Regulations on claiming compensation for damage resulting from contractual breaches

Claiming compensation for damage arising from a contractual breach is the right of the aggrieved party when the other party fails to duly execute the obligations as agreed. Such a regulation aims to protect legitimate interests and remedy any damage incurred. Below, NPLaw invites readers to explore the relevant legal issues surrounding the claim for compensation due to contractual breach.

I. Current situation regarding claims for compensation for contractual breach

At present, the process of claiming compensation for damage resulting from contractual breaches in Vietnam remains challenging and limited in practice. Although the law explicitly provides for the right of the aggrieved party to claim compensation, in reality, proving the occurrence of damage and the causal link between the breach and such damage faces numerous obstacles. Many cases are prolonged due to disagreement over the amount of compensation or the lack of reliable evidence.

Furthermore, in some instances, the breaching party deliberately evades or refuses to perform the obligation to compensate, compelling the aggrieved party to initiate litigation, which leads to time-consuming and costly proceedings. Additionally, the capacity of certain dispute-resolution authorities and procedural inefficiencies are factors that affect the effectiveness of compensation enforcement.

II. Legal provisions on claims for compensation for contractual breach

1. Definition of claiming compensation for contractual breach

Claiming compensation for contractual breach refers to the right of the aggrieved party to demand the breaching party to compensate for the actual losses sustained due to the latter’s failure to execute, or improper execution of, contractual obligations.

2. Conditions for claiming compensation for contractual breach

Pursuant to Article 303 of the Law on Commerce 2005, except for cases of exemption from liability as prescribed in Article 294 of the same law, liability for damages arises when the following conditions are met:

• There is an act of contractual breach;
• Actual damage has occurred;
• The act of breach is the direct cause of the damage.

Accordingly, the aggrieved party is entitled to claim compensation only when all three conditions are satisfied: The existence of a contractual breach, the occurrence of actual damage, and a causal relationship between the breach and the damage.

3. Methods of claiming compensation for contractual breach

Under Article 585 of the Civil Code 2015, the methods for claiming compensation for contractual breach are as follows:

• Actual losses must be fully and promptly compensated. The parties may agree on the level of compensation, the form of compensation whether in money, property, or performance of certain acts and on whether compensation shall be made in a lump sum or in installments, unless otherwise provided by law.
• The liable party may have the compensation amount reduced if there was no fault, or if the fault was unintentional and the damage is excessive relative to their financial capacity.
• When the amount of compensation is inconsistent with reality, either the aggrieved party or the liable party may request the court or a competent authority to adjust it.
• If the aggrieved party is partly at fault in causing the damage, they shall not be compensated for the portion of damage attributable to their fault.
• The party whose lawful rights or interests are infringed shall not be compensated if the damage resulted from their failure to take necessary and reasonable measures to prevent or mitigate the damage.

III. Questions on claims for compensation for contractual breach

1. Is it permissible to file a lawsuit to claim compensation for contractual breach? which authority has jurisdiction?

According to Article 419 of the Civil Code 2015, the entitled party may request compensation for benefits that they would have received had the contract been properly performed. The entitled party may also demand the obligor to pay reasonable expenses incurred due to non-performance, provided such expenses do not overlap with the compensation for expected benefits under the contract.

In addition, at the request of the entitled party, the court may compel the obligor to compensate for non-material (moral) damages. The level of such compensation shall be determined by the court based on the specific circumstances of the case. Thus, the aggrieved party has the right to initiate legal proceedings before a court to claim both material and, where applicable, moral damages.

As to jurisdiction, pursuant to Clause 3, Article 26 of the Civil Procedure Code 2015, disputes arising from civil transactions or contracts fall within the jurisdiction of the people’s courts. It means that disputes relating to contractual breaches and claims for resulting damages shall be resolved by the competent people’s court.

Additionally, under Article 39 of the Civil Procedure Code 2015, territorial jurisdiction lies with the court where the defendant resides or where the contract is performed, unless otherwise agreed by the parties regarding the place of dispute resolution or the selection of arbitration under the law.

2. Obligations of the claimant when demanding compensation for contractual breach

When requesting compensation for damages arising from contractual breach, the aggrieved party (the claimant) bears the following legal obligations:

• Burden of proof: Pursuant to Article 304 of the Law on Commerce 2005, the claimant must prove three key elements:
  + Actual loss occurred;
  + The specific extent of the loss (monetary value, quantity of goods, expenses, etc.);
  + The direct benefits lost which they would have obtained had the contract been duly performed.
• Duty to mitigate losses: As stipulated in Article 305 of the Law on Commerce 2005, the aggrieved party must take reasonable measures to mitigate the damage. Failure to do so entitles the breaching party to request a reduction of compensation corresponding to the portion of loss that could have been prevented.

3. Main considerations when claiming compensation for contractual breach

When pursuing compensation, attention should be paid to the following aspects:

• Clearly identifying the damage arising from the contractual breach: The claimant must prove that actual loss resulted from the breach. Such loss may include damage to property or economic benefits lost or diminished due to non-performance.
• Establishing the causal link between breach and damage: The claimant must demonstrate a direct causal relationship between the breach and the resulting damage. Without such connection, the compensation claim may be denied.
• Statute of limitations: Under the law, the statute of limitations for claiming damages is three (03) years from the date the claimant knows or ought to have known of the damage and the liable party. After this period, the right to claim compensation lapses.
• Evidence and documentation: The claimant must prepare all relevant evidence, including contracts, records of breach, invoices, damage-related documents, notices, or correspondence related to the breach to substantiate the compensation claim.

4. What evidence must be provided when claiming compensation for contractual breach?

In accordance with Article 304 of the Law on Commerce 2005, the claimant must provide specific evidence to substantiate the legitimacy of their claim, including:

• Proof of actual damage;
• Proof of the extent of damage;
• Proof of the direct benefits that would have been gained.

Therefore, to lawfully and validly pursue compensation, the claimant must submit sufficient and substantiated evidence as mentioned above. The collection and clear presentation of such evidence are crucial determinants of the claim’s validity and the likelihood of it being accepted in dispute resolution proceedings.

5. What is the statute of limitations for claiming compensation for contractual breach?

Pursuant to Article 429 of the Civil Code 2015, the statute of limitations for initiating a lawsuit to claim compensation for damages arising from a contractual breach is three (03) years from the date the entitled person knows or should have known that their lawful rights and interests were infringed.

Accordingly, the limitation period for claiming compensation for contractual breach is three (03) years, commencing from the date the aggrieved party knows or ought to have known of both the occurrence of damage and the liable party.

IV. Legal consultancy services on claims for compensation for contractual breach

The foregoing article by NPLaw provides an overview of the legal framework concerning claims for compensation for damages arising from contractual breaches. With a team of experienced lawyers and legal professionals, NPLaw is always ready to accompany, advise, and assist clients in matters related to such claims. Should you require legal support, please contact NPLaw for timely assistance.