Consequences of Breaches of Agency and Warranty Under Vietnamese Law
Consequences of Breaching Representations and Warranties Under Vietnamese Law
As detailed in our previous article, in our view, representations and warranties (warranties) must constitute an obligation on the part of the party making them under Vietnamese law. They may imply an obligation on the part of the provider (the warrantor) to ensure that the stated facts and matters are true. In this article, we will attempt to examine the consequences of breaching representations and warranties under Vietnamese law. As discussed in more detail below, depending on the context, a breach of warranty may result in:
· legal liability arising from the breach of the warranty as an independent obligation; or
· liability arising from a breach of the obligation to deliver goods in conformity; or
· Liability arising from a breach of the duty to provide information to the parties to the contract; or
· Compensation (or reimbursement) for losses within the scope agreed upon by the parties regarding compensation (or reimbursement) for losses arising from a breach of warranty.
Since “representations and warranties” are merely general concepts and no specific legal framework is prescribed under Vietnamese law, it is crucial that contracts governed by Vietnamese law include provisions addressing the above issues to achieve the parties’ desired outcomes.
Based on the discussion below, a more appropriate approach may be to include specific language in the share purchase agreement, where the warranty is part of the description and quality of the shares being sold, such that, among other things, the seller may be subject to remedies applicable to breaches of the obligation to deliver non-conforming shares.
Liability for breach of warranty as a breach of an independent obligation
A warranty may constitute an obligation under Vietnamese law. Accordingly, from a technical standpoint, a breach of warranty constitutes a breach of an obligation and gives rise to legal liability for the seller. However, if a warranty is treated as an independent obligation, it remains unclear how damages resulting from a breach of warranty are determined under Vietnamese law. To mitigate this, the parties may need to agree on what will be considered damages in the event of a breach of warranty.
Liability for breach of the obligation to deliver goods in conformity
According to the Vietnamese Commercial Law 2005, the sale of shares may be considered the sale of “goods” (merchandise). Accordingly, the seller of shares in a company has the obligation to deliver the goods to the buyer in accordance with the parties’ agreement regarding quality, quantity, packaging, maintenance, and other matters. The 2005 Commercial Law and the 2015 Civil Code also provide detailed provisions on remedies in cases where goods do not meet the agreed-upon quality or specifications.
Although the above requirements are more applicable to ordinary goods, they may still apply to shares in a company. However, the law does not clearly define what constitutes the “quality, quantity, and other matters” of goods under a share purchase agreement.
Assurances regarding the condition and status of a company significantly impact the company’s value, thereby determining the value of its shares under a share purchase agreement. Accordingly, reasonable assurances in a share purchase agreement must constitute the quality of those shares. However, one could argue that only the par value, the number of shares, and the rights attached to the relevant shares constitute the quality and quantity of the subject matter under the share purchase agreement. To avoid such potential disputes, the share purchase agreement should include language clarifying that the warranties constitute the description and quality of the shares being transferred.
Liability for breach of the duty to provide information to the parties in the contract
According to the 2015 Civil Code, if a party possesses information that affects the other party’s decision to enter into the contract, it must disclose such information to the other party. If the party fails to do so and causes damage or loss, it must compensate the other party. Accordingly, if the seller breaches a warranty, the buyer in a share purchase agreement may argue that the seller failed to disclose inaccurate warranty information and must therefore compensate the buyer for any losses and damages.
However, there are some issues with this approach. First, the buyer must prove that the seller “had knowledge” of the warranty breach. This may not always be the case. Sometimes, the seller is also unaware of the breach of warranty. Second, even if the buyer proves that the seller “had knowledge” of the breach of warranty and failed to disclose it to the buyer, the buyer must also prove the damages resulting from the failure to disclose the information. Under Vietnamese law, this may be more difficult than proving damages resulting from failure to deliver goods in conformity.
Liability for compensation (or reimbursement) of losses
Since a warranty is not a legal concept under Vietnamese law, a breach of warranty does not automatically give rise to a liability for compensation. That said, indemnity clauses are quite common in share purchase agreements. An indemnity clause in a share purchase agreement may be considered a contractual commitment by the seller to reimburse the buyer for certain losses and damages in the event of a breach of warranty.
However, there is a certain degree of uncertainty regarding the validity and enforceability of indemnity clauses in contracts under Vietnamese law (see here and here).
