Analysis of Compensation for Damage under the Commercial Law of 2005

1. Introduction

From a legal perspective, it is evident that every individual living in society must respect the general rules of society and the community, and cannot infringe upon the legal rights and interests of others for their own personal benefit. When an entity breaches its legal obligations causing harm to another entity, it must bear the consequences of its violation. The act of "compensating for losses" to the affected entity is understood as damages compensation. Except in special cases, the sanction of damages compensation in the Commercial Law will arise even if there is no agreement between the parties when the conditions of "a breach of contract, actual damage, and a causal relationship between the breach and the damage" are met.

2. Principles of Compensation

According to Clause 1, Article 302 of Commercial Law 2005, "Damages compensation is the act of the breaching party compensating the losses caused by the breach of contract to the aggrieved party. The value of compensation includes the actual and direct losses that the aggrieved party must bear as a result of the breach and the direct benefits that the aggrieved party would have enjoyed if there had been no breach." Thus, the sanction of damages compensation is a financial sanction, where compensation is made for the actual losses incurred due to the breach by one party in the contract.

In theory, damages compensation, when applied under the principles of "complete" and "promptly" aims to make the breach of contract by the other party in the commercial relationship “harmless in material terms” to the aggrieved party.

For example, An is a trader (buyer) and Binh is also a trader (seller) of electronic components (chips, LCD screens). They both signed a contract for the purchase of electronic components, including 100 semiconductor chips and 500 32-inch LCD screens, valued at 1.5 billion VND. Since An did not pay for the goods as agreed, this negatively impacted Binh’s cash flow, leading to the loss of other business opportunities.

In this case, Binh has the right to demand payment and compensation for damages (if any) due to An's failure to fulfill the payment obligation on time as agreed. Binh needs to prove actual damage occurred and that this actual damage was directly caused by An’s non-payment.

Moreover, under Article 306 of the Commercial Law 2005, Binh also has the right to request the customer (An) to pay overdue interest on the late payment based on the overdue loan interest rate set by the State Bank at the time of payment corresponding to the delay period.

3. Role of Applying Damages Compensation

From the above analysis, it is clear that promptly applied breach penalties hold certain roles and values. The role of damages compensation is to compensate for the losses caused by a breach of contract by one party to the other. The value of compensation includes “actual, direct losses” and “direct benefits that the aggrieved party would have enjoyed if there had been no breach.”

For example, on October 10, 2015, trader An and trader Binh signed a contract to buy and sell pine wood worth 1.0 billion VND. The delivery and payment between the two parties were to be completed before December 22, 2015, for the buyer to resell the goods to trader Cu with similar items (but with a price difference of 100 million VND, meaning 10% higher) on December 25, 2015.

The parties agreed to execute the contract accurately and stipulated a maximum damages compensation value of 1 billion VND, selecting the Commercial Law of 2005 as the applicable law in case of disputes.

As of December 22, 2015, the seller had delivered goods equivalent to 80% of the contract value, with the remaining 20% An requested to delay until before 9 p.m. on December 23, 2015, due to a transport vehicle accident caused by overloading, leading to a bridge collapse on the delivery route. Binh disagreed with An and demanded to cancel the contract and seek compensation of 1 billion VND from An for the contract breach.

In this example, we see two issues: first is Binh's “contract cancellation request” and second is the “1 billion VND compensation request” from Binh to An.

For the first issue, Binh's request to cancel the contract has no basis because the parties "have no other agreement" when applying the contract cancellation sanction. This sanction can only be applied when there is "a fundamental breach" of the contract obligations under the Commercial Law. In this case, Binh purchased goods for resale to Cu for a profit margin (10% of the contract value), with delivery to Cu on December 25, 2015. Therefore, An's request to delay delivery until before 9 p.m. on December 23, 2015 constitutes a contract breach but does not amount to a "fundamental breach," as the contract between Binh and Cu would still be fulfilled (Binh's purpose is still achieved) without directly affecting the execution of the contract between Binh and Cu.

Secondly, Binh's request for 1 billion VND compensation is unconvincing. According to the Commercial Law, the basis for obtaining damages compensation arises when there are sufficient conditions of "a breach of contract, actual damage, and a causal relationship between the breach and the damage." In this case, although An breached the contract, it has not "causally resulted in actual damage" to Binh, so the compensation sanction is inapplicable. Furthermore, the compensation value stipulated in the Commercial Law includes “actual, direct losses” and “the direct benefits the aggrieved party would have enjoyed” if there had been no breach. In this case, Binh would not suffer “losses” even if there was a delay in delivery. Moreover, the Commercial Law stipulates that compens75ation should be based on actual damage, meaning that compensation is only justified to the extent of actual damage. The law does not permit pre-agreements on compensation amounts, and such agreements would be rendered void by the court in case of disputes.

Through the above example, it is clear that for damages compensation sanctions to be applied, sufficient grounds must exist. When such grounds are met, the damages compensation sanction will adequately compensate for the losses of the aggrieved party, rendering the breach of contract harmless in material terms to the aggrieved party. Realistically, no entity wishes to bear the primary responsibility for compensation, but if necessary, the entity must compensate for damages based on the principles of "completeness" and "promptness."

Compensating "completely" embodies a profound philosophy that no one benefits from breaching a contract, nor should anyone receive more than the actual damage. Consequently, the breaching party is responsible only for the damages directly caused by their actions. Prompt compensation plays an important role as it compensates for the material losses of the aggrieved party, allowing them to stabilize quickly without disruption to their current or future work plans.

Damages compensation also serves as a deterrent message to other entities, encouraging them to refrain from legal violations and contract breaches in commerce. This also educates organizations and individuals to respect and strictly adhere to the law and community life rules, fostering trust in justice. However, from different perspectives, the role and function of damages compensation in the Commercial Law can be considered as follows:

Firstly, compensation must be "complete." This principle emphasizes that no one should benefit from damage and no one should compensate beyond the caused damage. It ensures that entities adopt reasonable preventive measures, avoiding scenarios where one party purposely creates situations for gain. Currently, complete compensation can be interpreted in two ways:

1. Complete compensation means fully compensating all losses that the aggrieved party must endure due to the breach;
2. Complete compensation refers to full compensation of the losses prescribed by the Commercial Law, which must be compensated to the aggrieved party.

The author supports the first view because it is based on the actual losses and only those causally linked to the breach should be compensated.

Thus, the aggrieved party must prove that the damage they endure is a result of the breach. Even though the second view considers statutory losses, without proving a causal relationship, the breaching party cannot be compelled to pay damages. This is because fairness dictates that an entity can only be liable for damages directly or indirectly caused by its breach.

Secondly, compensation must be carried out "promptly." This means that damages must be compensated as quickly as possible. In practice, prolonging the period can lead to increased and severe damages. Prompt compensation helps the aggrieved party quickly mitigate the damage and restore normal business activities and reduces the amount of compensation the breaching party has to pay.

The principles of damages compensation stem from the nature of compensatory sanctions, which aim to restore the aggrieved party's material interests. Thus, the aggrieved party needs full compensation to restore their lost material interests, or in other words, the aggrieved party should not be better off due to the damages compensation than if the contract had been performed as agreed. This makes the breach “meaningless in material terms” to the aggrieved party.

This principle is also clearly stated in Article 74 of the Vienna Convention: “The damages shall not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in light of the facts and matters of which it then knew or ought to have known, as a possible consequence of the breach of contract”. Although the current Commercial Law does not fully replicate the Vienna Convention, the compensation is based on: “The value of compensation includes the actual and direct losses that the aggrieved party must bear due to the breach and the direct benefits that the aggrieved party would have enjoyed if there had been no breach”. In judicial practice, when considering damages compensation, the courts always refer to this compensation principle to resolve compensation claims, as the essence of damages compensation is to place the aggrieved party's material interest to a position they would have had if the contract had been performed appropriately. This means that no party can exploit or benefit from unfounded compensation claims.

4. Conclusion

The damages compensation sanction in the Commercial Law 2005 has proven its role and function effectively. The principles of “complete” and “prompt” compensation have best protected the legitimate rights and interests of the parties when infringed upon, restoring the material values lost and putting the material factors back to their original position. The responsibility for damages compensation is a reasonable regulation clearly functioning as a civil sanction in contractual relationships as business activities become increasingly competitive.

According to Industrial and Commercial Magazine

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