What Are Fundamental Contract Breaches in Law on Commerce 2005 and CISG 1980?

Fundamental breach is atype of contract breach, in which the Law on Commerce 2005 defines that a breach of contract committed by one of the parties is fundamental if it causes damage to the other party to the extent that the other party fails to achieve purpose of contract conclusion. The significant factor that makes the difference between the fundamental and minor breach of contract is the materiality.

 

Fundamental breach is an important foundation for the imposition of trade remedies such as temporary suspension of performance, suspension of performance or contract cancellation when the contract has no specific agreement. Nonetheless, Law on Commerce 2005 does not provide further guidance on fundamental breach. Court or arbitrator has a right to determine whether a breach is fundamental on a case-by-case basis. 

As set forth in CISG 1980, a breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. CISG also does not provide specific provisions to explain fundamental breach in details. Nonetheless, it can be deemed that in order to constitute a fundamental breach, three following factors need to be met: (i) a breach is made, (ii) detriment resulted from such breach substantially deprives him of what he is entitled to expect under the contract, and (iii) the breach can be foreseen.

The difference between constitution of a fundamental breach under CIGS 19080 and Law on Commerce 2005 is that: a breach cannot be treated as under CISG 1980 in case the breaching party did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. Law on Commerce 2005 does not stipulate factor (iii) as mentioned herein but requires that (1) a breach is made and (2) damage resulted from such breach causes other party failed to achieve its purpose of contract conclusion to constitute a fundamental breach. The aggrieved party accordingly has a right to impose remedies such as temporary suspension of performance, suspension of performance or contract cancellation.

The consequence factor of fundamental breach in Law on Commerce 2005 is similar to CIGS 1980. In case the purchaser is aggrieved party, what he/she is entitled to expect under the contract is right to receive the goods, to own the goods and to sell to other parties to earn profits or manufacture products or other ways he/she can make a profit. In case the seller is aggrieved party, what he/she is entitled to expect under the contract is right to receive payments, which is profits he/she may earn. The purpose of contract conclusion as provided in Law on Commerce 2005 is same as what the purchaser and seller are entitled to expect under the contract as stipulated in CISG 1980.

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The Need for Commercial Mediation in the Performance of International Contracts

In contract dispute resolution, the average time to resolve a commercial contract dispute at the Court in Vietnam, even with the help of dispute lawyers in Vietnam whom know well the process would take long time through multiple proceedings. This period will last longer if there is a foreign party in the dispute, including service of notarization, legalization, authentication (or apostile) the documents. According to World Bank statistics, the cost of resolving a commercial dispute at the Court accounts for about 29% of the contract value (including attorneys’ fees, court fees, judgment execution fees).

The practice of resolving the dispute case at the Court appears to face many challenges of time lengthening and possible effective enforcement leading to cost of time and money. Therefore, the selection of dispute resolution in the mediation center is a possible option to resolve this issue.

Vietnam authorities and international agencies have taken active measures needed to promote the application of commercial mediation in international contracts, in order to resolve issues more quickly and effectively in international trade disputes. The application of commercial dispute resolution at mediation centers in Vietnam will save time and costs for dispute resolution. In addition, the dispute resolution at the mediation center will also help the parties maintain the relationship for future business transactions.

Until Aug 2019, in Vietnam, there are 7 commercial mediation centers licensed by the Ministry of Justice with a team of domestic and international certified mediators and lawyers who can contribute to resolving disputes in international trade contracts.  The use of mediation centers in the settlement of disputes in Vietnam with the help of lawyers in Vietnam will help the parties to find common grounds and together save cost, time, keep confidentiality of the dispute and could continue to do business with each other.

ANT Lawyers is a Law firm in Vietnam with international standards, recognized by Legal500, IFLR1000. We are an exclusive Vietnam member of Prea Legal, the global law firm network coverig more than 150 juridictions. The firm provides a range of legal services as following to multinational and domestic clients.

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