Consequences Of Breaches Of Representations And Warranties Under Vietnamese Law
Introduction
As detailed in a prior post, in our opinion, representations and warranties (warranties) should constitute obligations of the person giving it under Vietnamese law. They could imply an obligation on the part of the person providing them (Warrantor) to guarantee that the stated facts and matters are true. In this post, we will try to examine the consequences of breaches of representations and warranties under Vietnamese law. As discussed further below, depending on the context, a breach of warranties might give rise to:
· liabilities for breach of warranties as independent obligations; or
· liabilities for breach of obligations to deliver conforming goods; or
· liabilities for breach of obligations to provide information to contracting parties; or
· indemnity (or reimbursement) of losses to the extent the parties have agreed for an indemnity (or reimbursement) of losses arising from a breach of warranties.
Given that “representations and warranties” are exclusively common law concepts and no specific legal framework for them is provided under Vietnamese law, it is important that Vietnamese law contracts should have provisions dealing with the above in order to achieve the intended outcome of the parties.
Based on the discussion below, probably, the preferable approach is to have specific wording in the share sale and purchase agreement that warranties form part of the description and quality of the sale shares so that, among other things, seller could be subject to the remedies applicable to breach of obligation to deliver non-conforming goods.
Liabilities for a breach of warranties as a breach of independent obligations
Warranties could constitute obligations under Vietnamese law. Accordingly, technically, a breach of warranties is a breach of obligations and should give rise to liabilities to the seller. However, if warranties are considered as independent obligations, then it is not clear how to determine the damages arising from breaches of warranties under Vietnamese law. To mitigate this, the parties might need to agree on what would be considered as damages if there is a breach of warranties.
Liabilities for breach of obligations to deliver conforming goods
Under Vietnamese Commercial Law 2005, a sale of shares could qualify as a sale of “goods” (hàng hóa). Accordingly, the seller of shares in a company will have the obligations to deliver the goods to the buyer in accordance with the agreements of the parties on quality, quantity, packaging, maintenance and other issues. The Commercial Law 2005 and the Civil Code 2015 also provide for detailed remedies in case goods are not conforming to the agreed quality and specifications.
Although the above requirements are more relevant to normal goods, they can still apply to shares in a company. However, the law is not clear about what could constitute “quality, quantity and other issues” of the goods under a share sale and purchase agreement.
Warranties about the status and conditions of a company have significant impact on the value of the company which in turn determine the value of the shares of such company under the share sale and purchase agreement. Accordingly, logically warranties in a shares sale and purchase agreement should constitute the quality of such shares. That said, one could still argue that only the par value, number of shares and rights attached to the relevant shares constitute the quality and quantity of the goods under a share sale and purchase agreement. To avoid such a potential argument, a share sale and purchase agreement should have wording to clarify that the warranties constitute the description and quality of the transferred shares.
Liabilities for breach of obligations to provide information to contracting parties
Under the Civil Code 2015, where one party has information affecting the acceptance of entry into a contract by the other party, it must notify the other party thereof. If such party’s failure to do so results in loss and damages, such party must pay compensation. Accordingly, if there is a breach of Warranties by the seller, the buyer in a share sale and purchase agreement could take a position that the seller has failed to notify the buyer of the incorrect warranty and therefore must compensate the buyer for loss and damages.
However, there are several issues with this approach. First, the buyer must prove that the seller “has information” about the breach of warranty. This may not always be true. Sometimes, the seller also does not know about the breach of warranty. Second, even if the buyer could prove that the seller “has information” about the breach of warranty and does not disclose to the buyer, the buyer also needs to prove damages caused the failure to disclose information. Under Vietnamese law, this could be more difficult than proving damages as a result of failure to deliver conforming goods.
Liabilities for indemnity (or reimbursement) of losses
Since warranties are not a legal concept under Vietnamese law, a breach of warranties does not by default result in an indemnity obligation. That said, indemnity clauses are quite common in share sale and purchase agreement. An indemnity clause in a share sale and purchase agreement could be considered as a contractual undertaking by the seller to reimburse the buyer certain losses and damages if there is a breach of warranty.
However, there is certain level of uncertainty as to the validity and enforceability of an indemnity clause in a Vietnamese law contract (see here and here).
This post is written by Nguyen Thuc Anh and Nguyen Quang Vu.