Author: TNTP LAW

Security collateral is a measure to ensure the fulfilment of obligations to return leased property, which is a movable property in a property lease contract. Additionally, security collateral aims to ensure the fulfilment of payment obligations and the obligation to return the property either in value or with an equivalent valuable item in case the lessee fails to return the leased property. In this article, TNTP will present the basic content you need to know about the measure of securing the performance of obligations: the security collateral measure.

1. Concept of security collateral

Security collateral is an act whereby a lessee of a movable property transfers a sum of money or precious metals, gems or other valuable things (hereinafter referred to as security collateral property) to the lessor for a specified time limit to secure the return of the leased property.

Thus, the security collateral measure is only used to secure the obligation to return leased movable property. This means that parties are not allowed to use collateral for obligations related to any other types of contracts, including real estate lease contracts.

Collateral assets do not include real estate, negotiable papers, and property rights. Typically, the value of collateral assets is equal to the value of the leased property, but it can be lower or higher depending on the agreement of the parties.

2. Conditions for the effectiveness of collateral

The collateral contract is considered a civil transaction, so for this contract to become effective, the parties must comply with the provisions of Article 117 of the Civil Code regarding the conditions for the effectiveness of civil transactions. According to this, the participants in the contract must have legal capacity, civil conduct capacity compatible with the established contract, voluntary participation, and a purpose and content of the contract that does not violate legal prohibitions and is not contrary to social ethics.

3. Rights and obligations of parties putting up collateral

Parties putting up collateral have the rights and obligations to:

• Request parties receiving collateral to cease extracting, using or establishing civil transactions for security collateral properties; preserve and keep security collateral properties from losing value;

• Exchange and replace security collateral properties or include security collateral properties in other civil transactions when parties receiving security collateral agree;

• Pay for parties receiving security collateral appropriate costs for managing, and preserving security collateral properties. Appropriate costs are necessary, legitimate expenditures which, in normal conditions, parties receiving security collateral must pay for to prevent security collateral properties from going missing, being damaged or destroyed;

• Register property ownership or fulfil other obligations as per the law to enable parties receiving security collateral to possess security collateral properties in case the collateral giver violates commitments regarding contracting or contract performance;

• Other rights and obligations agreed upon or prescribed by the Civil Code or the relevant law provisions.

4. Rights and obligations of parties receiving collateral

Parties receiving collateral have the rights and obligations to:

• Request parties putting up security collateral to cease exchanging, replacing or establishing other civil transactions with security collateral properties without the consent of parties receiving security collateral;

• Possess security collateral properties in case the collateral giver violates commitments regarding contracting or contract performance;

• Preserve security collateral properties;

• Refrain from establishing civil transactions, extracting, or using security collateral without consent of properties of parties putting up security collateral;

• Other rights and obligations agreed upon or prescribed by the civil code or the relevant law provisions.

5. Handling security collateral properties

According to Article 2 of Article 329 of the Civil Code, in the case of returned leased property, the lessee receives the security collateral properties after paying the rent; if the lessee does not return the leased property, the lessor has the right to demand the return of the leased property; if the leased property is no longer available for return, the security collateral properties belong to the lessor.

In addition to the methods of handling security collateral properties as prescribed by law, the parties can also agree on other methods to handle security collateral properties. For example, in case the lessee does not return the leased property, the lessor has the right to retain the security collateral properties and demand compensation for damages, paying the difference if the value of the security collateral properties is lower than the leased property, etc.

This article, “Security collateral – Basic content you need to know” is presented by TNTP. In case of any issues requiring discussion, please contact TNTP for timely assistance.

Best regards,

A deposit contract is a form of agreement aimed at binding parties in various civil transactions. In practice, parties may use deposits to secure the signing of a land use rights transfer contract, a sale and purchase agreement, a lease agreement, and more. In this article, TNTP will present the essential points that parties should consider when drafting a rental deposit contract.

1. Information of the parties

A rental deposit contract should clearly and completely express the information of the involved parties, including the depositor and the depositary. If individuals are involved, detailed information such as full name, ID card information, contact address, phone number, email, etc., should be provided. If legal entities are involved, details such as the name, main office address, tax identification number, and information about the legal representative or authorized signatory should be supplied.

2. Purpose of the deposit

In this section, parties need to agree on the purpose of the deposit. For example, the deposit could be to ensure the signing of a lease agreement. Additionally, basic information about the property for rent should be stipulated, including the type of property, location, address, dimensions (total floor area, total land use area), structure, number of floors, and intended use.

3. Deposited property

Parties need to specify the type of property being deposited, documentation related to the property (if any), and the agreed-upon total value of the deposited property. It’s crucial to note that the deposited property can only be money or other valuable items such as precious metals, gemstones, or other valuable objects. Typically, the deposited property is money, and in this case, the parties need to specify the exact amount.

4. Method and deadline for deposit payment

Parties should stipulate the payment method and the deadline for deposit payment. Payment methods can include cash or bank transfers. In the case of a bank transfer, specific account information of the depositary should be provided. Regarding the payment deadline, parties need to define a specific timeframe within which the depositor must make the payment to the depositary, for example, within 05 days from the date of signing the deposit contract.

5. Deposit agreement

Parties need to include details such as the rental period, rental price, and the execution of the lease agreement.

For rental price details, the parties should specify whether the rental price includes value-added tax and other taxes or fees such as electricity, water, telephone, fax, internet, sanitation service fees, etc., and determine the responsibility for paying these taxes or fees.

Concerning the execution of the lease agreement, parties need to stipulate that within a specific timeframe, the parties must sign the lease agreement with conditions and terms inherited from the agreement of this deposit contract.

Parties should agree on the legal consequences if one of the parties fails to sign the lease agreement. For instance, if the depositor fails to sign the agreement within the specified timeframe, it is considered a refusal to enter into the lease agreement, and the depositary has the right to lease to another party. In such a case, the deposited amount is not refunded. Conversely, if the depositary fails to sign the lease agreement, they must refund the deposited amount and an additional amount equal to the deposited amount to the depositor.

Parties need to agree on how to handle the deposited amount after signing the lease agreement. Options include deducting the deposited amount from the payment under the lease agreement or returning it when the parties sign the lease agreement.

6. Force majeure event

For this type of contract, parties should agree on a force majeure clause, defining a force majeure event, the responsibilities of the party encountering a force majeure event, and the exoneration of liability for the party facing a force majeure event.

7. Effectiveness and termination of the contract

Parties need to agree on the contract’s effective period, the cases in which the contract will terminate, and the legal consequences when the contract is terminated. For example, parties may agree on circumstances leading to early termination, such as i) mutual agreement in writing, ii) if any contract violation is not rectified within a specific timeframe from the date of receiving a rectification request from the non-violating party. In this case, the non-violating party has the right to unilaterally terminate the contract by sending a written notice to the violating party; iii) if a force majeure event lasts beyond a specified number of days from the occurrence date, this contract can be terminated based on written notice from one party to the other.

8. Dispute resolution

In this clause, parties need to agree on dispute resolution methods such as negotiation, mediation, dispute resolution in court, or arbitration (with attention to conditions for arbitration). Typically, parties may choose negotiation for dispute resolution when a dispute arises. In case negotiation is unsuccessful, the parties may initiate legal proceedings by filing a lawsuit in a court with jurisdiction over dispute resolution.

The above are the contents of the article “Instructions for drafting the basic contents of a rental deposit contract”. It is hoped that these insights are helpful for those interested in this matter.

Best regards,

Compensation for Damages (CFD) resulting from a contractual breach is a crucial legal measure that plays a compensatory role for the damaged party (the entitled party) in the aftermath of a breach of contract. To apply the compensation for damages appropriately, considering its purpose and legal regulations, parties need to understand aspects such as the compensable damages, grounds for applying CFD, determining the amount of CFD, cases of exoneration from CFD, etc. In this article, TNTP will present the fundamental points that parties should consider when applying compensation for damages.

1. Concept of compensation for damages

Compensation for damages involves the party in breach compensating for the losses caused to the violated party as a result of the breach of the contract.

The value of CFD includes the actual losses directly borne by the violated party due to the actions of the breaching party and the direct benefits that the violated party would have rightfully enjoyed if not for the breach.

2. Basis for the emergence of compensation for damages responsibility

Except for cases of exoneration specified in Article 294 of the Commercial Law (2005), CFD responsibility arises when the following elements are present:

• There is a breach of the contract. A breach of the contract occurs when one party fails to perform, performs inadequately, or performs incorrectly the obligations agreed upon or as stipulated by the Commercial Law.

• There is actual damage. Damage refers to any losses that a person must bear due to the violation of their legal rights, property, and lawful interests. In other words, damage is any negative change in the rights, property, and lawful interests of the entitled party.

• The breach of the contract is the direct cause of the damage.

3. Obligations of the party requesting compensation for damages

• Obligation to prove the losses

The party requesting CFD must prove the losses, the extent of losses caused by the breach, and the direct benefits that the violated party would have rightfully enjoyed if not for the breach.

• Obligation to limit the losses

The party requesting CFD must apply reasonable measures to limit the losses, including the losses related to the direct benefits that would have been rightfully enjoyed due to the breach. If the party requesting CFD does not apply these measures, the breaching party has the right to request a reduction in the value of CFD by the amount of losses that could have been reasonably limited.

4. Rights of the parties when applying compensation for damages

• Right to demand interest for late payment

If the breaching party delays payment for goods or services or other reasonable costs, the violated party has the right to demand payment of interest on the delayed amount at the overdue interest rate prevailing in the market at the time of payment, corresponding to the period of delay. This is unless there is a different agreement or legal provisions.

When determining the interest rate for late payment, the Court relies on the average overdue interest rate prevailing in the market of at least 03 (three) commercial banks (Vietnam Joint Stock Commercial Bank for Foreign Trade, Vietnam Joint Stock Commercial Bank for Industry and Trade, Vietnam Bank for Agriculture and Rural Development, etc.) with headquarters, branches, or transaction offices in the province or centrally-run city where the Court is resolving or adjudicating, at the time of payment (the time of first-instance trial) to decide the late payment interest rate, except in cases where the parties have a different agreement or the law stipulates otherwise.

• Right to demand compensation for damages after applying other sanctions

A party does not lose the right to claim compensation for damages for losses resulting from the breach of the contract of the other party when other sanctions have been applied.

5. Relationship between sanctions for violation and compensation for damages

• In cases where the parties do not agree on sanctions for violation, the violated party has the right to demand CFD, except as otherwise provided in the Commercial Law.

• In cases where the parties agree on sanctions for violation, the violated party has the right to apply both sanctions for violation and compensation for damages, except as otherwise provided in the Commercial Law.

The above is the article “Commercial remedy: Imposing compensation for damages” that TNTP is providing to its readers. In case of any issues requiring discussion, please contact TNTP for timely assistance.

Best regards,

The 2015 Civil Code stipulates that Lien on property is a measure to ensure the fulfillment of obligations. Lien on property is a legal mechanism to protect the party entitled to payment in contracts where both parties have obligations. In this article, TNTP will present the basic content you need to know about the measure of securing the performance of obligations: the measure of Lien on property.

1. Concept of Lien on property

Lien on property means that the obligee (hereinafter referred to as the lienor) who is legally possessing the property being an object of a bilateral contract is entitled to retain the property when the obligor fails to perform the obligations or has performed the obligations not strictly as agreed upon. A bilateral contract is a contract in which each party has obligations to the other.

2. Effectiveness of Lien on property

• The moment of binding effectiveness among parties is when one party violates an obligation in the contract, and the subject of the contract is the property of the breaching party.

• The moment of counteractive effectiveness: Article 347(2) of the 2015 Civil Code stipulates that Lien on property becomes counteractively effective against third parties from the moment the holder seizes the property. According to this regulation, the counteractive effectiveness against third parties of the holder is determined based on the actual possession of the property, entirely independent of registering the Lien on property measure. However, the actual possession of the property begins from the moment the obligated party fails to perform or improperly performs its obligation, so the binding effectiveness among parties and counteractive effectiveness arise simultaneously.

3. Rights and obligations of the lienor

Lienor has the following rights and obligations:

• Request the obligor to fulfill completely the obligations arising from a bilateral contract.

• Require the obligor to pay expenses necessary for taking care of and keeping such property.

• Exploit the property to obtain yield and income therefrom with the consent of the obligor. The value of benefits from the exploitation of the property shall be offset against the value of the obligation of the obligor.

• Take care and preserve the property.

• Do not change the status of the property.

• Do not transfer or use the property without the consent of the obligor.

• Return the property upon the complete performance of the obligation.

• Compensate for lost or damaged property.

4. Lien right execution

• Lienors shall only hold properties or parts of properties directly related to infringed obligations. In case subjects of infringed obligations include multiple properties, lienors have the rights to select properties to hold.

• In case subjects of infringed obligations are works that create products, lienors shall hold created products or materials necessary for production. In case subjects of infringed obligations are works that do not create products, lienors shall hold tools and equipment handed over by obligors to conduct tasks.

• In case held properties generate profit that is not a result of extraction of held properties, lienors must hand the generated profit to obligors. In case lienors are managing profit where subjects of obligations have been handed over to obligors before the obligors infringe obligations, lienors shall hold the profit until obligations to the lienors have been fulfilled.

5. Termination of lien on property

A lien on property shall terminate in any of the following cases:

(i) The lienor actually no longer retains the property;

(ii) Contracting parties shall agree on another security instead of retain on property;

(iii) Upon the complete performance of the obligation;

(iv) The property ceases to exist;

(i) As agreed by the parties.

6. Lien right guarantee

• In case competent agencies or competent individuals as per relevant law provisions request lienors to hand over held properties to settle the case as per the law, handing over of held properties in such case shall not at as the basis for termination of lien in properties.

• In case property owners or other competent individuals include held properties in civil transactions, lienors shall not have obligations to hand properties to parties that participate in the civil transactions, except for following cases:

(i) The obligation to lienors has been fulfilled;

(ii) The obligation towards the holder has not been fulfilled, but falls under the termination of Lien on property as stipulated in cases (i), (ii), or (v) mentioned in Part 5 of this article.

This article, “Lien on property – Basic content you need to know” is presented by TNTP. In case of any issues requiring discussion, please contact TNTP for timely assistance.

Best regards,

Guarantee is one of the security measures stipulated in the obligations and contracts under the Civil Code. The creditor undertakes to fulfil an obligation on behalf of the party obligated under the agreement if the latter fails to fulfil or improperly fulfils that obligation. In this article, TNTP will present the essential information about the security measure enforcing obligations: the guarantee.

1. Concept of guarantee

Guarantee means an undertaking made by a third person (from now on referred to as the guarantor) to an obligee (from now on referred to as the creditor) to perform an obligation on behalf of an obligor (from now on referred to as the principal debtor) if the obligation falls due and the principal fails to perform or performs the obligation incorrectly.

The parties may agree that the guarantor shall only be obliged to perform the obligation if the principal debtor is incapable of performing it.

2. Guarantee agreement

• The guarantor may negotiate with the creditor on applying security measures using assets to ensure the fulfilment of their guarantee obligation.

• In cases where the guarantor commits to performing tasks on behalf of the guaranteed party, the guarantor must have the legal capacity for civil acts and possess the civil behavioural capacity appropriate to the guaranteed obligation.

• Guarantee agreements can be expressed through a separate guarantee contract, a letter of guarantee, or other forms of guarantee commitment.

3. Conditions for the effectiveness of a guarantee

Since a guaranteed contract is considered a civil transaction, for this contract to take effect, the parties must adhere to the provisions of Article 117 of the Civil Code regarding the conditions for the effectiveness of civil transactions. Participants in the contract must have legal capacity, civil behavioural capacity suitable for the established contract, and voluntary participation in the contract, and the contract’s purpose and content must not violate legal prohibitions or social morality. Guarantee contracts must comply with the regulations of the Civil Code and relevant laws.

4. Scope of guarantee

• A guarantor may guarantee an obligation in whole or in part on behalf of a principal debtor.

• A guaranteed obligation includes interest on the principal, penalties and compensation for any damage and interest on late payment unless otherwise agreed.

• The parties may agree on using security as property to secure the performance of a guaranteed obligation.

• If the obligation to guarantee is an obligation arising in the future, the scope of the guarantee is exclusive of any obligations arising after the guarantor being a natural person dies or the guarantor being a juridical person ceases to exist.

5. Termination of guarantee

A guarantee shall terminate in any of the following cases:

• The obligation secured by the guarantee terminates.

• The guarantee is cancelled or is substituted by another security.

• The guarantor has satisfied the guaranteed obligation.

• As agreed by the parties.

The above is the article “Guarantees – Basic content you need to know” that TNTP is sending to its readers. In case of any issues requiring discussion, please contact TNTP for timely assistance.

Best regards,