BREACH OF CONTRACT AND REMEDIES 2025

BREACH OF CONTRACT AND REMEDIES 2025

BREACH OF CONTRACT AND REMEDIES 2025

DRAFTING BATTLE-TESTED CONTRACTS

CHAPTER 5

BREACH OF CONTRACT AND REMEDIES

(PART I)

A contract records the agreement between the parties, and besides the agreements to perform the contract, the parties should also anticipate and agree upon potential risks in case of breach of contract. When drafting this section, two questions need to be clarified:

(1) How can one foresee all possible breaches of contract? This is probably more related to drafting techniques and is an essential skill.

(2) When a breach of contract occurs, how do you and your client want to address it? This is a question that a contract drafter needs to keep in mind throughout the drafting process, as a breach of contract can occur at any point during the performance of the contract.

A breach of contract is an issue that the parties do not want to happen. The parties often avoid and hesitate to mention it during negotiations, but detailing this clause is indeed necessary because:

(i) This agreement section will serve as the best guide for the parties to remedy the breach. The first audience for this guide is the other departments or personnel within the company—those directly involved in or related to contract performance. The second audience is the parties to the contract. If the breach clauses and remedies are not agreed upon, it will be challenging to find a solution when a breach occurs; furthermore, the parties sitting down to renegotiate a solution will waste their time, especially when some breaches need to be resolved immediately. Even when a breach occurs, if one party is not cooperative, negotiating a solution can be difficult.

For example, Party A is a food supplier for Party B (a wedding service restaurant). The parties agree that from 5 to 7 a.m. on June 1, 2023, Party A will deliver the food items ordered by Party B to prepare for a wedding party for its customer.

However, Party A violated the delivery time and informed Party B that it could not deliver on time. In this case, if the parties did not anticipate the breach and propose remedies in the contract, finding a solution would be problematic. A satisfactory solution could be that Party B may find another supplier to purchase sufficient ingredients, and if there is a price difference (Party B must buy at a higher price), Party A will be responsible for compensating the difference.

(ii) The breach and remedy agreement section in the contract helps the parties mitigate the risk of breach. This is an excellent clause that can help the parties limit non-compliance with the contract and disruptions during contract performance. The remedy section may include penalties that will be applied in case of breach. This significantly influences contract compliance, making the parties strive to fulfill and adhere to their obligations and agreements.

For example: In the contract, it is agreed: “If the customer fails to pay any amount due on the due date, the customer will pay late payment interest at the rate of…% per day on the overdue amount. Party A has the right to suspend product delivery to the customer until the overdue amount is fully paid. Party A has the right to use the customer’s discounts (if any) to offset these late payment penalties.” This will encourage the buyer not to violate the payment deadlines to avoid unfavorable consequences.

In the scattered terms within the contract and in Chapter 4, the obligations of the parties in the contract are also mentioned, and usually, commercial attorneys will provide sanctions along with the breach of obligation section. So why draft an additional breach of contract section when there is already a clause about obligations? A breach of contract is when one party fails to perform, performs incompletely, or performs incorrectly the obligation as agreed between the parties or as prescribed by the the 2005 Law on Commerce. Thus, breach of contract can be understood as:

(i) A breach of any obligation in the contract;

(ii) A breach of other regulations/agreements in the contract.

Thus, besides breaching obligations, other breaches outside of obligations, such as breaches of representations, warranties, or conditions precedent not being met, are also considered breaches of contract.

The most important goal when drafting a contract is to ensure the contract is performed as smoothly as possible. Therefore, when the breaches of contract are stated, the parties also need to agree on remedies when a breach occurs. These can be remedies prescribed by law or agreed upon by the parties to continue performing the contract, or in the worst-case scenario, to terminate the contract.

This chapter will cover the basic content including: Breach of contract (fundamental breaches in sales contracts, non-fundamental breaches in sales contracts, considering the special needs of customers); Remedies (events triggering remedies, ways to coordinate remedies, contract termination – an extreme remedy).

I. BREACH OF CONTRACT

Clause 12 of Article 3 of the the 2005 Law on Commerce (amended in 2017, 2019) stipulates: “A breach of contract is when one party fails to perform, performs incompletely, or performs incorrectly the obligation as agreed between the parties or as prescribed by this Law.” This can be considered a broader provision compared to the concept of “breach of obligation” in the the 2015 Civil Code, including:

(i) Breach of any obligation in the contract: The fundamental obligations we have mentioned in the contract, such as the obligation to deliver goods of the correct type, quantity, and quality; the obligation to pay…

(ii) Breach of other agreements in the contract: Other agreements such as representations, warranties, and conditions precedent. There are cases where breaching these agreements also affects the performance of the contract. For example, the seller warrants that “the goods under the contract are legally owned by the seller, are not in dispute with a third party, and are not subject to any enforcement measure to ensure execution of a judgment,” but during contract performance, a dispute over the ownership of the goods arises, leading to the contract being unable to be performed. Clearly, this is the seller’s fault for breaching the warranty of the legality of the goods ownership, and this is also considered a breach of contract.

(iii) Breach of legal provisions: This can include cases such as: The contracting party lacks the authority to enter into the contract, violating the form of the contract concluded, the contract’s subject matter is prohibited by law, or the content of the contract signed by the parties does not ensure the principles of voluntariness, equality, and honesty…

The the 2005 Law on Commerce (amended in 2017, 2019) does not detail specific acts of breach of contract, so reference can be made to the Principles of International Commercial Contracts (PICC) to identify the following acts by the breaching party (parties):

  1. One party fails to perform its obligations. This could be a case where one party does not perform any obligation under the contract or only performs part of the obligation, but the remaining part still affects the interests of the party with the right. For example, after signing the sales contract, the seller does not deliver the goods, or the buyer receives the goods but does not fulfill the payment obligation.
  2. The breach is due to incorrect performance of the obligation. In this case, the breaching party has prepared the conditions and performed the tasks it committed to, but the performance does not match the agreement established by the parties. For example, delivering goods of incorrect type, quantity, or quality.
  3. The breach is due to a delay in performing the obligation. This is different from failing to perform the obligation on time, and the parties need to distinguish this to clarify responsibility when a breach occurs. In this case, one party does not perform the obligation on time and has taken no actions to prepare for contract performance. In contrast, in the case of delayed performance, the breaching party has taken some steps to prepare for its obligation performance and genuinely wishes for the contract to be performed well but is unable to do so due to objective obstacles.

In the breach of contract section, it is usually divided into “fundamental breach” and “non-fundamental breach.” This distinction is significant in deciding which remedies to apply when a breach occurs.

According to the provisions of the the 2005 Law on Commerce (amended in 2017, 2019), a fundamental breach is a breach of contract by one party that causes damage to the other party to the extent that the other party does not achieve the purpose of entering into the contract.

When a fundamental breach occurs, the buyer has the right to apply certain remedies under the the 2005 Law on Commerce without the need for the parties to agree in the contract, such as: suspension of contract performance, termination of contract performance, cancellation of the contract, compensation for damages, and specific performance of the contract… In fundamental breaches, there must be damage that causes the other party not to achieve the purpose of entering into the contract.

The the 2005 Law on Commerce (amended in 2017, 2019) also does not clearly explain what constitutes not achieving the purpose of entering into a contract. This issue is specifically addressed in the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG). Article 25 of the CISG stipulates: “A breach of contract committed by one party is a fundamental breach if it causes such detriment to the other party as substantially to deprive them of what they are entitled to expect under the contract unless the party in breach did not foresee and could not reasonably have foreseen such a result.”

Accordingly, a fundamental breach is determined based on the following factors: (1) There must be a breach of contractual obligations; (2) That breach of contractual obligations must result in the other party losing what they expected (hoped to gain) from the contract; (3) The breaching party could not foresee the consequences of the breach.

From this, we can identify the elements that constitute a fundamental breach of contract:

  1. There is a breach of contractual obligations: The most important factor in determining the level of breach in the concept of “fundamental breach” is the existence of a breach of obligation that can arise from the contract (such as the parties’ agreement) or from the CISG provisions (e.g., Clause 2 of Article 46 of the CISG). Without a breach of obligations, Article 25 cannot be invoked and applied.
  2. Significant damage: A breach of contract can either result in damage or not. In practice, there are cases where a breach of contract occurs, but no damage ensues. However, according to the provisions of Article 25 of the CISG, the damage caused by the breach of contract is a mandatory, prerequisite factor that constitutes the fundamental nature of the breach of contract, and that damage must be significant.
  3. Foreseeability of the consequences of the breach (ability to foresee):A breach cannot be deemed fundamental if the breaching party did not foresee the significant consequences and a reasonable person in a similar situation would not have foreseen it either. Therefore, Article 25 of the CISG requires an assessment of the subjective awareness and thoughts of the breaching party and simultaneously comparing it with the awareness and knowledge of a neutral party in similar conditions. This objective assessment requirement is mandatory under Clause 2 of Article 8 of the CISG.

For non-fundamental breaches, the application of commercial sanctions is as follows: The non-breaching party may not apply sanctions such as suspending contract performance, terminating contract performance, or canceling the contract for non-fundamental breaches.

The above provides a method to identify cases of breach of contract according to legal provisions. The task of the contract drafter is to anticipate all possible breaches reflected in the contract to avoid risks for the client. Regarding drafting techniques, we cannot list all breaches, but we can apply the following methods:

Method 1: The drafter should communicate and ask the client’s expectations: When entering into this transaction, what does the client expect the most? The thinking process is: The situations where the other party prevents the client from achieving their expectations are considered breaches of contract (of course, considering exempted liability factors).

For example: The client is an investor entering into a cooperation contract, and their biggest expectation is “profit.” So, what situations prevent the client from achieving this expectation? What factors will affect achieving the client’s desired “profit”? We can list the affecting situations such as:

– Business losses (This is not a breach of contract).

– The other party fails to perform their committed tasks (This is a breach of contract).

Method 2: For more complex contracts or fields unfamiliar to the drafter, the drafter can use the “storytelling” drafting technique. This means the drafter can ask the client to recount the requirements, processes to execute the specific contract, and identify any “roadblocks” in these stages to understand the contract’s purpose and foresee potential risks.

For example: In a service contract for creating advertisement videos, we can ask the client to describe each execution stage, their expectations, and requirements for each stage, such as: Campaign background, campaign goals, target customers, and the message to be conveyed… From there, the drafter can bind the obligations and requirements for the service provider to avoid risks (script requirements, personnel, props, costumes…) to help the client achieve their initial expectations.

II. REMEDIES

Identifying breach clauses is essential, but it is meaningless without incorporating corresponding remedies, as the ultimate goal for both parties is to continue the performance of the contract. Therefore, it is necessary to propose remedies for the parties to achieve their contractual desires.

Depending on which party is the aggrieved party, the parties can choose different remedies. The drafter can refer to various remedies categorized as follows:

– Remedies prescribed by law (no agreement required): Specific performance, compensation for damages, suspension of contract performance, cancellation of the contract, late payment interest…

– Remedies by agreement (require agreement to be applied): Penalties for breach, advance payment…

– Remedies that can still maintain the contract: Specific performance, compensation for damages, penalties for breach, late payment interest…

– Remedies affecting contract performance: Suspension, termination, cancellation of the contract…

  1. Events Triggering Remedies

Each remedy applied will have its own conditions and grounds for application. However, to activate the remedies, the following general provisions are required:

The contract must be effective: This can be considered a prerequisite condition because only when the contract is effective can the agreement of the parties be considered. The effectiveness of the contract is not mentioned in the the 2005 Law on Commerce (amended in 2017, 2019) but can refer to the provisions of the the 2015 Civil Code. The conditions for the effectiveness of commercial contracts are specifically stipulated as follows:

– Conditions regarding the contract parties: The parties must be traders and the contract must be signed by the trader’s representative (according to law or authorized representative).

– Conditions regarding the voluntariness of the parties: A contract is only effective if it is the result of the true intentions of the parties. When concluding a commercial contract, the parties must be completely voluntary, without pressure from others such as pressure from partners or third parties. Some cases of violating the principle of voluntariness include mistakes, deceit, or threats.

– Conditions regarding the content and purpose of the contract: The content of the contract is understood as the rights and obligations of the parties as expressed through the terms of the contract to reflect the purpose of entering into the contract. In principle, the content and purpose of the contract must not violate prohibitions of the law and must not contravene social ethics as stipulated in Article 123 of the the 2015 Civil Code.

– Conditions regarding the form of the contract: The form of the contract must comply with the legal provisions governing the contract. For a commercial contract to be effective, the content of the contract must be established in a form recognized by the governing law (oral, written, specific acts). Some cases where the law requires the contract to be made in writing include international sales contracts, commercial agency contracts…

There must be a breach of contract: The breach can be in the form of action or inaction violating the agreements in the contract.

There must be actual damage: This condition applies to the remedy of compensation for damages.

There must be a causal relationship between the breach and the actual damage: That is, the breach must be the direct cause of the damage, and the occurrence of damage must be inevitable for the remedy to be applied. In practice, one breach of contract can cause multiple damages, and one damage can result from multiple breaches.

If you need more consulting, please Contact Us at NT International Law Firm (ntpartnerlawfirm.com)

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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”

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