A penalty for breach of contract is a civil liability due to an agreement between the parties in the contract, under which the violator is obliged to remedy the consequences by paying an amount of money to the affected party a certain fine. This is a fairly common sanction in the contract relationship to deter, prevent violations, educate the sense of compliance with the commitments recorded in the contract, increase the self-discipline of the parties and punish the party that violates the contract.
Contract violation penalty agreement
According to Article 418 of the Civil Code 2015 on the performance of contracts, there is an agreement on penalties for breach of contract as follows:
“1. A penalty for violation means an agreement between the parties in the contract under which the violator is obliged to pay a sum of money to the violating party.
2. The fine for violations shall be agreed upon by the parties.
3. The parties may agree that the party violating the obligation must only pay the fine for violation without having to pay damages or pay the violation penalty and pay damages; if there is no prior agreement on the level of damage compensation, the full damage must be compensated.
In case the parties do not have an agreement on compensation for damages, the violator of the obligation must only pay the fine for the violation.”
According to this provision, the civil code is not binding on the level of penalties for violations, the parties agree on the penalty for violations in the content of the contract.
Cases of penalties for breach of contract
Penalties for violations in civil contracts
– The penalty for violation is an agreement between the parties in the civil contract, according to which the violator is obliged to pay a sum of money to the violating party.
– The fine for violations shall be agreed upon by the parties, unless otherwise provided by relevant laws.
– The parties may agree that the violator of the obligation is only subject to the violation penalty without having to pay damages or both be subject to the violation penalty and pay damages.
– In case the parties have an agreement on penalties for violations but do not agree on both being subject to fines for violations and having to pay damages, the violating parties shall only be subject to penalties for violations.
As such, the parties to the civil contract may only impose penalties for violations when there is an agreement.
(Article 418 of the Civil Code 2015)
Penalties for violations in commercial contracts
– Penalty for violation means that the violator requests the infringing party to pay a fine for breach of contract if there is an agreement in the contract, except for the cases of disclaimer specified in Article 294 of the Commercial Law 2005.
– Violation penalty level: The penalty for violation of contractual obligations or the total fine for many violations agreed upon by the parties in the contract, but not more than 8% of the value of the violated contract obligations, except for the cases specified in Article 266 of the Commercial Law 2005.
– In case the parties do not have an agreement on penalties for violations, the violating parties shall only have the right to claim damages, unless otherwise provided by the Commercial Law 2005.
– In case the parties have an agreement on sanctioning the violation, the violating party shall have the right to apply both sanctions for violations and forced compensation for damages, unless otherwise provided by the Commercial Law 2005.
As such, the parties to the commercial contract may only impose penalties for violations when there is an agreement.
(Articles 300, 301, 307 of the Commercial Law 2005)
Penalties for violations in construction contracts
– Penalties for violations of construction contracts must be agreed upon by the parties and stated in the contract.
– For construction works using public investment capital, foreign state capital invested in public, the contract fine shall not exceed 12% of the value of the violated contract.
In addition to the agreed penalty, the breaching party must also pay damages to the other party, the third party (if any) in accordance with the Law on Construction and other relevant laws.
As such, the parties to the construction contract may only impose penalties for violations when there is an agreement.
(Article 146 of the Construction Law 2014, Point c Clause 64 Article 1 of the amended Construction Law 2020)
Above is an article on “Penalties for breach of contract” of Apra Law Firm. If you have any question about the above issues and need to be answered, please contact the hotline number for further advice and support.
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