THE INADEQUACIES OF REGULATIONS ON MANDATORY CONTENT IN STANDARDIZED HOUSING SALE CONTRACTS FROM THE PERSPECTIVE OF BUYER PROTECTION

 

THE INADEQUACIES OF REGULATIONS ON MANDATORY CONTENT IN STANDARDIZED HOUSING SALE CONTRACTS FROM THE PERSPECTIVE OF BUYER PROTECTION

THE INADEQUACIES OF REGULATIONS ON MANDATORY CONTENT IN STANDARDIZED HOUSING SALE CONTRACTS FROM THE PERSPECTIVE OF BUYER PROTECTION

THE INADEQUACIES OF REGULATIONS ON MANDATORY CONTENT IN STANDARDIZED HOUSING SALE CONTRACTS FROM THE PERSPECTIVE OF BUYER PROTECTION

Nguyễn Phan Phương Tần

Ph.D., Lecturer, Faculty of Economic Law, University of Economics and Law, VNU-HCM

ABSTRACT

Regulations on mandatory content in real estate business contracts in general and standardized housing sale contracts, in particular, have been widely applied in real estate business law and several other specialized laws. This study debates the effectiveness of these regulations from the perspective of protecting the buyer’s rights. The author concludes that the regulations have several inadequacies and potentially harm buyers in housing sale transactions between investors and customers.

Keywords: mandatory content, mandatory clauses, housing sale contract, homebuyer

I. PRINCIPLE OF CLEAR LANGUAGE AND REGULATIONS ON MANDATORY CONTENT IN STANDARDIZED HOUSING SALE CONTRACTS BETWEEN INVESTORS AND BUYERS

  1. Principle of Clear Language in Contract Law

The principle of clear language (plain meaning rule) is a rule in the interpretation of statutes or contracts that was widely applied in the 19th and 20th centuries in English and American case law (Murphy, 1975). This rule means that when the language of a contract is unambiguous and clear, the interpretation of the contract’s meaning must be determined based on the language within the contract itself rather than external evidence. This rule emphasizes respecting the content within the contract that the parties have agreed upon. Courts base their resolutions of disputes on the words and agreements within the contract.

This principle requires the parties in a contract to carefully and thoroughly consider during the negotiation and drafting stages. The parties will have to incur more costs at this stage to ensure they clearly understand the agreement and select the most necessary clauses to include in the contract, so that when violations or disputes arise, the contract’s content will be the prioritized basis for the court to resolve the issues for the parties. Transaction costs incurred may include negotiation costs, attorney consultation fees, drafting costs, and even opportunity costs and time spent reading the draft contract.

Additionally, this principle goes hand in hand with the Doctrine of Contra-Proferentem, which is applied in the interpretation of standardized contracts. According to Holmes and Thurman (1987), contrary to the case where the contract language is clear (since language is not always univocal), if the contract has ambiguous clauses, the interpretation should favor the party that did not draft the standardized contract.

Based on these principles and doctrines, real estate business law and consumer protection law have established specific regulations governing housing sale contracts between investors and their customers.

  1. Legal Regulations on Mandatory Content in Standardized Housing Sale Contracts between Investors and Customers

Firstly, the customers engaged in housing sale transactions within the scope of this study are limited to non-commercial buyers, as understood under Clause 1 Article 3 of the 2023 Law on Consumer Rights Protection No. 19/2023/QH15 issued by the National Assembly on June 20, 2023 (2023 Law on Consumer Rights Protection).

Housing sale contracts will be entirely drafted by the investors, while customers usually will not have the opportunity to renegotiate or adjust the standardized clauses in these contracts. This characteristic aligns with the concept of standardized contracts as stipulated in Article 405 of the 2015 Civil Code.

However, housing sale contracts between investors and customers differ from typical consumer contracts. In these transactions, transaction costs, or more specifically, error costs, will be significantly higher than in ordinary consumer contracts due to the considerably higher value of housing compared to typical consumer goods transactions. Although the likelihood of disputes in the housing market is lower compared to other consumer goods and services markets such as automobiles, motorcycles, transportation services, or telecommunications, when disputes do arise, the costs of resolving disputes or the damages caused can be substantial.

The author argues that, aiming to reduce transaction costs and dispute resolution costs, lawmakers have based themselves on the principle of clear language to establish regulations on mandatory content in real estate business contracts in general, and housing sale contracts between investors and buyers in particular.

According to Article 46 of the 2023 Law on Real Estate Business No. 29/2023/QH15 issued by the National Assembly on November 28, 2023, which comes into effect on August 1, 2024, housing sale contracts must include the following content:

(i) Names and addresses of the parties;

(ii) Information about the real estate;

(iii) Sale price;

(iv) Method and term of payment;

(v) Bank guarantee for the investor’s financial obligations in the case of future housing sales;

(vi) Timeline for the delivery and receipt of the real estate and accompanying documents;

(vii) Warranty;

(viii) Rights and obligations of the parties;

(ix) Liability for contract breaches;

(x) Penalties for contract breaches;

(xi) Cases of contract termination, cancellation, and handling measures;

(xii) Dispute resolution methods; and

(xiii) Effective date of the contract.

Additionally, as consumer contracts, housing sale contracts between investors and customers must also ensure the inclusion of mandatory content as stipulated in Clause 3 Article 23 of the 2023 Law on Consumer Rights Protection. This includes content such as the responsibility to protect customer information and cases of force majeure.

The regulations on mandatory content/clauses in contracts bring about certain benefits:

Firstly, ensuring the obligation of the investor to provide information and limiting the impact of asymmetric information.

The subject of the contract is housing, which can be existing housing or future housing. This may require the buyer to spend more time and effort to investigate and verify its legality. Additionally, the investor having complete control over drafting the contract may increase the risk of the buyer not being able to access the necessary information to make a decision to enter into the contract, resulting in subsequent damages.

For example, the dispute over the apartment sale contract between the buyer and the investor in Judgment No. 106/2015/DS-PT was tried on appeal by the People’s Court of Ho Chi Minh City on January 21st, 2015. In this case, the buyer sued the investor for late delivery of the apartment as per the signed contract. Therefore, the buyer requested the cancellation of the contract and demanded the return of the paid amount and compensation for damages.

However, during the dispute resolution process, evidence showed that the investor had signed the apartment sale contract with the buyer before obtaining approval from the City People’s Committee and before constructing the project’s foundation, violating the sales conditions stipulated by law. As a result, the appellate court declared the entire apartment sale contract void, and the buyer was only refunded the paid amount without any related compensation for damages.

In this case, it can be seen that the buyer was not provided with complete information about the project’s legal status, leading to the conclusion of a void contract. The legal consequences of a void contract are significantly more detrimental to the buyer compared to the seller simply breaching the obligation of late delivery if the contract were valid.

Secondly, the parties to the contract and the dispute resolution authorities will save significant time related to providing evidence to prove the agreements between the parties.

If the contract does not stipulate all the necessary clauses, the parties will need to spend considerable time and cost studying the applicable laws during contract performance. They will also need to collect and store evidence to prove their claims in case of disputes. If the contract specifies all necessary clauses for the transaction, contract interpretation will thus be quicker and less costly.

However, these mandatory regulations may pose certain difficulties and risks for buyers if they do not understand their legal nature correctly.

II. THE INADEQUACIES OF REGULATIONS ON MANDATORY CONTENT IN STANDARDIZED HOUSING SALE CONTRACTS BETWEEN INVESTORS AND CUSTOMERS

  1. Inadequacies in Determining the Validity of Contracts

The 2023 Law on Real Estate Business and the 2023 Law on Consumer Rights Protection both mandate that housing sale contracts between investors and customers must include specific content/clauses. The question arises, what are the legal consequences if the standardized contract drafted by the investor for the customer lacks these mandatory contents/clauses? Will the court recognize the legal validity of the contract if its content lacks one or several statutory elements?

Firstly, regarding the conditions for a contract’s validity. According to the provisions of Article 117 and Article 408 of the 2015 Civil Code, a contract will be invalid if it violates any of the following conditions:

(i) The participating parties do not have the capacity to enter into and perform the contract;

(ii) The content or purpose of the contract violates prohibitions of the law or contravenes social ethics;

(iii) The contract must be established on a voluntary basis;

(iv) Compliance with formal conditions if the law requires this condition; and

(v) The object of the contract must be executable.

Thus, among the conditions ensuring the validity of a contract, none of them mention that the lack of a specific content in the contract will lead to invalidity.

Some viewpoints suggest that this case can be considered a violation of the law’s prohibitions. From this perspective, a violation of the law’s prohibitions can be accounted for when the law requires a mandatory action, expressed “within the framework of an imperative norm,” that the subject does not perform (Đoàn Thị Phương Diệp, 2019). If the law mandates that the contract must include certain clauses and the parties do not specify them fully, the contract can be invalid.

This viewpoint has been applied by the court in Judgment No. 10/2018/DS-ST regarding a deposit contract dispute adjudicated by the People’s Court of Đức Hòa District, Long An Province, on January 19th, 2018. In this dispute, the buyer and seller drafted a receipt for the deposit but did not set a specific date for entering into the land use rights transfer contract. The deposit receipt only stated, “on the day the red book is available for notarization, an additional 270,000,000 VND will be paid.”

Therefore, the court declared the deposit contract between the buyer and the seller invalid, stating that “The content of the ‘Receipt for Deposit’ dated May 30th, 2017, made by Ms. T and Ms. C only shows the amount of the deposit received and the obligations of the parties when not performing the transfer contract but does not specify the exact date (day, month, year) for the two parties to go to the Notary Office to sign the next transfer contract, which violates the contract’s content according to Clause 1, Article 328 of the 2015 Civil Code.” Thus, the lack of mandatory content in a contract can also lead to the contract being invalid.

The author does not agree with this viewpoint. According to Article 123 of the 2015 Civil Code, the prohibition of law refers to specific acts that the law prohibits the subjects from doing. This means that Vietnamese law views prohibitions as actions that are not allowed, rather than mandatory actions that subjects must perform. Moreover, if a contract lacks a certain content that the law prescribes, it can still be executed based on the legal provisions.

Secondly, based on contract theory, the clauses in a contract can be temporarily divided into three types: essential clauses, common clauses, and discretionary clauses (Đinh Văn Thanh et al., 2018).

Accordingly, a contract cannot be performed if it lacks essential clauses. Thus, if essential clauses are missing, the contract cannot be considered concluded and, therefore, cannot take effect. Conversely, if only common clauses are missing, the contract can still be established and performed. In this case, the absence of common clauses does not affect the contract’s validity.

To distinguish between essential and common clauses, other sources of contract law beyond agreements are often relied upon, such as legal provisions, customs, practices, and usages. If, in the absence of agreements between the parties, these other sources can be applied as a basis for performance, then the content would be considered a common clause.

For example, the clause on the location of housing delivery. If the contract does not specify this, Clause 2(a) Article 277 of the 2015 Civil Code can be applied to determine the delivery obligation’s location, which is the place where the real estate is situated.

Similarly, in the case of the deposit contract mentioned in Judgment No. 10/2018/DS-ST, if the deposit contract does not specify the term, Clause 3 Article 278 of the 2015 Civil Code can be referred to for determining the time of obligation performance. The court’s declaration of the deposit contract’s invalidity is unfounded.

Thus, among the contents mandated by the 2023 Law on Real Estate Business and the 2023 Law on Consumer Rights Protection for housing sale contracts, parties in the transaction, as well as dispute resolution authorities, need to distinguish between essential clauses and common clauses to determine whether the absence of these contents leads to contract invalidity.

Moreover, the author argues that declaring a transaction such as housing sales, which have significant value, invalid simply because the contract document lacks certain clauses is wasteful and detrimental to the parties. Except in cases where the parties cannot provide evidence showing they have agreed upon the essential necessary contents as the basis for contract performance, only then should invalidity be declared. In cases where only common contents such as the parties’ information, liability for contract breaches, cases of contract termination, cancellation, sanctions, dispute resolution methods, force majeure events, or the effective date are missing, it should not be the basis for declaring the housing sale contract invalid.

  1. Inadequacies in Protecting the Buyer’s Rights When Disputes Arise

Article 46 of the 2023 Law on Real Estate Business mentions that penalty clauses for breaches are mandatory in housing sale contracts between investors and buyers. The author argues that this regulation is more harmful than beneficial to homebuyers.

In practice, disputes over standardized housing sale contracts show that, in most cases, penalty clauses in housing sale contracts between investors and buyers are only applied to penalize customers for payment violations. Very few cases penalize investors for delayed project delivery. This is often because the penalty clauses are drafted by investors, binding as many conditions as possible if customers want to demand penalties for contractual breaches by investors.

For example, in Judgment No. 123/2019/DS-PT regarding the dispute over an apartment sale contract adjudicated by the People’s Court of Hanoi on May 24th, 2019. Although the contract stipulated that the apartment delivery time was “expected in Q1/2016,” as of September 30th, 2017, the investor had not yet delivered the apartment. Therefore, the buyer sued, demanding that the investor pay a penalty for the delayed delivery at an interest rate of 0.05%/day as stipulated in the contract.

However, according to the agreement at point a, Clause 2, Article 12 of the Contract: “The buyer must make payments for the apartment according to the agreed schedule in the contract, but only if overdue by 180 days from the delivery date, the seller must bear the penalty for breaches.” Thus, the buyer must fulfill all payment obligations before the seller is required to deliver the apartment on schedule. Buyers cannot make payments if the seller does not issue a delivery notice for the buyer to make the final payment. Therefore, it is almost impossible for the buyer to penalize the seller.

Apart from the fact that current regulations on penalty clauses are still incomplete, mandating the inclusion of penalty clauses in housing sale contracts between investors and buyers contradicts the principle of freedom of contract for this type of clause. That is, penalties are not a default sanction for contract breaches. Penalties only arise if there is a prior agreement between the parties according to Article 418 of the 2015 Civil Code. Thus, the 2023 Law on Real Estate Business mandating this clause in contracts contradicts the principle of the 2015 Civil Code, benefiting the seller but not necessarily ensuring protection for homebuyers.

III. CONCLUSION

Thus, the 2023 Law on Real Estate Business’s attempt to include mandatory content can pose significant risks to the parties when they cannot agree on the application method. The most affected party is undoubtedly the homebuyer (consumer), as their ability to influence transaction content is very low. When disputes arise, they must incur significant costs to address them.

The author believes that the regulations on the content of housing sale contracts should only be recommendations. In cases where the contract lacks necessary content, which may risk leaving users without sufficient information to enter into the contract, the current registration mechanism can require supplementation.

In essence, mandatory clauses have long been regulated and widely applied, but in reality, the rights of buyers are still at risk of being violated. This means that lawmakers should cease the application of mandatory clauses to improve the situation.

REFERENCES

  1. Diệp, Đ. T. P. (2019). Pháp luật hợp đồng Việt Nam nhìn ở góc độ so sánh với luật Cộng hòa Pháp. Tạp chí Nghiên cứu Lập pháp, số 11(387).
  2. Holmes, E. M. & Thurman, D. (1987). A new and old theory for adjudicating standardized contracts, p. 365.
  3. Murphy, A. W. (1975). Old Maxims Never Die: The Plain-Meaning Rule and Statutory Interpretation in the Modern Federal Courts. 75 Colum. L. Rev. 1299.
  4. Merriam-Webster. Merriam-Webster.com Legal Dictionary. https://www.merriam-webster.com/legal/plain%20meaning%20rule. Accessed on June 6th, 2024.
  5. Thanh, Đ. V., Tuấn, N. M. (2018). Giáo trình Luật Dân sự Việt Nam, Tập II. NXB. Công An Nhân Dân, Hà Nội, p. 120.
  6. People’s Court of Đức Hòa District, Long An Province (2018), Judgment No. 10/2018/DS-ST regarding a deposit contract dispute, January 19th, 2018.
  7. People’s Court of Hanoi (2019), Judgment No. 123/2019/DS-PT regarding the dispute over an apartment sale contract and the penalty for late delivery, May 24th, 2019.
  8. People’s Court of Ho Chi Minh City (2015), Judgment No. 106/2015/DS-PT regarding the dispute over an apartment sale contract, January 21st, 2015.

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