed to be legal grounds for temporarily suspending contract performance.

+ One party commits a fundamental breach of contractual obligations.

- Application of sanctions for suspension of contract performance

Pursuant to Article 310 of the Commercial Law 2005, except in cases of liability exemption, this sanction is applied when one of the following cases occurs:

+ A breach occurs that the parties agreed to be legal grounds for suspending a contract.

+ One party commits a fundamental breach of contractual obligations.

- Application of sanctions for contract cancellation

Pursuant to Article 312 of the Commercial Law 2005, except in cases of liability exemption, this sanction is applied when one of the following cases occurs:

+ A breach occurs that the parties agreed to be legal grounds for contract cancellation.

+ One party commits a fundamental breach of contractual obligations.

In cases where one party seeks to temporarily suspend, suspend , or cancel a contract, such a party must immediately notify the other party of the action. Failure to provide immediate notification that results in damages to the other party, the breaching party is required to compensate for damages caused. You are reading information about sanctions in commerce that is currently of interest.

4. Common questions about commercial sanctions

4.1. Is a party exempt from liability for sanctions in commercial transactions if a breach is caused by the other party's fault?

Pursuant to point c, Clause 1, Article 294 of the Commercial Law 2005, a party is exempt from liability if the violation is entirely caused by the other party's fault. However, if both parties are at fault, the violating party remains responsible for their actions.

4.2. Can requiring contract performance and other sanctions be applied simultaneously?

Based on Clause 1, Article 299 of the Commercial Law 2005, unless otherwise agreed upon by the parties, during the period when the sanction requiring contract performance is applied, the injured party has the right to request compensation for damages and fines for breaches. However, other sanctions cannot be applied simultaneously. If the breaching party fails to fulfill the requirement to perform the contract within the time frame set by the injured party, the injured party is entitled to apply other sanctions to protect their legitimate rights and interests.