Consequences of Violation of Representations and Warranties Under Vietnamese Law
Consequences of Violation of Representations and Warranties Under Vietnamese Law
As detailed in the previous article, in our opinion, representations and warranties (warranties) must constitute the obligations of the person making them under Vietnamese law. They may imply an obligation on the part of the person providing them (the Warrantor) to ensure that the facts and matters stated are true. In this article, we will try to consider the consequences of violating representations and warranties under Vietnamese law. As discussed further below, depending on the context, a breach of warranty may result in:
– Legal liability for breach of warranty is an independent obligation; or
– Liability for breach of proper delivery obligations; or
– Liability due to breach of the obligation to provide information to the parties in the contract; or
– Compensate (or reimburse) losses to the extent the parties have agreed to compensate (or reimburse) losses arising from breach of warranty.
Since “representations and warranties” are just common concepts and there is no specific legal framework prescribed in Vietnamese law, it is important that contracts under Vietnamese law have provisions that address the above issues to achieve the parties’ desired results.
Perhaps based on the discussion below, a more appropriate approach would be to have specific wording in the share purchase agreement that warranties are part of the description and quality of the shares sold so that, among other things, the seller can be subject to remedies. applies to violations of non-conforming delivery obligations.
Liability for breach of warranty as breach of independent duty
Warranties may constitute obligations under Vietnamese law. Accordingly, technically, a breach of warranty is a breach of duty and gives rise to liability for the seller. However, if the warranty is considered an independent obligation, it is unclear how to determine damages arising from breach of warranty under Vietnamese law. To mitigate this, the parties may need to agree on what will be considered damages if there is a breach of warranty.
Liability for breach of proper delivery obligations
According to Vietnam’s Commercial Law 2005, the sale of shares can be considered the sale of “goods” (goods). Accordingly, the seller of shares in the company will have the obligation to deliver goods to the buyer in accordance with the parties’ agreement on quality, quantity, packaging, maintenance and other issues. The 2005 Commercial Law and the 2015 Civil Code also detail the handling measures in case the goods do not meet the agreed quality and specifications.
Although the above requirements are more relevant to general goods, they can still apply to shares in a company. However, the law does not clearly stipulate what may constitute “quality, quantity and other matters” of the goods under a share purchase contract.
The assurance of the state and condition of a company has a significant impact on the value of the company, which in turn determines the value of that company’s shares under the stock purchase agreement. Accordingly, reasonable guarantees in a share purchase contract must constitute the quality of that share. However, one could still argue that only the par value, number of shares and the rights attached to the shares concerned constitute the quality and quantity of the goods under the share purchase contract. To avoid such potential controversy, the share purchase agreement should contain wording to make it clear that the warranties constitute the description and quality of the shares being transferred.
Liability for breach of the obligation to provide information to the parties in the contract
According to the 2015 Civil Code, in case one party has information that affects the other party’s acceptance to enter into a contract, it must notify the other party. If that party fails to perform and causes damage or loss, that party must compensate. Accordingly, if the seller breaches the Warranty, the purchaser in a share purchase contract may claim that the seller failed to notify the purchaser of the incorrect warranty and must therefore compensate the purchaser for loss and damage.
However, there are some problems with this approach. First, the buyer must prove that the seller “had knowledge” of the breach of warranty. This may not always be true. Sometimes, the seller is also unaware of the breach of warranty. Second, even if the buyer proves that the seller “had information” about the breach of warranty and failed to disclose it to the buyer, the buyer still needs to prove damages for failure to disclose the information. Under Vietnamese law, this may be more difficult than proving damages for failure to deliver goods properly.
Liability to compensate (or reimburse) loss
Because warranty is not a legal concept under Vietnamese law, breach of warranty does not result in an obligation to indemnify by default. That said, indemnification clauses are quite common in share purchase contracts. An indemnification clause in a share purchase agreement can be considered a contractual commitment by the seller to reimburse the buyer for certain losses and damages for breach of warranty.
