Article 292 of Commercial Law No.36/2005/QH11 stipulates types of commercial remedies. Therein, material remedies to recover and compensate for the aggrieved party’s damage include fines for breaches and forcible payment of damages. So, what is the difference between fines for breaches and forcible payment of damages, in this article, we will focus on clarifying the differences between these two remedies to serve as a basis for practical application.
1. Concept and definition
● Fine for breach (the penalty for violation) means a remedy whereby the aggrieved party requests the breaching party to pay an amount of fine for its breach of a contract if so agreed in the contract, except for cases of liability exemption (according to Clause 1, Article 418 of Civil Code 2015, and Article 300 of Commercial Law 2005).
● Forcible payment of damages (compensation for damages) means a remedy whereby the breaching party pays compensation for the loss caused by a contract-breaching act to the aggrieved party (Clause 1, Article 302 of Commercial Law 2005).
● Fine for breach means a remedy has two purposes:
– Deterring, preventing the breach of contract and raising people’s awareness of compliance with the contract;
– Punishing the party that breaches the contract.
● Forcible payment of damages aims at compensating in kind for the aggrieved party.
3. Grounds for commercial remedies
● Fine for breach can only be applied when there is a breach of contract and the contract has an agreement on a fine for breach. If the contract does not agree on a fine for breach, the aggrieved party will not be able to apply this remedy. In case the parties have an agreement on a fine for the breach but the fine level did not agree upon by the parties, as a result, there is a high probability of leading to disputes when a breach of contract occurs.
● Liability to pay damages shall arise upon the existence of all of the following elements:
– Breach of the contract;
– Material loss;
– The act of breaching the contract is the direct cause of the loss.
Thus, unlike the fine for breach that forces the parties to agree on the contract, payment of damages is applied regardless of whether there is an agreement on damages in the contract, depending on the three elements mentioned above. The party claiming damages must prove the loss, the loss level caused by the breach, and the direct profit that the aggrieved party would have received if the breach of contract did not occur.
On the other hand, the party claiming damages must take all reasonable measures within the ability to limit the loss caused by the breach of contract. In cases where it is possible to take measures to limit the loss, but the aggrieved party does not apply, the breaching party has the right to demand a reduction in the amount of compensation equal to the loss that could have been limited.
4. Fine level and level of damages
● The parties can agree on a fine level, but if the law provides for a maximum fine level, the parties must not agree to exceed that limit.
For example, the Law on Construction stipulates that for works using public and non-public investment state funds, the fine level must not exceed 12% of the value of the violated contract. The Commercial Law stipulates that the maximum fine for breach of contract is 8% of the value of the breached contractual obligation portion, the only exception is the fine for traders providing assessment services issue assessment certificates showing incorrect results caused by their unintentional faults must not exceed ten times the assessment service charge (Article 266 of Commercial Law 2005).
● The value of damages covers the value of the material and direct loss suffered by the aggrieved party due to the breach of the breaching party and the direct profit that the aggrieved party would have earned if such breach had not been committed. Due to the compensation, the number of damages cannot exceed the material loss.
5. The relationship between fines for breaches and forcible payment of damages
● According to Article 418 of Civil Code 2015, the parties may reach an agreement that the violating party has to pay a fine for violations and is not liable to any compensation for damage, or has to pay both a fine for violations and compensation for damage. In case the parties have an agreement on fines for violations that do not specify that the violating party has to pay both a fine for violations and compensation for damage, then the violating party has to pay only the fine for violations.
● According to Article 307 of Commercial Law 2005, where the parties do not agree upon fines for breaches, the aggrieved party shall only be entitled to claim damages, unless otherwise provided for by this Law. Where the parties agree upon fines for breaches, the aggrieved party shall be entitled to apply both remedies of fines and damages, unless otherwise provided for by this Law.
Above is the article “The difference between penalty for violation and compensation for damages”. We hope this article was useful to you.