When concluding a contract, the contract often contains sanctions provisions to bind the parties to properly and fully perform their obligations as stipulated. Specifically, if a party breaches the contract, the aggrieved party will have the right to request the breaching party to pay the agreed penalty and compensate for damages arising from the breach, this is called “compensation for contract damages”. In addition, in civil law, there is a provision for “compensation for non-contract damages”. These are two concepts that many people do not understand and clearly distinguish. Therefore, in this article, TNTP will clarify these two issues through the analysis below.
1. The concept of damage
• According to the common definition, damage can be understood as loss of life, physical or spiritual property.
• Pursuant to Article 361 of the Civil Code 2015, the concept of Damage is defined as follows:
– Damage caused by breach of obligation, namely material damage and spiritual damage.
– Material damage means those material losses that include property and can be identified, measured to have reasonable solutions to prevent and overcome the losses.
For example: A comes to B’s house to play and breaks B’s valuable decoration. In this case, it can be understood that B is suffering property loss (or general physical damage).
– Spiritual damage means spiritual loss including life, body, health, honor, dignity, reputation, and other personal benefits of an entity.
For example: A and B are driving on the road together. Because A is speeding, an accident occurs, causing B to break his leg and suffer serious injuries. In this case, it can be understood that B is suffering loss of life, body, and health (or general spiritual damage).
2. Distinguish between “compensation for contractual damages” and “compensation for non-contractual damages”
a) Similarities
Compensation for contractual damages and Compensation for non-contractual damages have the following in common:
• Are the acts of overcoming the consequences when the injured party is affected by the damaging act causing physical or spiritual loss.
• There is a causal relationship between the damaging act and the consequences of the damaging act.
• When damage occurs, the parties can agree on the level of compensation for damages.
• Only arises when actual damage occurs and the injured party is affected by the damaging act.
b) Differences
(i) Regarding the basis for compensation:
• Compensation for contractual damages: Is in the content or sanction clause stipulated in the contract. This will arise only when there is an agreement on damages in the contract and the violation of the agreement has occurred. It can be understood that damages are not a forced condition and when a violation occurs (regardless of whether there are consequences of damage or not), the liability to compensate for damages will arise.
For example: Company A is the supplier of goods to Company B according to the Purchase Orders. However, Company A fails to deliver the goods on time according to the Contract, causing Company B to import goods from a third party at a higher unit price than Company A’s unit price and not be able to produce enough products according to the Orders.
In this case, Company A’s failure to deliver goods on time as per the Contract is considered a breach of agreement, resulting in Company B suffering financial losses when having to purchase at a higher price from a third party (direct losses) and affecting its business reputation and product brand with customers (indirect losses).
• Compensation for non-contractual damages: Only arise when a civil violation occurs, often occurring in everyday life. This civil violation does not exist in any previously concluded contract between the person causing the damage and the person suffering the damage.
For example: A was driving on the road in accordance with traffic regulations. At an intersection, C drove in a drunken state, crossed the red light, and crashed into A’s car while passing through the intersection, causing serious damage to A’s car and A was injured.
In this case, A and C did not know each other before and there was no contract between the two of them before. Therefore, neither of them knew in advance that the accident would happen. In particular, C participated in traffic while drunk and not sober, violating traffic laws and C’s act violated A’s life, health, and property.
(ii) Violation acts:
• Compensation for contractual damages: This is an act of violating the agreement in a contract that is specifically stipulated in the sanctions provisions to force the parties to properly fulfil the agreed obligations. The violation may not have occurred because it is only stipulated in the form of a general convention established by the contracting parties to limit and avoid violations of such acts. It can be understood that compensation for damages in a contract only arises due to the intentional or unintentional fault of the person who does not perform or does not properly perform the contract.
For example: Party A and Party B enter into an economic contract with an agreement on compensation for damages when one party unilaterally terminates the contract without written notice to the other party.
This clause is a sanction to bind the parties not to freely terminate the contract unilaterally. In reality, it is possible that the violation of this sanction does not occur, and the sanction still exists in the form of a common convention for the parties to rely on to properly perform and limit contract violations. This clause will arise when one party, intentionally or unintentionally, terminates the contract unilaterally without prior notice to the other party. This is also the basis for compensation for damages in the contract for the violated party.
• Compensation for non-contractual damages: This is an act of violating the provisions of law issued by the state in various specialized laws leading to damages.
For example: Similar to the example in section (ii) on Compensation for non-contractual damages, the violating party participated in traffic while drunk and not sober, violated traffic laws, and this person’s act violated the life, health, and property of the damaged party.
(iii) Method of implementation:
• Compensation for contractual damages: The parties can agree on the level of compensation for damages at the time of signing the contract (reflecting the mutual agreement of the contract) or can re-agree on the level of compensation for damages after the time the breach of contract has occurred. In case there is no sanction clause in the contract, after the damage occurs, the parties can still agree on the level of damage as well as the method of compensation for damages.
• Compensation for non-contractual damages: The injured party must be compensated in full and promptly. Since the parties in a civil relationship may not know each other and do not know what will happen in advance, there cannot be any prior agreement between the parties. Therefore, the parties can agree on the level of compensation for damages at a time after the civil violation occurs and causes damage or loss.
(iv) Joint responsibility:
• Compensation for contractual damages: In case the contract has a clause agreeing that the parties are jointly responsible when damage occurs, the parties will be jointly responsible for compensation for damages according to the agreement.
For example: In the Business Cooperation Contract, there is a provision that the parties are jointly responsible when an item of work X is damaged. In case such an event occurs, the parties will base on the provision to have solutions and jointly compensate for the damage according to the agreement in the contract.
• Compensation for non-contractual damages: In case many people cause damage, those people must jointly compensate the damaged person. The compensation liability of each person causing damage is determined in proportion to the degree of fault of each person; if the degree of fault cannot be determined, they must compensate for the damage in equal shares.
For example: A was driving a motorbike on a national highway. Because A was speeding and recklessly overtaking, he crashed into the left side of C’s car which was going in the opposite lane and caused an accident that caused B’s death. Through the results of the investigation and conclusion, both A and C were at fault for the loss of B’s life, so both A and C must be responsible for compensation for the damage.
(v) Burden of proof:
• Compensation for contractual damages: The injured party has the obligation to prove the damage for the claim by providing grounds to prove that claim.
• Compensation for non-contractual damages: The injured party has the obligation to prove the damages. The person claiming compensation for damages must provide documents and evidence to prove that the request is well-founded and clearly state each actual damage that has occurred.
From the above content, it can be seen that compensation for non-contractual damages and compensation for contractual damages have basic similarities and differences. Accordingly, depending on each specific type of damage, the application of legal basis and criteria for compensation for damages will be different.
Above is an article by TNTP lawyer on the topic: “How does the law regulate non-contractual damages and contractual damages?”. Hopefully this article brings value to readers.
Sincerely,
