Under the Commercial Law 2005, the value of damage that the non-defaulting party could claim due to a breach of contract will comprise (i) the value of the “actual and direct loss” incurred by the non-defaulting party due to the defaulting party’s breach; and (ii) the “direct profits which the non-defaulting party would have earned” in the absence of such breach. Apparently, the amount that the non-defaulting party must compensate a third party (e.g. non-defaulting party’s customer) as a result of the breach of the defaulting party (Third Party Damage) is not considered as lost profits at (ii). However, it is not clear whether and how Third Party Damage could be included in “actual and direct loss” (Direct Loss) suffered by the non-defaulting party.

Commercial Law 2005 does not provide further details on how to determine Direct Loss. The Civil Code 2015 provides a list of damages due to breach of obligation/contract, which may be used to determine this kind of loss, including:

(i)         physical damages, being actual losses that can be determined, which include loss of property; reasonable expenses to prevent, mitigate or restore damage; and actual loss or reduction of income;

(ii)        loss and damage in respect of benefits from the contract which the non-defaulting party would have enjoyed; and

(iii)       any expenses arising from the defaulting party’s failure to fulfil its contractual obligations which do not overlap with the amount of compensation as mentioned in (ii) above.

However, it is not sufficient to prove that Third Party Damage is considered as Direct Loss suffered by the non-defaulting party.

Assessment of “actual” element in relation to Third Party Damage

In practice, although there is no clear guidance on how to determine the “actual” element of Third-Party Damage, Vietnamese Courts may assess this element via the following documents/criteria:

·       The content of contracts between the non-defaulting party and third party;

·       Purchase orders between the non-defaulting party and its customers;

·       Business plan of the non-defaulting party in relation to the transaction with third party; and

·       The agreement between the non-defaulting party and the third party regarding the amount it must compensate for such third party or court judgment on the non-defaulting party’s obligation to compensate for third party; etc.

Assessment of “direct” element in relation to Third Party Damage

It is arguable that if the non-defaulting party could prove the direct cause-effect relation between the defaulting party’s breach of contract and the loss suffered by the non-defaulting party under the Commercial Law 2005, the “direct” element of Third Party Damage could be satisfied. However, it may not be reasonable as the value of damage is a separate issue to be proved by the non-defaulting party under Article 304 of the Commercial Law 2005 in addition to its obligation to prove grounds to claim for damage according to Article 303 of the Commercial Law 2005.

In practice, Vietnamese Courts take into account whether the defaulting party knows or should have known about the relationship between the non-defaulting party and the third party (Third Party Transaction) when evaluating the “direct” element of Third Party Damage.

·       In the Court Case 1006/2008/KDTM-ST, the Court has rejected a claim for damage in form of compensation paid to third parties on the ground that the defaulting party is not notified of the transaction between the non-defaulting party and the third party. Dr. Do Van Dai takes the view that a request for compensation of damage should only be accepted if the defaulting party knows or should have known the existence of the Third Party Transaction.

·       That having said, Vietnamese Courts are silent on the level of detail the defaulting party must know or should have known of such Third Party Transaction. It is arguable that the “direct” element could only be satisfied when the defaulting party could be aware or should have been aware of the Third Party Transaction in specific detail (i.e., the existence of contractual relationship between the non-defaulting and a specific third party, not knowledge of any general transaction with third party) at the time of signing contract with non-defaulting party.

In conclusion, assessment of the “actual” and “direct” elements of Third Party Damage to be considered as Direct Loss will be determined by Vietnamese Courts at its discretion on a case-by-case basis. Hopefully, the authority will provide further guidance on this issue in the upcoming time.

This post is written by Trinh Phuong Thao and edited by Nguyen Quang Vu.