When entering a commercial contract, one of the matters that a contractual party does not pay sufficient attention to is liability exemption. The liability exemption is a provision protecting legitimate rights and interests of the breaching contractual party in specific cases while implementing the contract in practice, ensuring fairness in commercial business relations.

In this article, BLawyers Vietnam presents an overview of four notes on liability exemption when breaching a contract in the commercial field.

1. Two conditions for liability exemption

Firstly, the breaching act shall be exempted from liability if it meets all the following conditions:

(i) A case of liability exemption agreed upon by the parties occurs;

(ii) A force majeure event occurs;

(iii) A breach by one party is entirely attributable to the other party’s fault; or

(iv) A breach is committed by one party as a result of the execution of a decision of a competent state management agency that the party did not know at the time concluding a contract.

Secondly, the breaching party shall bear the burden of proof of liability exemption. If the breaching party cannot prove this reasonably under the law, there is no ground to apply exemption from liability for the breaching act.

2. Four notes on liability exemption

Per our experience, there are four notes as follows:

(i) Firstly, the law allows contracting parties to freely agree on an exemption clause in a contract. However, not all agreements on the exemption are recognized by the law. To protect a disadvantaged party and to establish fairness in commercial activities, the law regulates cases in which agreements on liability exemptions do not take effect, specifically as follows:

1. (a) If a standard-form contract contains provisions exempting the party providing such standard-form contract from liability, or provisions increasing the liability of or waiving the legitimate interests of the other party, such provisions shall be ineffective; or(b) If general trading conditions contain provisions exempting the party giving the general trading conditions from liability or increasing the liability of or waiving legitimate interests of the other party, such provision shall be ineffective.

(ii) Secondly, not every breaching act considered as a consequence of a force majeure event shall be applied to a liability exemption.

The Civil Code 2015 defines a force majeure event as an event that occurs in an objective manner, is unforeseeable, and cannot be remedied even though all necessary and permissible measures have been applied. In accordance with such regulations, contract parties usually agree that force majeure events include natural disasters, pandemics, etc. However, in reality, when the parties have a dispute and one party requests the application of an exemption from liability, the Court will base its decision on the evidence and proofs of the breaching party, and consider and evaluate the entire situation that represents all circumstances occurring at the time when the incident is considered to have arisen to determine whether the breaching party has satisfied all conditions of a force majeure event, and the parties’ agreement on liability exemption. And at the same time, the court will ensure the legitimate rights and interests of the aggrieved parties.

A lawsuit case occurred in 2010 in which the defendant company A claimed that its breach of contract was due to a force majeure event; specifically, because of boat accidents, the captain and crew had to abandon the boat, leading to loss of goods and a breach of the contract of carriage with the plaintiff company B. However, the Court found that the defendant was not exempt from liability in this case because the defendant’s boat was already in operation outside the permitted maritime zone, in which case the captain failed to exercise due diligence to minimize the risk to the cargo vessel.

Therefore, when entering a contract, the contracting parties should pay attention to specific and detailed terms of cases considered as force majeure events, and accompanying handling consequences and obligations of the parties in these cases.

(iii) Thirdly, the Law on Commerce 2005 only regulates the liability exemption of the breach of one party due to the other party’s entire fault. This Law has not provided an exemption for the breach of one party’s fault due to the third party’s fault. Therefore, the breaching party will not be exempted from liability due to the fault of the third party even if the reason is that the third party encounters a force majeure event. If the parties would like to be exempted from liability when such situations occur, the parties should agree to it in a contract.

(iv) Fourthly, when cases of liability exemption occur, the breaching party must promptly notify the other party in writing of cases of liability exemption and possible consequences thereof. If the breaching party fails to notify or does not notify the other party in a prompt manner, it must compensate for the damage.

The above is not official advice from BLawyers Vietnam’s lawyers. If you have any questions or suggestions about the above, please contact us at consult@blawyersvn.com. BLawyers Vietnam would love to hear from you.

Date: 05 September 2023

Writer: BLawyers Vietnam