Discussion about contract-related issues in the 2015 Civil Code and the 2005 Law on Commerce

When I was a student, I learned the Civil Code and the Law on Commerce both of which deal with issues related to contracts. From my practical experience, I find it important to determine whether a contract is governed by the Civil Code or the Law on Commerce.   The reason is that rights and obligations between contracting parties as prescribed by the Civil Code and the Law on Commerce are different. 

Part 1: General provisions concerning contracts

I. Definitions

As prescribed by the preexisting Civil Code and Law on Commerce, there were a clear distinction between 2 definitions “civil contract” and “commercial contract”. However, the 2015 Civil Code in effect from January 1, 2017 has already ruled out the definition “civil contract” and expanded its scope of application to all of contract types, including civil contracts, employment contracts, business contracts or commercial contracts, etc.

This change sounds more appropriate on the assumption that any dispute arises in a contract which cannot be defined as either commercial or civil one. In comparison with the previous Civil Code, this creates legal space for implementation.  

In the 2015 Civil Code:

Contract means an agreement between parties on establishment, change or termination of civil rights and obligations. 

In addition, this Code defines obligations as follows:

Obligation means something that forces one or more person(s) (hereinafter collectively referred to as obligor) to transfer physical objects, rights, give monetary payments or dispose of security instruments, perform work, or not to perform specified work, in the interest(s) of one or more other person(s) (hereinafter collectively referred to as right holder).      

In the 2005 Law on Commerce:

It does not give any clear definition of what a commercial contract means but we can understand as follows: 

Commercial contract refers to a contract arising out of commercial operations.

Commercial contract is a legal form of commercial conduct in which an arrangement between two or more parties (including at least one party who is a trader or persons who are granted the trading entity) is made in order to establish, change or terminate rights and obligations of parties involved in commercial operations. 

Hence, in order to be deemed a commercial contract, one of the parties involved in the contract must be a trader carrying out commercial transactions with one or more other parties.    Meanwhile, 2 aforesaid requirements are not prescribed by the Civil Code.

II. Persons involved in a contract

	The 2015 Civil Code	The 2005 Law on Commerce
	Persons involved in the making of a contract must have full civil capacity. Note: Persons aged from 15 to under 18 who enter into and carry out civil transactions on their own, except those related to both movable and immovable property, must submit registration application, and who enter into and carry out other ones in accordance with laws, must obtain consent from their legal representatives.	- Persons involved in a contract must have full civil capacity. - One of the persons involved in a commercial contract must be a trader.

III. Conditions for a contract’s entry into force

In this content, the 2005 Law on Commerce does not prescribe these conditions but most of contracts have to meet the following conditions:

- Persons involved in the making of a contract must have full civil capacity.

- Objectives and subject matters of a contract are not determined as prohibited acts referred to in the law and do not breach social ethics.

- Agreement is made at arm’s length and on a voluntary manner;

- Contract must be made in the form specified by the law (if any).

It should be noted that, if requirements, i.e. one of contracting persons is a trader and contractual subject matters are commercial operations, are not met, contracts will not be deemed commercial contracts but still be in force provided that all of 4 aforesaid conditions are satisfied.  

IV. Contractual inclusions

The 2015 Civil Code sets out specific regulations on possible inclusions of contracts while the Law on Commerce does not. Contracts may include:

- Contractual subject matters;

- Agreed quantity and quality;

- Contractual price and payment method;

- Duration, location and method of execution of contract;

- Rights and obligations of contracting parties;

- Liabilities arising from the breach of contract; 

- Dispute resolution methods;

V. Dispute mechanism

The 2005 Law on Commerce gives out the following processes of resolution of disputes arising from a contract: 

- Negotiation process in which two parties reach settlement between themselves.

- Mediation or conciliation process in which a body or organization is agreed upon as a mediator by contractual parties. 

- Adjudication process.

These are also specified in the Civil Code, except the arbitration process.

VI. Statute of limitations

As provided by the 2015 Civil Code, the statute of limitations in which a lawsuit over a contractual dispute must be filed to a Court is 03 years from the date on which the right holder requires (s)he knows or must know that his/her legitimate rights and interests are violated.

Meanwhile, the 2005 Law on Commerce prescribes that the statute of limitations applied to commercial disputes is 02 years from the date on which legitimate rights and interests are violated, unless otherwise provided in subparagraph e paragraph 1 Article 237 of this Law.

VII. Sanctions on breach of contract

The 2015 Civil Code imposes the following sanctions: 

- Breach of contract penalties 

- Award of damages for breach of contract; 

- Rescission;

- Unilateral termination of contract.

The 2005 Civil Code imposes the following sanctions: 

- Forced compliance with contract.

- Breach of contract penalties.

- Forced compensation for any loss or damage.

- Temporary suspension of contract.

- Termination of contract.

- Cancellation of contract.

- Other sanctions are agreed upon by contracting parties without prejudice to basic rules of Vietnamese laws and international treaties to which the Socialist Republic of Vietnam is a member and international trade conventions.

There is a difference in terms of regulations on each sanction which are set out in the 2015 Civil Law and the 2005 Law on Commerce: 

• Breach of contract penalties:

There is the similarity in agreement between contracting parties in which the breaching party is obligated to pay a monetary amount to the non-breaching party or the non-breaching party requires the breaching party to pay a sum as a penalty for breach of contract.

It is noted that the Law on Commerce has exemption clauses.

Level of penalty is agreed upon by contracting parties, unless otherwise prescribed by the 2015 Civil Law. In comparison with the 2005 Law on Commerce, this is also agreed upon by interested parties but is restricted to 8% of value of the breached contractual obligation, unless otherwise prescribed in Article 266 of this Law.

• Compensation for any loss or damage:

In terms of definition, both laws define that this is the action in which the breaching party compensates for any loss or damage resulting from breach of contract to the non-breaching party.

Value of compensation for any loss or damage prescribed by the Civil Code is the interest arising out of contract to which the non-breaching party would have been entitled and the cost incurred from failure to fulfill contractual obligations. In comparison with the definition given in the Law on Commerce, it includes value of actual or direct damage or loss caused by the breaching party and the amount of direct benefit to which the non-breaching party would have been entitled unless breach of contract occurs.  

Relationship between breach of contract penalty and compensation for any loss or damage:

As permitted by the 2015 Civil Code, contracting parties may agree that the breaching party is only subject to penalty, not compensation, otherwise subject to both penalty and compensation. 

Therefore, obligation to pay compensation is not automatic without an agreement reached (as prescribed by the 2015 Civil Code)

The 2015 Law on Commerce prescribes that in the absence of any agreement on breach of contract penalty between parties, the non-breaching party is only entitled to claim a compensation for any loss or damage that it may suffer, unless otherwise prescribed by laws.  

In case an agreement on breach of contract penalty between parties exists, the non-breaching party has the right to apply both of the sanctions in form of breach of contract penalty and forced compensation for any loss or damage, unless otherwise prescribed by this Law.  

This means that the 2005 Law on Commerce prescribes that obligation to pay compensation for any loss or damage is automatically fulfilled even though there is a lack of agreement between parties, unless otherwise provided by laws.   

• Sanction in the form of contract cancellation:

Pursuant to the 2015 Civil Code, contract cancellation shall be accepted without compensation required in the following circumstances:

- The other party violating the contract is deemed a contract cancellation condition agreed upon between parties;

- The other party commit the serious breach of contract;

- In other cases specified by laws.

* Serious violation is defined as an act of a party’s failing to fulfill contractual obligations to the extent that the other party is prevented from gaining its targets in entering into the contract. 

Note: Contract cancellation must be notified to the other party, and if any loss or damage occurs by not doing so, compensation must be made. 

In comparison with the 2005 Law on Commerce, contract cancellation occurs in the following situations:

- Any breach that contracting parties have agreed upon as a condition for contract cancellation occurs;

- Any party commits the fundamental breach of contract.

In conclusion, with respect to contract cancellation prescribed by the 2015 Civil Code, compensation is not required except when contract cancellation occurs without prior notice or inflicts any loss or damage, and with respect to contract cancellation prescribed by the 2005 Law on Commerce, compensation is required if any loss or damage is caused by breach of contract. 

Reading in Vietnamese Những vấn đề liên quan đến hợp đồng tại BLDS 2015 và Luật thương mại 2005