INSIGHTS

Violation of Delivery Deadline in Purchase and Sale of Goods

May 07, 2017 Dispute Resolution

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The term of “Delivery Deadline of Goods” is a fundamental term and is almost always provided in the contract for the purchase and sale of goods.  It helps to ensure that the buyer gets the goods at the necessary point in time to conduct its business plans.

In principle, under Article 37[1] of the 2005 Law on Commerce, the seller has the responsibility for delivery of goods at the agreed time.  In other words, in case the delivery deadline expires and the seller could not deliver the goods on time, the seller is deemed to be in violation of the contract and the buyer is entitled to refuse to receive the goods or to refuse to make the relevant payment.  In this event, the contract cannot be continued unless otherwise is agreed by the parties.

Therefore, is it possible to conclude that the contract for purchase and sale of goods is automatically terminated if the seller does not deliver the goods on time?

There is currently no provision for automatic termination under the relevant laws.

The 2005 Law on Commerce has no regulation regarding this issue.  Therefore, under Article 4.3[2] of the 2005 Law on Commerce, the regulations of the 2015 Civil Code shall be applied.  Specifically Article 422 of the 2015 Civil Code provides as follows:

Article 422. Termination of the contract

 A contract shall terminate in the following cases:

1.     The contract was completed;

2.     By agreement of the parties;

3.     The individual having entered into the contract dies or the legal entity, having entered into the contract, ceases its existence during the period the contract must be performed by such individual or legal entity;

4.     The contract is rescinded or unilaterally terminated;

5.     The contract cannot be performed because its object no longer exists;

6.     The contract is terminated under Article 420 of this Code [3];

7.     Other cases as prescribed by law.”

Therefore, the law has no provision allowing the contract to be automatically terminated just because the term of performing an obligation of a party has ended.  In other words, in case a party violates the delivery deadline of the goods and there is no other agreement between the parties, the contract is still legally enforceable, though it is deemed to have ended in fact (the seller cannot continue to deliver the goods and the buyer does not continue to receive the goods).

Therefore, under these circumstances, what actions should a buyer take who desires to terminate the contract and refuse to receive the goods?

Under the 2005 Law on Commerce, the buyer is entitled to apply one of the following remedies:

Right of enforcement of the contract under Article 297[4] of the 2005 Law on Commerce: In the event the buyer still is in need of the goods, it may purchase the goods from a third party as a replacement and request the seller to reimburse the difference in price and other relevant expenses (for instance: freight charges). When the seller completes such payments, the contract shall be terminated as “completed” under Article 422.1, the 2015 Civil Code.

Unilateral termination of contract performance under Article 311[5] of the 2005 Law on Commerce: The contract shall completely terminate from the date the seller receives a notice of termination from the buy The parties shall only perform their reciprocal obligations related to the obligations performed by the other party before the date of the contract termination.

Rescission of the contract under Article 312[6] and Article 313[7], the 2005 Law on Commerce: rescission of the contract shall allow the buyer (i) to rescind a specific delivery and continue to receive subsequent deliveries or (ii) to rescind all the deliveries already made, return the goods, and claim the purchase money in case the goods delivered are integrally connected (integrated goods).

It should be noted that the application of these remedies requires the buyer to comply with conditions and procedures as prescribed by law, including sending a formally written notice to the other party.  Therefore, when it is realized that the seller has violated the delivery deadline, the buyer needs to promptly consider applying one of the above remedies to protect its lawful rights and interests.  Delay in applying the remedies may affect the interests of the buyer in the future.

The following is a specific example[8] of the consequences of delay in applying the proper commercial remedies:

Company A signed a purchase and sale contract with Company B, which included a delivery deadline of May 2013 and a deposit of approximately $300,000 USD.  When the delivery deadline expired, Company B had only delivered less than half of the goods which were agreed upon.  Between the time of contract and the time that the delivery deadline expired, there had been a substantial decrease in the price of such goods.  Therefore, Company A no longer desired to continue to receive the goods.

Company A could have unilaterally terminated the contract, required Company B to return the deposit, and have claimed a “deposit compensation”[9] as prescribed by law.  However, Company A incorrectly believed that the contract had expired, and therefore did not provide notice to Company B about the termination of the contract.  Instead, Company A only verbally negotiated with Company B, and even continued to receive a late delivery of the goods which Company B had already produced.

After many sessions of negotiation, Company B still did not want to return the deposit. Therefore, Company A filed a complaint against Company B with the Vietnam International Arbitration Center to claim the deposit, a deposit compensation and damages in accordance with Vietnamese Law.  However, because there was no document from Company A stating that it wanted to terminate the contract and had not refused the continued deliveries when Company B violated the delivery deadline, the Arbitral Tribunal considered the negotiation between Company A to Company B to be an extension of the terms of the contract.  Accordingly, the Arbitral Tribunal considered that Company A was partially at fault in this situation and only ordered Company B to return the remaining deposit without any other compensation.

Because of the delay in applying its legitimate commercial remedies, Company A gave up its rights to require Company B to perform its contractual obligations, specifically having to pay the deposit compensation.  Although Company B was the violating party, it did not have to bear any further legal responsibility.

 –   Written by LE & TRAN | Vietnam’s Premier Boutique Litigation Firm

#Vietnam #DisputeResolution #Litigation #ContractViolation


[1] Article 37, the 2005 Law on Commerce provides:
Article 37. Delivery Deadline of Goods
1. The seller must deliver goods in the time of delivery of goods agreed in the contract;
2. In the event that there is only an agreement of the Delivery Deadline of Goods without a specific time, the seller may deliver goods at any time under such Delivery Deadline of Goods and must notify the buyer of the delivery in advance;
3. In case there is no agreement for the Delivery Deadline of Goods, the seller must deliver goods within a reasonable time after entering into the contract.”

[2] Article 4.3, the 2005 Law on Commerce provides, in part:
“Article 4. Application of the Law on Commerce and relevant laws
[…]
3. Commercial activities, which are not provided in the Law on Commerce and other relevant laws, shall comply with the regulations of the Civil Code.”

[3] Article 420, the 2015 Civil Code provides:
“Article 420. Performance of the contract when there is a fundamental change of circumstances
1. There is a fundamental change of circumstances when the following conditions are fully satisfied:
a. There is a change of circumstances due to an objective event occurring after the contract is entered into;
b. A
t the time of entering into the contract, the parties could not foresee the change of circumstances;
c. T
he change of circumstances is so important that if the parties knew about it in advance, the contract would not have been entered into or would have been entered into with completely different contents;
d. 
The continuation of the contract performance without modifying its contents will cause serious damage to a party; and
e
. The party who receives benefits under the contract, has applied all necessary measures in the best of its ability in compliance with the characteristics of the contract, but fails to prevent or minimize the effect on its benefits.
2. In case there is a fundamental change of circumstances, the party who receives benefits under the contract may request the other party to renegotiate the contract within a reasonable time.
3. In the event the parties cannot agree on modification of the contract within a reasonable time, either party may request the Court:
a. To terminate the contract at a specified time;
b. To modify the contract to balance the lawful rights and interests of the parties in the context of a fundamental change of circumstances.
The Court only is entitled to modify the contract in the event that the termination of the contract will result in greater damage than the expenses incurred in performing the modified contract.
4. In the course of negotiating the modification or termination of the contract, or while the Court is handling the case, the parties shall continue performing their contractual obligations, unless the parties agree otherwise.”

[4] Article 297, the 2005 Law on Commerce provides:
“Article 297. Right of enforcement of the contract
1. Right of enforcement of the contract is defined as a remedy under which the aggrieved party requests the violating party to properly perform the contract, or applies other remedies so the contract is performed and the violating party shall be responsible for any arising expense.
2. In the event that the violating party fails to fully deliver goods or to properly provide the service under the contract, it shall fully deliver goods or properly provide the service under the contract. In case the violating party delivers goods or provides services in poor quality, it shall eliminate the defects of the goods or the shortcomings of the service, or deliver other goods as a replacement or properly provide the service under the contract. The violating party must not use money or other types of goods or services as a replacement, unless it is agreed to by the aggrieved party.
3. In the event that the violating party fails to comply with Clause 2 of this Article, the aggrieved party is entitled to purchase goods or receive provision of services as a replacement for the type of goods or services stated in the contract from another party, and the violating party shall be responsible for the difference in price and relevant expenses, if any; or by itself eliminate the defects of the goods or shortcomings of the services, and the violating party shall accordingly pay for actual and reasonable expenses that arise.
4. 
The aggrieved party shall receive the goods or provision of services and make payments to such goods or services in case the violating party already fulfilled all obligations in compliance with Clause 2 of this Article.
5. In the event that the violating party is the buyer, the seller is entitled to request the buyer to make payment, to receive the goods or to fulfill its other obligations in compliance with the contract and this Law.”

[5] Article 311, the 2005 Law on Commerce provides:
“Article 311. Legal consequences of termination of contract performance
1. In the event that a contract performance is terminated, it shall be ended from the date a party receives the termination notice. The parties shall no longer perform their contractual obligations. The party that has performed its obligations may request from the other party a payment or performance of its reciprocal obligations.
2. The aggrieved party may claim damages under the provisions of this Law.”

[6] Article 312, the 2005 Law on Commerce provides:
“Article 312. Rescission of a contract
1. Rescission of a contract shall include rescission of a part of the contract or rescission of the entire contract.
2. Rescission of the entire contract shall mean the complete annulment of all contractual obligations for the entire contract.
3. Rescission of part of the contract means the annulment of the performance of specific parts of the contract while the other parts remain in full force and effect.
4. Except for cases of liability exemption under Article 294 of this Law, the remedy of rescission of contracts shall be applied in the following cases:
a. There is an occurrence of an act of breach which the parties have agreed shall be a condition resulting in the rescission of the contract;
b. Where one party commits a substantial breach of the contractual obligations.

[7] Article 313, the 2005 Law on Commerce provides:
Article 313. Rescission of the contract in case of delivery of goods or provision of services in installments
1. Where the parties to a contract agree on delivery of goods or provision of services in installments, and one party fails to perform its obligations regarding the delivery of goods or provision of services and such failure constitutes a substantial violation of such delivery of goods or provision of services, the other party shall be entitled to declare the rescission of the contract for such delivery of goods or provision of services.
2. In case a party fails to perform its obligation for an installment of delivery of goods or provision of services, which is deemed to be the basis for the other party to conclude that a substantial breach of the contract will occur with regard to subsequent of goods or provisions of services, the aggrieved party shall be entitled to declare the rescission of the contract applicable to such subsequent deliveries of goods or provisions of services, provided that such (aggrieved) party must exercise that right within a reasonable time.
3. Where a party has declared the rescission of a contract as it applies to a single delivery of goods or provision of services, such party is still entitled to declare the rescission of the contract as it applies to subsequent deliveries of goods or provision of services which have been implemented or which are yet to be implemented if the interrelationship between the deliveries of goods [or provisions of services] results in the delivered goods or provided services not being able to be used for their proper purpose as originally intended by the parties at the time they entered into the contract.

[8] Specific example provided exclusively by LE & TRAN.

[9] Under Article 328.2, the 2015 Civil Code, a “deposit compensation” shall mean a compensation applied to the party receiving the deposit when it violates the contract or refuses to sign the contract.