Contract is an indispensable legal document in business activities of enterprises. In which, to ensure the performance of the Contract, enterprises often have a term on penalty for breach of the Contract. However, enterprises often do not understand the regulations of the law on penalties for breach of contract. Enterprises assume that the penalty for breach of contract can be arbitrarily agreed. Through this article, TNTP will clarify regulations of the law as well as provide advice for enterprises to consider when choosing penalty for breach of a commercial business contract.
1. Regulations of the law on penalty for breach of commercial business Contract
Pursuant to Article 301 of the Commercial Law 2005, a penalty for breach is penalty for breach of contractual obligation or the total penalty for multiple breaches as agreed by the parties in the contract, but not exceeding 8% of the value of the breached contractual obligation, except for the case of penalty for breach when the assessment result is wrong.
Pursuant to Clause 2 Article 418 of the Civil Code 2015, penalty for breach is agreed by the parties, except for the case relevant laws have other regulations.
Therefore, currently, there are two regulations on the penalty for breach of Contract. This leads to enterprises agreeing on inconsistent penalty for breach. Some enterprises choose a maximum penalty that is not more than 8% of the value of the breached contractual obligation. Some enterprises assume that the Civil Code is the “mother” law, covering the Commercial Law, so that the parties are still allowed to agree arbitrarily on the penalty for breach of contract.
For the above two views, enterprises should note that:
The regulation in Clause 2, Article 418 of the Civil Code 2015 has the content “except for the case relevant laws have other regulations”. In terms of the principle of application of the law, in case the specialized law has regulation different from the general law, the specialized law shall prevail. For the penalty for breach of a commercial business contract, the governing law is the Commercial Law 2005 because the contract arises in a commercial relationship, with the purpose of making a profit.
Therefore, enterprises must apply penalties for breach of the Commercial Law 2005. The penalty for breach of the Civil Code 2015 are only applied within the scope of civil contracts such as deposit contracts, loan contracts, property sale contracts, …
2. Advice for enterprises to choose penalty for breach
Currently, although the law does not prohibit enterprises from agreeing to a larger penalty for breach, if a dispute arises and the enterprise litigates at a competent authority, the dispute settlement agency still only allows the parties to apply a maximum penalty of 8% of the value of the breached contractual obligation, the agreed-upon portion exceeding 8% will not be accepted by the competent authority.
Therefore, enterprises need to clearly define that:
In case the penalty for breach of commercial business contract agreed by the parties is larger than 8% of the value of the breached contractual obligation, when a dispute arises, if enterprises still want to apply the agreed penalty, enterprises can only settle dispute through negotiation. If the enterprises litigate at a competent authority, enterprises can only request a maximum penalty of 8% of the value of breached contractual obligations.
Above are legal sharings of TNTP on penalty for breach of commercial business Contract. Based on these analyses and its need, enterprises can consider giving an appropriate penalty for breach of the Contract. We hope this article is useful for you.
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TNTP & Associates International Law Firm