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.