Khóa luận tốt nghiệp: Measure of damages under vietnamese civil law

Compensation for damage due to a breach of contract is an important legal measure that plays a role in compensating the aggrieved party the obligee for losses resulting from the breach o

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SCHOOL OF LAW VIETNAM NATIONAL UNIVERSITY, HANOI

LE HANG PHUONG

MEASURE OF DAMAGES UNDER VIETNAMESE CIVIL LAW

GRADUATION THESIS

HANOI - 2022

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VIETNAM NATIONAL UNIVERSITY, HANOI

SCHOOL OF LAW

LE HANG PHUONG

MEASURE OF DAMAGES UNDER VIETNAMESE CIVIL LAW

Major: General Legal Studies Student code: 18062023

GRADUATION THESIS

Supervisor: Dr DO GIANG NAM

HANOI – 2022

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ACKNOWLEDGEMENT

Foremost, I would like to express my sincere gratitude towards my thesis supervisor, Mr Do Giang Nam for his patience, motivation, enthusiasm and immense knowledge His guidance helped me in all the time of research and writing this thesis

Besides my supervisor, I am extremely grateful to Ms Nguyen Thi Bich Thao, Ms Tran Kien, Mr Ngo Huy Cuong and all other professionals and lecturers of Law Faculty of Vietnam National University, Hanoi for their motivation and enthusiasm, for leading me, guidance me and facilitating for all the students in the School of Law, Vietnam National University, Hanoi Thanks

to them, I have learnt so much, and been mature, not only academic knowledge but also valuable practical experience so that I can confidently accept all challenges in the future

My sincere thanks also go to Mr Vu Thanh Cu, Mr Nguyen Kien Cuong and Mr Dang Trung, Mr Nguyen Cao Thang, Ms Le Hong Linh and Ms Cao Khanh Linh (NEU) for being my teammate of CISG Pre-moot 2021- Vietnam National Round Moot and FDI Moot National Round 2021 who accompany with me the very first lesson in arbitration and have always been supportive me

in my every single significant event during my student time in SOL-VNU

During my 4 years in law school, I believe that I have had so many opportunities to embrace my career Thanks to Tilleke & Gibbins and Dungzsrt

& Associates where I was and am a legal intern, I have learnt more than I could expect and met people who are enthusiastic with works They are not only professional, they are also heartfelt

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My deep sense of gratitude forwards my parents: “Bố mẹ là điều quý giá nhất con có trên đời Con sẽ không lùi bước trước bất cứ khó khăn, thử thách nào vì điều con sợ nhất trên đời là làm bố mẹ thất vọng.”

Last but not least, for my friend that I have met in SOL-VNU: Do Tue Khanh, Le Thao Linh, Nguyen Phuong Hoa, Do Ngoc Huyen, Trinh Quoc Dat, Nguyen Luu Hoang Nghia, Nguyen Doan Khanh Trung, Dao Hong Phuc, Le Duc Hung and many other friends in Class of K63 These incredible people are always beside me whenever I need and need any advice from them

This thesis is my last assignment in the School of Law- Vietnam National University of Hanoi, closing a life chapter and opening a new, challenging and unpredictable one Remaining in my mind are the most valuable memories I have had in SOL-VNU, which will follow me the rest of my life

Hanoi, 18th May 2022,

Lê Hằng Phương

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INDEX OF ABBREVIATIONS

Goods The 1980 Vienna Convention

Commercial Contracts

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TABLE OF CONTENT

CHAPTER ONE: THE THEORETICAL FRAMEWORK OF MEASURING

I The theoretical framework of Breach of contract 16

3 The legal grounds for arising liability for damages: 24

4 The measure of damages due to breach of contract under Common Law and

4.1 There is a prior agreement on the damages: 25 4.2 There is no agreement on the compensation for damages due to breach of

4.3 Theoretical framework of measuring compensation due to breach of

CHAPTER TWO: ANALYSIS, ASSESSMENT AND PRACTICAL APPLICATION OF PROVISIONS ON MEASURE OF DAMAGES 41

I The new approach of acknowledgment of Vietnamese law-makers about the compensation for damages due to breach of contract 41

II The measure of damages provisions under The 2015 Civil Code: 45

1 There is a prior agreement for measure of damages for compensation: 48 1.1 The prior agreement on the type of compensable damages 50 1.2 The prior agreement on the liquidated amount (liquidated damage clause) 51

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2 There is no prior agreement on measure damages for damages between parties 54

CHAPTER THREE: THE RECOMMENDATION TO AMEND THE

I The advantage of the current provisions on measure of damages 62

II The limitation of the provision of measure of damages for compensation

III The recommendation on the measure of damages for compensation due to

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INTRODUCTION

I Regarding Rationale of the study

Contract is one of the main legal means used by all individuals and organizations to satisfy their needs in all aspects of lives Due to the importance

of contracts to social life, legal systems around the world place contract law at the center of private law and are always interested in improving and developing this field of law

If the establishment of a contract is the process by which the parties agree

on the terms of the contract, contract performance is the process by which the parties turn the terms they have voluntarily committed to come true, fulfilling the rights and obligations they wish to achieve When entering into a contract, usually the parties will voluntarily fully implement the terms that they have voluntarily committed However, in some cases, due to subjective or objective reasons, the obligor fails to properly perform the obligation as committed, causing damage to the obligee in the contractual relationship In order to overcome the adverse consequences brought about by the obligor's breach of contract, the contract law of all countries provides for solutions to help the aggrieved party to overcome the consequences caused by the breach of contract caused by the contract of the obligor, thereby helping the aggrieved party to protect the legitimate rights and interests due to the breach of the contract

Compensation for damage due to a breach of contract is an important legal measure that plays a role in compensating the aggrieved party (the obligee) for losses resulting from the breach of contract In legal systems, the principle of compensation is to put the aggrieved party in the position it would have been if the contract had been properly performed, although, legal systems also have differences in this measure such as compensatory damages, grounds for

II Purpose and mission of the study

1 Purpose of the study:

The purpose of the graduation thesis is through the study of theoretical and practical issues of the provisions of Vietnamese law on compensation for damage caused due to breach of contract in Vietnam, on the basis of comparison

to provisions on compensation for breach of contract of some countries and a number of international legal documents in order to contribute to clarifying and enriching the theoretical, practical and legal basis of the compensation for damage caused due to breach of contract, selectively absorb advances in international law, at the same time, make specific recommendations to amend and supplement inadequate and inadequate provisions in the current law, improve the legal mechanism to adjust compensation for damage caused by

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breach of contract according to the trend, modernity and integration, thereby improving the regulatory efficiency of Vietnam's contract law

2 Mission of the study:

To accomplish the above purpose, the thesis has the following specific tasks:

- Clarifying theoretical issues on compensation for damage caused due to breach of contract, such as: the concept and nature of remedial measures for breach of contract, compensation for damage caused by breach of contract; clarifying the theoretical issues about the grounds for applying the measure of compensation for damage caused by the breach of contract, the cases of exemption from liability for damage compensation, determination of the level of compensation for damage, etc

- Research and compare Vietnamese contract law with French contract law,UK (typical of Civil law and Common law systems) and international legal documents on compensation for breach of contract From the comparative research, the thesis will propose to acquire good experiences, suitable to the political, economic and social conditions of Vietnam

- Propose specific directions and solutions to improve the regulations of the

2015 Civil Code and a related law on the measure of compensation for damage caused by a breach of contract

III Object and scope of the study

1 Object of the study:

The research object of the thesis is the provisions of the 2015 Civil Code, the

2005 Civil Code and legal documents related to the measure of compensation for damage caused by a breach of contract such as the 2005 Commercial Law, the 2014 Construction Law, Maritime Code in 2015, Law on Medical Examination and Treatment in 2009, Law on Lawyers in 2012, the 2006 Law on Civil Aviation (amended, added in 2014) Besides, some judgments of

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Vietnamese courts will also be used and studied in the thesis to illustrate the research results The research object of the thesis also includes the contract law

of two typical countries in the Civil law system, the Common law is France, the

UK and some international legal documents on contracts such as the 1980 Vienna Convention on Contracts contract for the international sale of goods (hereinafter referred to as the CISG), the Unidroit Code of Conduct on International Commercial Contracts (hereinafter referred to as the UPICC), Principle of European Contract Law (hereinafter referred to as the PECL for short)

2 Scope of the study:

On the rules in the text clearly state the theory, research focuses and clarify the following issues:

Firstly, on the basis of the law on compensation for damage caused due to breach of contract, the thesis will focus on researching and clarifying the rationale for compensation for damage due to breach

Secondly, the thesis focuses on clarifying the provisions of the 2005 Civil Code, the 2015 Civil Code, the 2005 Commercial Law and some relevant legal documents on compensation for damage due to the scope of the contract Thereby clarifying the changes of the Civil Code in 2015 compared with the Civil Code 2005 The thesis studies the contract law of England, France and international legal documents such as CISG, UPICC, PECL on the basis of comparison with regulations provisions of the law of Vietnam, through which it aims to determine the compatibility and limitations in the Vietnamese dong law

on compensation for damage due to the scope of the contract

Third, on the basis of studying the issues, implementing the law and performing the work on the application of the law on compensation for damages

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due to the scope of the contract, the thesis will give the evaluation opinions and opinions propose to improve the legal provisions on this issue

IV Reasoning and research methodology

The thesis research will be based on the methodology dialectical and historical materialism of Marxism-Leninism This is considered as a guideline for the orientation of specific research methods of the PhD student in the process

of implementing the thesis Specific research methods: On the basis of the methodology of Marxism-Leninism, undergraduate student will use specific research methods as follows:

- The comparative method is applied to show the similarities and the difference between Vietnamese contract law and British and French contract law and international legal documents on contract law are CISG, UPICC and PECL

- Methods of analysis and commentary to clarify theoretical and regulatory issues current law on compensation for damage caused by breach of contract;

- General method to generalize the legal status of compensation for damage caused by violations breach of contract in order to make appropriate recommendations;

On the basis of applying the above research methods, the researcher makes the following assessments:

Evaluation of the institution of compensation for damage caused by a breach

of contract in the law of Vietnam in order to draw out recommendations to improve the contract law of Vietnam in general and the institution of compensation for damage caused by a breach of contract in particular more complete, more compatible with world law

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V Scientific and practical significance of the thesis

In terms of theory, by clarifying a number of theoretical issues on

compensation for damage caused by breach of contract, the thesis contributes to the consolidation and improvement of theoretical issues about contracts in

Vietnamese legal studies

In terms of practice, the viewpoints and recommendations to improve the Vietnamese law related to compensation for damage caused by breach of contract proposed in the thesis will be a valuable reference for legislators , competent agencies in completing the provisions of Vietnamese law on compensation for damage caused by breach of contract The thesis is also a reference for courts and arbitration agencies in settling disputes related to compensation for damage caused by breach of contract In addition, the thesis is also a useful reference source for Vietnamese individuals and businesses in the process of settling disputes by means of compensation for damage caused by breach of contract

VI The novelty of the graduation thesis

Firstly, the thesis is the first work in Vietnam to systematically study system, in-depth from the perspective of theory and legal status on the measure

of compensation for damage caused by a breach of contract

Secondly, from a theoretical perspective, the thesis contributes to clarifying the important role of compensation for damage caused by a breach of contract, and at the same time, the thesis also clarifies two important contents of compensation for damage caused by a breach of contract breach of contract is the basis for applying the measure of compensation for damage caused by the breach of contract and determining the level of compensation for damage caused

by the breach of the contract

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Third, the thesis has analyzed the current situation of Vietnamese contract law on compensation for damage caused by a breach of contract in combination with the contract law of a number of modern legal systems, thereby specifying the advantages and disadvantages of the contract law points and limitations of Vietnamese law and propose recommendations for improvement

VII Structure of the thesis

In addition to the introduction, an overview of the research status of the thesis topic, conclusion, The list of references and appendices, the content of the thesis consists of 3 chapters:

- Chapter One: The theoretical framework of measuring compensation due to breach of contract

- Chapter Two: Analysis, Assessment and Practical application of provisions

on measure of damages

- Chapter Three: The recommendation to amend the current provisions on measure of damages

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CHAPTER ONE: THE THEORETICAL FRAMEWORK OF

MEASURING COMPENSATION DUE TO BREACH OF CONTRACT

I The theoretical framework of Breach of contract

1 The definition of contract:

Contract has several names under many legal systems all around the world, many of them can be called as agreement, covenant, convention….1 People may feel close or distant depending on the name of each name of the contract However, they also have the same characteristics in all legal systems Starting from a covenant, now it is developed to a model terminology that people usually use called “contract”

The term “covenant” is beginning to appear when applied to marital relationships.2 Theologically, a covenant is a promise binding two people or two parties to love one another unconditionally The principal features of covenant can be quickly described It is first mentioned by Bracton but not yet by Glanvill, which makes the year 1201, the date of its earliest recorded instance,

an accurate enough indication of its time of origin.3 At first the covenant mainly

serves to initiate the “final concord”, the agreement or compromise made before

and with the approval of the Court of Pleas Very soon, however, covenant assumes a wider role to serve a variety of transactions—whether to borrow or repay money, or to build a house, or to perform services, or to ensure a future supply of wool or corn—although its most frequent employment is in connection with leases, so much so that, as Maitland observes, ‘the placitum conventionis is almost always what we should call an action on a lease’ Lately,

1 Ngo Huy Cuong – Contract Law Textbook (p.10)

2 David O Coolidge - Same-Sex Marriage (p.2)

3 Select Civil Pleas (Seiden Society, vol 3), pi 89

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A contract was defined as a legal relationship in which two people or two parties bind themselves together on mutual condition to affect some future result.4

The 2005 Vietnamese Civil Code defined “A civil contract is an agreement

of parties to establish, amend or terminate civil rights and obligations.” The

2015 Civil Code has changed the definition of contract when exclude “civil” in

the “civil contract” compared to The 2005 Civil Code In specific “A contract is

an agreement between parties to establish, amend or terminate civil rights and obligations.” This revolution changed the mindset of Vietnamese law-makers

when they acknowledged clearly the Vietnamese law system and the rule of conflict of law To be more specific, when the specialized law such as Intellectual Property Law, The Commercial Law… does not have any provisions

to regulate a legal issue, it would be reflected in Civil Law which is considered

to be the highest legal effect document in terms of private law

2 The legal framework of breach of contract

The institution of breach of contract is present in all legal systems in the world today because it is one of the most important and leading problems encountered in all civil relationships

According to A Dictionary of Law - Oxford Dictionary, Breach of contract

means “An actual failure by a party to a contract to perform his obligations under that contract or an indication of his intention not to do so.” 5A breach of contract consists of a failure, without law excuse, to perform a contractual obligation The failure may take many different forms, including: (i) an express refusal to perform the contract or a particular term of the contract; (ii) defective performance; and (iii) incapacitating oneself from performing the contract

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Compared to the definition above, pursuant to Art.1231-1 French Civil Code,

it can be seen the similarity when it stated that: “A contract is deemed breached

if at least one obligation was not performed or was delayed, unless it was due to

an external cause that cannot be imputed to the party.”

According to the Vietnamese dictionary, "breach" is "failure to comply with

or violate the provisions." Accordingly, it can be seen that when a party fails to

comply or do differently from what the parties specified in the contract is called

a breach of contract From a legal perspective, breach of contract can be

understood as "an act of one party that has acted contrary to the provisions of law or contrary to the committed content" For example, breach of payment

obligation, violation of terms of quality, technical requirements of goods, time

of delivery, etc

Thus, from the concepts of Common Law and Civil Law and definitions in

the Vietnamese language from a legal perspective, "a breach of contract is the failure by a party to a contractual relationship to perform, or to fail to perform obligations arising from the contract.”

3 The remedy for a breach of contract

In contractual obligation, in case that a party does not voluntarily perform, a claim for breach of obligation is necessary Hence, the law needs to foresee different remedies in order to force the duty of performance

Before analyzing the regulation stipulated under Vietnamese Law, survey the experience of countries with a developed market economy or the experience of the two largest legal traditions in the world today, Civil Law and Common Law

- two legal systems affecting many jurisdictions

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Approaching the issue logically, Abdul Kadar, Ken Hoyle and Geoffrey Whitehead (Common law attorneys) cited that Contract law dealt with forced agreements, so there comes the question of what enforcement was According to them, enforcement means that one of the contracting parties was wrong in performing the obligations of the contract, then the court, at the request of the aggrieved party, must impose the conditions of the aggrieved party and these conditions are intended to provide a remedy, but not a penalty, to the aggrieved party They asserted it is unlike criminal law, where contract law designs sanctions for compensation rather than punishment.6

Under Common Law system, a breach of contract was resolved that is was as

based on on the basis of two Writs consisted of “Writ of general assumpsit” and

“Writ of special assumpsit” which could be translated into Vietnamese as “tố quyền vi phạm hợp đồng tổng quát” and “tố quyền vi phạm hợp đồng đặc biệt”

respectively7 Beginning from the 17th century, the UK courts used Writ named

“assumpsit” to enforce the contract.8 On the basis of Writs, it leads to two basic

remedy as follows:

First, Writ of general assumpsit was applied in case that the claimant

performed fully or a separable part of his contractual obligation and has agreed

to convert the performance by paying a sum of money This remedy was called compensation to an agreed a sum of money If no agreed rate is available, reasonable costs of labor or services rendered by the claimant or property transferred by the claimant to the respondent shall be taken into account

6 Abdul Kadar, Ken Hoyle and Geoffrey Whitehead – Business Law, Made Simple Books, London (1985) (p.156)

7 Ngo Huy Cuong – Conract Law (p 392)

8 James Gordley, Contract, property, and the Will, The Civil Law and Common Law Tradition, The State and Freedom of Contract edited by Harry N Scheiber, Standford University Press, Standford, California, 1998 (p.68)

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Second, Writ of special assumpsit was applied in case that the respondent

breached a contract before the claimant performed the contract fully The claimant was not allowed to claim compensation according to the agreed sum of money, but, the claimant could only be compensated for the damages related to money from which the claimant had already suffered

Unlike Common Law, Civil law supposes that a breach of contract is a reason that rises another obligation is different from obligations of contract Usually, the remedies for a breach of contract are monetary compensation or to force to perform of the contract Remedy for forced performance of the contract means that The buyer is forced to fulfill the commitments at his own expense,

but this remedy is rarely used This remedy was also called “reparation in kind”

or “compensation in kind”, which means that that is, the bearer is bound to

perform the specified object However, the law also allows for another way of performing obligations - that is, the bondholder performs the obligation at the expense of the debtor, which means that after such performance has the right to demand payment in cash from the beneficiary In the event that compensation

of the same type cannot be made, the law provides for the replacement by a sum

of money

The Principle of European Contract Law (“PECL”) provided remedies for the act of not performing a contract which included (1) The creditor is entitled to recover money which is due (2) a defective performance, (3) Postpont obligations, (4) Terminate the contract, (5) terminate a part of the contract, (6) reduce price , (7) claim compensation and (8) claim interest It is to say that the PECL provided more types of remedy compared to the 2005 Commercial Code

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II The theoretical framework of Damages

1 The definition of Damages

Damages refers to the sum of money the law imposes for a breach of some duty or violation of some right.9 The Common Law system divided compensation into two ways: compensatory damages and non-compensatory damages When the breach of contract causes identifiable damage, the court shall apply compensatory damages remedies by awarding the plaintiff an adequate amount of compensation for the damage Compensation for non-compensatory damage is divided into two types: nominal damages and punitive damages Nominal damages was applied when the aggrieved party had no damages with a compensation of a few cents or a dollar to confirm a breach of contract and; punitive damages was only applied to malicious acts or breaches of contract accompanied by tort behavior in order to prevent such acts in the future

Under Civil Law system validity theory suggests that the sanctions that creditor pursue to compel the debtor to perform, when the debtor is not willing,

is an important area Unlike the Common Law system, which distinguishes

between the law of contract and the law of tort, the Civil Law believes that a breach of contract is the cause of an obligation that is different from the contract.10

2 The function of damages

In English law, the breach of a primary of ligation generally gives rise to a secondary obligation to pay damages Compensatory damages are a substitutional remedy The aim is to provide the injured promisee with the sum

9 https://www.law.cornell.edu/wex/damages

10 Ngo Huy Cuong – Contract Law textbook (p.394)

the assessment of damages for a breach of contract is universal It was found in

the judgment of Parke B in Robinson v Harman 12 where he stated that “the rule

of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed”

While compensation is undoubtedly the central purpose of damages under the instruments, from a policy perspective damages can also be said to pursue a number of other purposes First, remedies in general, and damages in particular, have been said to serve the goal of keeping peace through the prevention of private wars It has been suggested that if there were no remedies available, the injured parties could ‘seek justice’ by starting private wars against the parties in breach.13

Second, it seems clear that the existence of remedies, and in particular damages, is vital for the effective operation of contract law14 and if no legal

14 B Coote, ‘Contractual Damages, Ruxley, and the Performance Interest’ (1997) 56 Cambridge LJ 537, 541 6

H Collins, The Law

Fourth, it is submitted that economic considerations of wealth maximization and economic efficiency are not irrelevant to the international instruments and arguably constitute an important part of a set of values that the instruments aim to promote.18 The value of free trade, which the international instruments are intended to facilitate, is often justified from the standpoint of efficient allocation of resources.19 In addition, the goals of uniformity and harmonization pursued by the instruments are believed to encourage trade by means of reducing transaction costs.20

Agreed with the statement above, The 2015 Civil Law has the same perspective of damages Damages is to be used for the main purpose which is to offset to the aggrieved party for the damages arising from breach of contract by another party After being compensated, the economic position of the aggrieved

15 H Collins, The Law of Contract, 4th edn (London, Butterworths, 2003) 9; J Jackson, ‘Global Economics and International Economic Law’ (1998) 1 JIEL 1, 5; A Rosett, ‘Unification, Harmonization, Restatement, Codification, and Reform in International Commercial Law’ (1992)

40 AJCL 683

16 Art 1.3 UPICC

17 L Rev 339, 343–4, 360–1) 8 MJ Bonell, ‘Art 7 CISG’ in CM Bianca and MJ Bonell, Commentary on the International Sales Law: The 1980 Vienna Sales Convention (Milan, Giuffrè, 1987) 80

18 ‘Remedies for Breach of Contract under the CISG’ (2006) 25 Int’l Rev L Economics 378, 394)

19 JH Jackson, WJ Davey and AO Sykes, Jr, Legal Problems of International Economic Relations: Cases, Materials and International Regulation of Transnational Economic Relations, 3rd edn (St Paul, Minn, West Publishing Co, 1995) 7–14

20 G Cuniberti, ‘Is the CISG Benefiting Anybody?’ (2006)

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party will be brought back to the position when the contract is performed legally In order to perform the obligation to compensate legally, the fundamental principle of compensation, according to contract law, breaching party has an obligation to compensate fully (which means it would not be higher

or lower) the actual and direct damages caused to aggrieved party

3 The legal grounds for arising liability for damages:

(i) The contractual relationship between parties

This is the first and the most important to distinguish the responsibility for compensation or tort The contractual relationship is established when between parties (i) have an agreement and (ii) its purpose which is to establish, amend or terminate rights or obligations of parties

In case there is a contractual relationship between parties and damages arising from breach of contract, therefore, the compensation responsibility of breaching party will be governed by its contract and the contract law Otherwise, whether there does not exist any contractual relationship or the damages arose outside the scope of the contract, hence, the compensation responsibility for damages between parties will be governed by tort law and will not be bound by the contract law or even any terms in their contract

(ii) The act of breach of contract from a party

The event arises that the compensation liability must be the breach of contractual obligation There is a difference between breach of obligation and breach of contract and in a strict approach to each terminology of provision of contract law, a breach of contract that is not a breach of obligation may not fall within the scope of compensable damages From my own opinion, the agreement on compensation due to breach of contract in general is appropriated

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to the fundamental principle freely to agree and is needed to respect in

accordance with the principle “not against laws” and “ethics”

(iii) The damage arising out of the contract due to the breach of

contract

It is to say that not every breach of contract would cause damages, also, it

is more important that not every damage would be compensated Whether there were no damages or were not demonstrated any damages, the aggrieved party would have no right to claim damages Measuring damages is usually complicated practically In the context of contractual relationships, Mental damage seems to be less common in practice, and the aggrieved party often focuses only on physical harm Material damage must be actual and direct damage

(iv) Causation

Breach of contract and damages must have a cause-and-effect relationship In other words, damages caused by a breach of contract must be from the breaching party Therefore, if damage is incurred in connection with a breach but the breach is not the direct cause of such damage, such damage shall not be compensated In other words, indirect damage cannot be compensated

4 The measure of damages due to breach of contract under Common Law and Civil Law

4.1 There is a prior agreement on the damages:

i Theoretical framework under Common Law

The historical genesis of the principle of an agreement on the measure of damages due to breach of contract sheds light on its original rationale Liquidated damages clause is a part of the agreement that usually receives many

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arguments and regularly a clause bringing dispute between parties Having developed in the fifteenth century when the common law had no adequate machinery for trying cases of fraud

Applying the principle of “just compensation for the loss or injury actually sustained” 21 to liquidated damage provisions, the court has subsequently refused

enforcement where clause agreed upon is head to be in terrorem - a sum fixed as

a deterrent to breach or security for full performance by promisor, not as a realistic assessment of the provable damages Therefore, attempts to secure

performance through in terrorem clauses are currently declared unenforceable

even where evidence shows a voluntary, fairly bargained exchange.22

In English Law, The formulation of liquidated damages in contract provisions stated in its traditional and most general formulation the rule is as follow: Liquidated damages provisions are enforceable only if two requirements are satisfied: actual damages must be difficult to estimate (the difficult to estimate requirement), and the liquidated amount must be a reasonable estimate

of the actual loss (the reasonability requirement) In case, liquidated damages provisions that do not satisfy these requirements are referred to as penalties and are unenforceable Although these requirements appeared in a specific case, the requirements apply widely not only in the UK but also in the USA.23 These factors may be present singly or in combination

First, the agreement must be a reasonable forecast of just compensation for

the anticipated harm that would be caused by breach The two possible interpretations are: first, that if either actual or anticipated harm corresponds to

21 Jaquith v Hudson, 5 Mich 123, 133 (1858)

22 CHARLES J GOETZ* and ROBERT E SCOTT**- LIQUIDATED DAMAGES, PENALTIES AND THE JUST COMPENSATION PRINCIPLE: SOME NOTES ON AN ENFORCEMENT MODEL AND A THEORY

OF EFFICIENT BREACH (p.555)

23 Ibid footnote 23

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the stipulated sum, the clause will be valid; second, that the clause will not be valid if the stipulated sum is disproportionate to either actual or anticipated harm

Second, the possible damages which might result from the breach must be

uncertain and difficult to estimate The Courts have considered the degree of

uncertainty an influential factor in determining the reasonableness of the

estimate In the case Jaquith v Hudson, the Michigan Supreme Court concluded that the sum was clearly too large for just competition, even though the expression is direct contrary indicating the intent to make if a penalty is competent to the expression of the opposite intent

The common theme of these decisions is that a disproportion between the stipulated and the anticipated damage justifies an inference of overcompensation

However, theoretical and practical differences between these two approaches are great For example, suppose the amount of actual damages if there is a breach will depend on the difference between the contract price and the market price at the time of breach One basis for invalidation is the presumption of unfairness: liquidated damages provisions are unreasonable

In international practice, it is recorded that many scholars and judges who made arguments against the special scrutiny rules Common law jurisdictions distinguish clearly liquidated damages and penalties Liquidated damages are an amount contractually stipulated as a reasonable estimation of the actual damages

to be recovered by one party if another party breaches an agreement On the other hand, penalty clauses are contractual provisions that assess against a defaulting party an excessive monetary charge unrelated to the actual harms

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Penalty clauses are generally considered unforeseeable Several tests have been recommended to distinguish between these two remedies The traditional approach focused on the question of whether a given clause was a genuine pre-estimate of the loss that the aggrieved party was likely to suffer Recent approach has a further consideration that a clause may also be justified on the basis that a party has a legitimate interest in securing performance rather than damages, provided that the amount of damages stipulated in such a clause is not extravagant and unconscionable in a comparison with that party's interest

ii Theoretical framework under Civil Law

Fundamentally, the difference in approach to liquidated damages between the Common Law system and the Civil Law system is that there is no clear distinction between the liquidated damages clause and penalty clause and, normally, contract law in Civil Law system allows parties to have agreement on penalty clause with the purpose of deterring and punishing the breaching party Contract laws of several countries recognized both liquidated damages clause and penalty clause For instance, from Art 1226 to Art 1233 of The French Civil Code regulated penalty clause and Art 1152 regulated liquidated damages clause Art 340 and Art 341 of The German Civil Code recognized both above-mentioned clauses, however, the difference between these two remedies is that the penalty clause will be restricted by the Court's decisions whether the level of the penalty clause is too high or inconsistent In the case24 of Dunlop Pneumatic Tyre Company Ltd V New Garage and Motor Company Ltd., Lord Dunedin distinguished the essence of liquidated damages and penalties: “The essence of a penalty is payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is genuine covenanted pre- estimate of damage.”

24 The House of Lords in Dunlop Pneumatic Tyre Company Ltd V New Garage and Motor Company Ltd, 1914 July 01

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Liquidated damages and penalty clauses are generally permissible in civil law systems, with the caveat that excessive penalties may be reduced by the courts On the other hand, penalty clauses, to the extent that they provide for a monetary charge unrelated to the actual harm, are generally considered ineffective in the common law tradition

4.2 There is no agreement on the compensation for damages due to

breach of contract

i The theoretical framework under Common Law

In common law jurisdictions, there are three basic categories of recoverable damages.25 The main category is expectation damages, according

to which damages are awarded on the basis of putting the claimant in the position it would have been in, but for the breach A claimant’s ability to recover lost profits will depend on the subject of the breach of contract For example, it is more likely that a claimant will be able to recover lost profits in

a contract for the sale of goods than in a contract for the carriage of goods, as lost profits in the latter situation are generally held to be too remote.26 The second is performance damages – i.e., the cost of curing the defective performance The third is reliance or ‘wasted expenditures’ damages – i.e., expenditures or other losses that have been incurred by the claimant in reliance on the contract.27 The purpose of reliance damages is to put the claimant in as good a position as it was before the promise Within the category of expectation damages in common law jurisdictions, there are two subcategories – normal or direct damages (also known as general damages) and consequential damages (also known as special damages) Normal

25 There are also various other categories of loss that may be recoverable, such as moral damages, punitive or exemplary damages, non-monetary damages (i.e., specific performance), and these topics are addressed in depth

in other chapters of this publication

26 H McGregor, McGregor on Damages (20th ed Sweet & Maxwell, London 2017), Sections 4-0018-19

27 Halsbury’s Laws of England, Section 503

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damages are those damages that are the natural and probable consequence of the breach.28 Consequential damages are those that do not flow directly from the breach; they are recoverable only in limited circumstances, they are particular to the aggrieved party, and they may be more difficult to calculate

in financial terms.29

ii The theoretical framework under Civil Law

Damages measured on the cost of cure basis indirectly enable the injured promise to obtain the promised performance English Courts will refuse to make costs of cure awards that are unreasonable or disproportionate Otherwise, there are no such limitations in French Law, the principle of full compensation is applied to letters

Contract Law of the Civil Law system countries require different levels of reasonable certainty in general or in French Contract Law in particular require the reasonable certainty of damages, however, it is unclear Even though it is not explicit in the French Civil Code, the Supreme Court still requires reasonable certainty when a claim for damages arises before the Court The reasonable certainty under the Common Law system will be measured and demonstrated through the act of breach of contract leading to the loss of the aggrieved party which does not require the certainty of level of damages

Unlike the part above the measure of damages in term no agreement on the level will be measured in accordance with elements: Compensable damages,

28 Halsbury’s Laws of England, Section 317, citing Ratcliff v Evans [1892] 2 QB 524 at 528, per Bowen LJ; for the position under New York law, see C T Salomon, P D Sharp, ‘Chap 10: Damages in International Arbitration’, in J Fellas and J H Carter (eds), International Commercial Arbitration in New York (2nd ed., OUP New York 2016), paras 10.11-10.14

29 Ibid (paras 10.15-10.20)

- Compensable damages:

In terms that there is no agreement on damages between parties, the damage will be compensated in accordance with the full compensation principle This principle is recognized in every legal system since it allows the aggrieved party to have the amount of money equal to the whole damages that such party has already suffered from due to breach of contract by another party in contract Damages are compensated so that the aggrieved party can be placed in the position it would have been if the contract had been properly performed However, it does not mean that every claim for compensation for an aggrieved party can be accepted by the Courts, the legal studies all around the world

30 D Mainguy (ed), Le nouveau droit français des contrats, du régime général et de la preuve des obligations (après l’ordonnance du 10 février 2016) (UMR-CNRS 5815, 2016), para 243; B Fages, Droit des obligations (8th ed L.G.D.J., 2018), para 331

31 Practical Law Company UK, Damages in International Arbitration, online resource ID 0-519-4371 See also J Paulsson, ‘The Expectation Model’ in Y Derains and R H Kreindler (eds), Evaluation of Damages in International Arbitration, Dossiers of the ICC Institute of World Business Law, Vol 4 (Kluwer Law International, International Chamber of Commerce ICC 2006), 64

32 C Larroumet, S Bros, Traité de droit civil, Tome 3: Les obligations, Le contrat (8th ed Economica, 2016), para 655

Although the certainty requirement appears in almost all legal systems, the level of such requirement in each legal system is differentiated For instance,

CISG does not give an explicit certainty of damages under Art 74: “…Such damages may 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 the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract” shows that the CISG has indicated that

the breaching party is not liable for damages that have not occurred or are unlikely to occur In other words, CISG indirectly mentioned the certainty element of damages by placing the burden of proof of damages on the aggrieved party The requirement of certainty under Art 74 of CISG has been already pointed out by many scholars through analyzing the role of explaining and implementing UPICC Specifically, Alejandro M Garro had the same view that Art.7.4.3 of UPICC implemented Art 74 of CISG through emphasizing the level

of compensation that needs to be built based on certainty and reasonableness

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Implementing Art 74 of CISG, Art.7.4.3.(1) of UPICC emphasized the damages and the level of damages in the present and/or in the future may be compensated but it must satisfy the reasonable certainty element Also,

Art.7.4.3.(3) stated that: “Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.” This shows that UPICC holds the offending party liable for

compensation and the calculation of damages will be determined according to the probability of possible damage According to para (3), where the amount of damages cannot be established with a sufficient degree of certainty then, rather than refuse any compensation or award nominal damages, the court is empowered to make an equitable quantification of the harm sustained It showed that UPICC In other words, Article 7.4.3(3) of the UPICC reaffirmed the claim

of certainty of damage because the aggrieved party cannot require the performing party to claim compensation for damages that may not have occurred or never happen

non-The provision of non-The 2015 Civil Code also provided the certainty element

of compensable damages through the changing to “actual and identifiable damages” (“tổn thất vật chất thực tế xác định được”) compared it to the previous regulation as “actual damages, measured in money” (“tổn thất thực tế, tính được bằng tiền”) This amendment in The 2015 Civil is now broader when

it does not require parties of a contract to prove the level of compensable damages Also, The 2005 Commercial Law requires the certainty of damages which needs to be proven Unfortunately, many current Court’s decisions only

interpret the phrase "actual material loss" as direct damage without

acknowledging expectation damages This is the incompatibility between Vietnamese contract law and world contract law when all legal systems assume that the certainty of damage does not exclude future damage In other words, whether damages has not occurred already, it would be able to be compensated

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as long as it satisfies the certainty element Therefore, the phrase "actual material loss" should be interpreted in a broad sense to include not only direct damage, but also indirect damage, actual damage as well as future damage to protect against damage ensure the compatibility between Vietnamese contract law and the contract law of modern legal systems

- The damages must be predictable

According to international legal studies, in order for damages caused by a breach of contract to be compensated, an equally important condition of certainty is considered that the damage must be foreseeable or must be predictable by the parties at the time of entering into the contract

The predictability element appeared soon in Roman law in order to restrict compensation claims from the aggrieved party This idea also was developed by a French lawyer - Pothier and he put it in The 1804 French Civil Code, Art 1150: “ A debtor is liable only for damages which were foreseen or which could have been foreseen at the time of the contract, where it is not through his own intentional breach that the obligation is not fulfilled.” The condition of predictability of damage in the 1804 French Civil Code continues to

be recognized in Article 1231-3 of Decree No 2016-131, according to which

“the obligor is only responsible for compensating for the damage already predicted or could have been predicted at the time of entering into the contract, except where the failure to perform was due to gross error or fraud”.

Pothier's argument about the predictability of damages was also responded to and applied by the English courts of the nineteenth century This is the basis for building a theory of predictability (Contemplation doctrine) through

the case of Hadley v Baxendale The content of the Hadley v Baxendale case is

that the Hadley mill hired Baxendale to transport the damaged crankshaft to any

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repair shop, but Baxendale delayed the performance of the obligation and therefore the Hadley mill had to be shut down and suffered a loss during the time Baxendale delayed performing the obligation Hadley sued Baxendale for compensation for damages suffered by the Hadley factory However, the Court ruled that Hadley's mill was not acquitted during the period of delay by Baxendale, arguing that Baxendale had every reason to believe that the mill had

a different crank shaft to replace it, and The delay in transporting the crankshaft for repair does not affect the operation of the plant

The basic argument of the Court for making this decision was that at the time the contract was entered into, the contracting parties should have been able

to anticipate the risks and responsibilities they might incur, but because Hadley failed to provide Baxendale with sufficient information regarding the crankshaft

to know, so Baxendale could not reasonably predict the likelihood that Hadley would suffer damages in the event of Baxendale's failure to perform properly

This shows that the position of the Court in the case of Hadley v Baxendale is

not to force the breaching party to pay compensation for damages that this party did not anticipate because it did not know about the special circumstances, so it

is impossible to be careful necessary for the performance of the contract

Through the Court's argument in the case of Hadley v Baxendale, it can be seen

that providing information related to the conclusion of the contract of the parties

is very necessary because this helps the parties to predict the damages may occur if the contract is breached as well as contribute to limiting the breach of

contract On the other hand, the case of Hadley v Baxendale shows that English

law requires both parties in a contractual relationship to take the necessary care when making a contract, that is, the aggrieved party must provide information related to the contract the conclusion of the contract and, on the basis of the information provided, the party in breach must have made a reasonable

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prediction at the time of conclusion of the contract about the possible damage that would occur if the contract was not performed properly

Art 74 of CISG also assert the predictability of compensable damages:

“Such damages may 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 the light

of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.” It is noted that Art 74 does not

require the aggrieved party to demonstrate that the damages will certainly be caused, it only requires the aggrieved party to demonstrate the possibility of causing damages due to breach of contract

4.3 Theoretical framework of measuring compensation due to breach of contract under Vietnamese Law system

This is a new milestone after re-opening the country and reconnecting to the world, especially trading and investment Hence, The 1995 Civil Order was

an essential legal basis for such activities Pursuant to Article 610: “damages must be compensated fully and timely” Clearly, the principle of compensation

in The 1995 Civil Order included 2 elements: fully and timely Such elements may not be appropriate to be applied at the moment since not every damage can

be compensated “in time”, or “instantly” since the breaching party needed time

to find the amount of money to compensate to the aggrieved party and it might take a long period to achieve Furthermore, economic condition at that moment không tạo điều kiện cho việc thúc đẩy These such elements might not adapt to each other since it was difficult to compensate fully timely due to lack of money

Also under Art 610 of the 2005 Civil Code, a provision on the agreement

on the level of compensable damages had been stated as follows: “Parties may

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agree on the level of compensation, form of compensation by in kind or perform

a job, mode of compensation, unless otherwise provided by laws.” This

provision seems to be similar to approach of Common Law when allow parties

to agree on the level of compensable damages It also means that parties can agree on the amount of money which is higher or lower than the actual damages that the injured would have suffered from as long as such agreement did not violate any prohibited rules set by the National Assembly

This article might set out an appropriate approach for such agreement for parties However, in connection with compensation, The 1995 Civil Order also seemed to protect disadvantageous parties allowing the Courts to reduce huge damages whether it caused unintentionally and might cause huge damages for its causing damages party This seemed to be unreasonable for injured parties when they had to suffer from a loss and could not be brought back to the economic position before the event of causing damages occurred

A shortcoming of compensation provision under The 1995 Civil Order was that the types of compensable damages were limited Article 612 stated as

follows: “In the event of an infringement of property, the compensable damage may include lost, destroyed or damaged property, interests associated with the use and exploitation of the property, and reasonable costs for the prevention, mitigation and remedy of the damage.” The approach of this provision seemed

to limit the types of compensable damages, however, the type of property increased so that this provision was not suitable to promote the development of a country as well as protect the rights and interest of people

Additionally, damages only could be compensated under particular circumstances Under Section 3 from Art.617 to Art 633, only 16 circumstances

In conclusion, even though there was a lack of protection, the 1995 Civil Order also allowed parties to agree on the level of damages which is not totally agreed under the applicable law From above disadvantage, the legal ground for compensation was also developed in the 2005 Civil Code

Having learnt from the PECL, not out of that trend, Vietnamese law in general also builds a system to deal with non-performance of contracts around the

foundation of the above three sanctions system In the field of Commercial Law, Article 292 of the 2005 Commercial Law lists a system of remedies for a

breaching including:

(i) Force to perform of the contract

(ii) Penalties for breaches

(iii) Force to compensate for damage

(iv) Postpone to contract performance

(v) Suspend to contract performance

(vi) Cancel the contract

In the 1995 Civil Order ,the 2005 Civil Code and the 2015 Civil Code, although there is no similar provision that lists the sanctions system as the 2005 Commercial Law, however, from general provisions on civil obligations and liabilities to regulations regarding the contract, it is allowed to confirm that the