Contractual performance upon changed circumstances in vietnamese law

Although a specific provision on changed circumstances was for the

first time cofified in the Civil Code 2015, this notion had been recognized,

to some extent, in specific sector laws. Before the Civil Code 2015 was

enacted, the wrtitten and case law during pre-1975 period did not

recognize the notion of changed circumstances. Both the Civil Code 1995

and 2005 did not contain any provision on this issue. However, there are

certain similar provisions mention in some specific laws regulating high

risks and long term contracts, although not in an expressed way.

Therefore, Article 420 is the first official provision regulating the notion

of changed circumstances

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iency of legal application by competent agencies with the aim to meet the demand of the current economic conditions of Vietnam with the trend of international integration. The findings of this dissertation contribute to increasing the awareness of contractual parties and assisting competent agencies to better protect the legitimate rights and interests of the contract parties. Last but not least, the study can be used as a creditable secondary resources for legal practitioners, scholars and students in their academic research in the field of law, especially contract law. 5 7. Structure of the study Apart from the introduction, conclusion, bibliography, and annex, the dissertation is divided into four chapters as following: Chapter 1: Literature review and research questions of the study Chapter 2: Doctrinal issues of changed circumstances and contractual performance upon changed circumstances Chapter 3: Background of Vietnamese law on changed circumstances and its legal implementation Chapter 4: Potential directions and proposals for improve the law on changed circumstances and enhancing the efficiency of the implementation of this law. 6 Chapter 1 LITERATURE REVIEW AND RESEARCH QUESTIONS OF THE STUDY 1.1 Literature review 1.1.1 Literature review in Vietnam 1.1.1.1 Review of doctrinal research There is the lack of fundamental study on the matter of changed circumstance. Until now, there have been a few journal articles discuss about this topic. These articles, however, mainly favor the necessity of recognizing changed circumstance doctrine in the contract law. While some scholars raised concerns about the vagueness of changed circumstance provision regarding the definition, conditions, the difference between changed circumstances and for majeure and foresaw the potential obstacles in implementing this provisions; they neither provide a thorough research nor concrete solutions to address these above questions. There are some articles analyzing the doctrines of “hardship”, “changes of circumstance” and other similar notions. These scholarships provide valuable information about the origin, historical developments and the nature of unexpected circumstances in different countries. 1.1.1.2 Review of literature on contemporary legal provisions and practical implementation of provisions on contractual performance upon changes circumstances. Literature on contemporary legal provisions: The provision on contractual performance upon changes circumstances was first codified in Article 420 of Vietnamese Civil Code 2015. The published papers discussed about problems of this provision and foresaw potential obstacles of its implementation but neither provide a concrete interpretation of the law nor offer any proposals to address these matters. 7 Meanwhile, foreign scholar’s emphasis more on the corresponding provisions in international legal instruments such as UNIDROIT Principles of International Commercial Contracts (PICC) and The Principle of European Contract law (PECL), United Nations Convention on Contracts for the International Sale of Goods (CISG) and the national laws such as French, Germanic, English, and American systems. These papers, through case law analysis, discusses various issues of changed circumstances such as what factors need taken into account when determining whether hardship exist or not; and if hardship is found, then does parties have to renegotiate. Another debatable topic is whether the court should intervene the contract by adapting the agreed terms. Literature on practical implementation: Some authors analyses the judicial approach to cases related to changed circumstances dealt by the courts before Article 420 was enacted. After the Civil Code 2015 was enacted, some authors attempts to reveal the problems of the provision of changes circumstances, but there have not been any proposals made. 1.1.2.3 Directions and proposals for improving the law The published papers have proposed to propagate the new provision on changed circumstances and provide official interpretation of this provision. However, these articles fails to offer any further concrete solutions. In addition, some authors suggest that the court and legal practitioners should encourage parties to include a specific provision into their contracts. Some scholars argue that there are numerous factors need taken into account when demining changed circumstances. Ironically, until now, these factor have not been clarified. Moreover, several articles discuss about the provision on hardship of PICC with its commentaries and unaddressed issues. Nonetheless, there are a number of questions need further study as mentioned in the next part. 8 1.1.2.4 The issues to be addressed The study seeks to deal with these following issues: Firstly, the dissertation provides a fundamental analyses of the doctrine of unexpected circumstances, offers a definition of changed circumstances, contractual performance upon changed circumstance, differentiate changed circumstances and for majeure. The study demonstrates the relationship between the notion of changed circumstances and the principles of pacta sunt survanda and rebus sic statibus. In addition, the study discusses about the principle of equity and good faith which are relevant to the application of changed circumstances doctrine. The followings are new contributions of the dissertation: Firstly, the dissertation provide a fundamental analyses of the doctrine of unexpected circumstances. By comparing with the respective regulations in soft laws such as UNIDROIT Principles of International Commercial Contracts (PICC) and The Principle of European Contract law (PECL) and the law of several countries, the dissertation reveals the shortcomings of Vietnamese law. Thirdly, the dissertation examines how unexpected circumstances provision is applied by the courts through studying current relevant judgments. These cases demonstrate that not only the contracting parties but also the courts have difficulties in determining whether changed circumstances exist. Based on these investigations, the dissertation offers an explanation as to what constitutes unexpected circumstances. Finally, from thorough research of law and legal practice,. Secondly, the dissertation provides a fundamental assessment of the contemporary situation of Vietnamese law regulating unexpected circumstances with regarding to both issues of applicable conditions and legal consequences, including renegotiation processes. By comparing with the respective regulations in soft laws such as UNIDROIT Principles of International Commercial Contracts (PICC) and The Principle of European Contract law (PECL) and the law of several countries, the dissertation, the 9 study seeks to provide a rational interpretation of Article 420 with the aim to enhancing legal implementation. Thirdly, the dissertation examines how unexpected circumstances provision is applied by the courts through studying current relevant judgments. Fourthly, the study reveals problematic aspects of the provision on changed circumstances of Vietnamese law that serves as a context for the proposals. Fifthly, the dissertation proposes clear directions and concrete solutions with the aim to improve the law on unexpected circumstances and enhance the effectiveness of its enforcement 1.3. Related doctrines and research questions 1.3.1 Related doctrines When discussing the notion of chaned circumstances and the law on changed circumstances, the study mentions the following theories: Firstly, the contract theory is ultilized throughout the study as the basis for analyzing the theoretical issues as well as the law on chaned circumstances; Second, the theory of will freedoom and the limitation of will freedoom is mainly used when analyzing the renegotiation process of the parties to a contract and the consequences of unsuccessful negotiations. Freedom of contract also means the freedom of decision to be hold on the performance of obligations. Therefore, the law only intervenes the contract in exceptional cases with a view of respecting the parties' will freedoom through the process of renegotiation. Third, the theory of contractual equilibilum with the foundation of the principle of good faith, honesty and the principle of fairness. the theory of contractual equilibilum requires that after the contract takes effect, if there is a major and unforeseen change in the actual circumstances compared to the time of the contract conclusion, the parties may 10 renegotiate to adjust the relevant terms of the contract, and even terminate and cancel the contract, in order to meet the initial purposes of the parties and the principle of fairness. This theory is ultized to analyze the theoretical basis and the contract performance upon changed circumstances. 1.3.2. Research questions and research hypotheses 1.3.2.1 Research questions: - What are relevant doctrines of contractual performance upon changed circumstances? What is changed circumstances? What is contractual performance upon changed circumstances? What are the differences between changed circumstances and for majeure? - How is the current situation of Vietnamese law on contractual performance upon changed circumstances? How is judicial practice in Vietnam before and after the Civil Code 2015 came to effect? What are problems of legislatives and difficulties of legal implementation? - How to deal with these above problems? What solutions should be proposed to improve the law and enhance its implementation? 1.3.2.2 Research hypotheses - There have not been systematic theories on contractual performance upon changed circumstances. There is not a consensual definition of changed circumstances, contractual performance upon changed circumstances, and there is the lack of a distinction between changed circumstances and for majeure. The conditions of applying this doctrine are inconsistent among various national laws and international legal instruments. There is the lack of a fundamental of research on contractual theories relevant to the application of the notion of changed circumstances. - The Vietnamese law on changed circumstances fails to clarify the vague terms leading to difficulties in understanding and applying the provisions. 11 - There have not been any rational solutions to addresses the problem of the contemporary law. 1.2.2.3 Research findings: - Responding to the above discussed problems, the study formulates a definition of changed circumstances, contractual performance upon changed circumstances and distinguish between changed circumstances and for majeure based on relevant contractual theories. - Interpret and clarify aspects of the provisions on changed circumstances, including the conditions of changed circumstances, renegotiation obligation and legal consequences of break down renegotiations. The study demonstrates the problems of law and legal understanding based on practical analysis and comparative study. - Offer proposals to improve the law and enhance legal implementation of the law on changed circumstances which meet the conditions and demand of Vietnamese situation with the reference to international approaches. 12 Chapter 2 DOCTRINAL ISSUES OF CHANGED CIRCUMSTANCES AND CONTRACTUAL PERFORMANCE UPON CHANGED CIRCUMSTANCES 2.1 Doctrinal issues of changed circumstances 2.1.1 Definition of changed circumstances There are variety of definition in national laws and internationaal legal instruments. However, in gerneral, these different notions indicate an unexpect event happen beyond the control of parties, and that parties had now been unforseeable at the time of concluding a contract. The occurance of this event can disminish contractual equilibium (as in PICC) or make the contract performance onenourous (as in PECL) or make the contract frustrated (as in English and American Law). National laws and internationaal legal instruments do not formulate a definition but provide the conditions for applying hardship. The conditions stipulateds include: Firstly, the contract is fundamentally affected by the changes of circumstances. Secondly, the events occur or become known to the disadvantaged party after the conclusion of the contract. If the events occured or had known by parties, then parties must take the risk of such changes. Thirdly, the events could not reasonably have been taken into account by the parties at the time of the conclusion of the contract. Fourthly, the consequences of the event is considerable that if parties had known before, they would not have concluded the contract or concluded a contract with totally different terms. Thus, it can be said that changed circumstances indicates the fact that the basic assumptions based on that parties conclude the contract are changed 13 dramatically during the performance of contracts, making the performance much more burdensome or disminishing the equilibium of contracts, or making the contract frustrated. 2.1.2 Theories on changed circumstances 2.1.2.1.The theory on implied terms (Clausula rebus sic stantibus) This doctrine has its roots in Ancient Roman philosophy. This doctrine states that a person is required to to fulfill his promise only if the conditions at the time they promised remain the unchanged. 2.1.2.2 Theory of hypothesis (Voraussetzungslehre) This doctrine mentions the change of parties' intentions at the time of signing the contract. If the fundamental purpose is not met due to bilateral mistake of the original contractual circumstances, it is still considered a fundamental change of circumstances. 2.1.2.3 Theory of frustration of contract This doctrine was developed by the English Court during the judicial practice. This doctrine means that when the fundamental purpose of the contract is not achieved due to a change in circumstances, the parties may be released from the contractual obligation. At first this doctrine only applies when the object of a contract ceases, then applies also to cases where the contractual purpose becomes frustrated. 2.1.3 The differences of changed circumstances and force majeure Firstly, regarding the condition Secondly, regarding the level of circumstances Thirdly, regarding the purpose Fourthly, regarding the scope of application, Fifthly, regarding legal consequences 2.2 Doctrinal issues of contractual performance upon changed circumstances 2.2.1 Definition of contractual performance upon changed circumstances 14 The concept of contractual performance upon changed circumstances does not mean a stage of the contract performance process but rather is understood in a similar way to the concept of "hardship", "unexpected circumstance", or "change of circumstances" or a number of other similar terms. Contractual performance upon changed circumstances refers to the effect of the changed circumstances on the performance of a contractual obligation. This influence includes the contract that can be modified or terminated if the renegotiation fails. 2.2.2 Reasonales of recognizing provision on contractual performance upon changed circumstances 2.2.1.1 The principle of equity 2.2.1.2 The pacta sunt survanda principle 2.2.1.3 The principle of good faith 2.3 Contents of the notion contractual performance upon changed circumstances 2.3.1 Conditions of changed circumstances Firstly, the events occur or become known to the disadvantaged party after the conclusion of the contract.; Secondly, the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; Thirdly, the occurrence of the events is beyond the control of the the disadvantaged party; Fourthly, the risk of these events is not borne by the disadvantaged party. 2.3.2 Renegotiation of the contract Renegotiation is a very important process in order to reach an agreement between the parties. However, if the parties negotiate successfully, meaning that they agree to either modify or terminate the 15 contract, the parties will perform the contract according to the modified terms. 2.3.3 Dispute resolution competent and consequences of fail renegotiation In case the negotiation fails, one of the parties can request the Court or Arbitration to resolve the dispute. In various national laws, there are three different approaches to this mater: The first approach is neither adaptation nor termination but to follow the strict principle pacta sunt survanda. The second model is to empower the Court or Arbitration to modify or terminate the contract. Another approach, which can bee seen in common law systems, is to release the contractual obligation without any room for contractual adaptation. 16 Chapter 3 BACKGROUND OF VIETNAMESE LAW ON CHANGED CIRCUMSTANCES AND ITS LEGAL IMPLEMENTATION 3.1 Background of Vietnamese law on changed circumstances 3.1.1 Overview of Vietnamese law on changed circumstances Although a specific provision on changed circumstances was for the first time cofified in the Civil Code 2015, this notion had been recognized, to some extent, in specific sector laws. Before the Civil Code 2015 was enacted, the wrtitten and case law during pre-1975 period did not recognize the notion of changed circumstances. Both the Civil Code 1995 and 2005 did not contain any provision on this issue. However, there are certain similar provisions mention in some specific laws regulating high risks and long term contracts, although not in an expressed way. Therefore, Article 420 is the first official provision regulating the notion of changed circumstances. 3.1.2 Background of Vietnamese law on changed circumstances 3.1.2.1 Conditions of on changed circumstances - Causes and time of changes Part 1(a) of Article 420 stipulates that: “The circumstances change due to objective reasons occurred after the conclusion of the contract”. - The unforseeability of unexpected circumstances Acording to Part 1 (b) of Article 420, one of the conditions of changed circumstances is that: “At the time of concluding the contract, the parties could not foresee a change in circumstances.” When determining whether the changes are foresseable or not, there are a great deal of factors relevants such as the nature of circumstances, the assessment abilities of parties. When it is impossible to measure how knowdlegeable a party is, it is necessary to refer to the behaviour of a reasonable person in such similar conditions. 17 - Dramatical changes of circumstance Paragraph c and paragraph d of Part 1 Article 420 indicate a group criterion for assessing how fundamentally the circumstances have changed. Paragraph c state the level of changes, and paragraph d provides the serious level of damages. This change is must be reach a certain level to be constitutes the basic changes of circumstances. - The obligation to prevent damages Paragraph đ part 1 Article 420 states that: “The affected party has adopted all the necessary measures in its ability, in accordance with the nature of the contract, cannot prevent or minimize the extent of effect.”. 3.1.2.2 Renegotiation Firstly, the right to demand renegotiation or renegotiation obligation. Secondly, the deadline for demanding renegotiation. Thirdly, the contents of renegotiation Fourthly, the burdern of prove 3.1.2.3 Dispute resolution competency and consequences of fail renegotiation If the parties cannot reach an agreement on amending the contract within a reasonable period of time, any of the parties may request a court to terminate the contract at a specific time or amend the contract (Part 3 of Article 420). The conditions stipulated in Article 420 resembles Germanic approach in their theory called “Geschäftsgrundlage”. This doctrine is codified in Article 312 of German Civil Code 2002 and become a regime to excuse a party from contractual liability when the basic circumstances of the contract have changed dramatically. Although Vietnamese law is inspired by German doctrine of hardship, Article 420 fails to clarify what are basic circumstances of a contract. 3.2 The application of provision on changed circumstance 3.2.1 The situation before the enactment of the Civil Code 2015 18 Before the enactment of the Civil Code 2015, there had been a lack of provision regulating the performance of a contract in case of hardship. This legislative situation contributed to the difficulties of the courts in dealing with cases related to hardship. 3.2.2 The situation after the enactment of the Civil Code 2015 The study, through law and legal practice assessment, suggests that Vietnamese approach resembles certain provisions of PICC and soem national law. However, there are the remaining problems need further research: Firstly, the law fails to clarify what constitutes the basic foundation of a contract; Secondly, except for conditions listed in Article 420, there is the lack of an official definition of changed circumstances; Thirdly, the requirements stipulated in Article 420 are relative vague that need more specific interpretation; Fourtly, the law fails to regulate the renegotiation, especially with regarding to the right and obigation of renegotiation. Moreover, Article 420 does not state the budern of proof of the party invoking hardship provision, remedies for unreasonably refusual to renegotiate, and the reasonable period of renegotiation. Fifthly, the law does not make it clear as to whether the preferable consquence of fail renegotiation is termination or adaptation of the contract. Article 420 is silent as to if the court is empower to adapt or terminate the contract without parties’s consent. Sixthly, to what extent can the court modifies the contract terms. 19 Chapter 4 POTENTIAL DIRECTIONS AND PROPOSALS FOR IMPROVE THE LAW ON CHANGED CIRCUMSTANCES AND ENHANCING THE EFFICIENCY OF THE IMPLEMENTATION OF THIS LAW 4.1 Potential directions for improve the law on changed circumstances 4.1.1 Draw lessons from international provisions in order to meet the demand of global economy. 4.1.2 Ensure the feasibility of the law 4.1.3 Emphasis the principle of good faith in dispute resolution 4.1.4 Address the drawbacks of the law on changed circumstances 4.2 Proposals for improve the law on changed circumstances 4.2.1 Formulate the definition of changed circumstances Propose to add a definition into the first part of Article 420 as follows: "The basic circumstances of a contract is the shared asumptionss made by parties at the time of contract conclusion based on that the contract is”. In this definition, the study stresses two main characters of the circumstances of a contract, including the shared knowledge between parties and the core factors that is the ground of the contract. 4.2.2 Interpretation of basic changes of circumstances. The changes of circumstances are fundamental when the basic circumstances have been changed dramatically render the performance of a contract become harsh, or disminish the equilibium of a contract, or make the contract frustrated if the contract is performed according to the existing terms. 4.2.3 Amend the requirements of changed circumstances a. Admend the condition stated in paragrap a part 1 of Article 420 20 “The circumstances change due to objective reasons occurred or are known by parties after the conclusion of the contract.” b. Admend the condition stated in paragrap b part 1 of Article 420: “At the time of concluding the contract, the parties could not reasonably foresee a change in circumstances.” c. Merger paragrap c and d part 1 of Article 420 “The change exceeds the risks that the affected party has to bear according to the contract and the law”. 4.2.4 Improvement of provisions on renegotiation obligation The admendment of provisions on renetotiation obligation includes the following requirements: Regulate a renetotiation obligation in a way that the parties have the obligation to negotiate before requesting the Court to resolve, or one party has the right to request renegotiation and the other party is obliged to participate in this process, or the parties have the right to request the Court to resolve the case only if the negotiation fails or one party refuses to

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