Civil law and commercial law are both regulated to regulate contracts between parties. So when will a contract be governed by civil law and when will it be governed by commercial law? What is the difference between a civil contract and a commercial contract in terms of penalties for breach and compensation for damages? This article will analyze the above issues.

1. Cases of applying civil law in contracts

Pursuant to Article 4 of the 2015 Civil Code on the application of the Civil Code:

“Article 4. Application of the Civil Code

1. This Code is the general law regulating civil relations.

2. Other relevant laws regulating civil relations in specific areas must not be contrary to the basic principles of civil law prescribed in Article 3 of this Code.

3. In cases where other relevant laws do not provide or have regulations but violate Clause 2 of this Article, the provisions of this Code shall apply.”

Thus, civil law will be applied to regulate the relationships and transactions of the parties when such relationships and transactions have not been specifically regulated by specialized laws or specialized laws refer to the application of the Civil Code or specialized laws are contrary to the provisions of the Civil Code.

2. Cases of applying commercial law in contracts

Pursuant to Article 2, Article 4 of the 2005 Commercial Law as follows:

“Article 2. Subjects of application

1. Traders conducting commercial activities as prescribed in Article 1 of this Law.

2. Other organizations and individuals conducting commercial-related activities.

3. Based on the principles of this Law, the Government shall specify the application of this Law to individuals conducting commercial activities independently and regularly without having to register their business.

Article 4. Application of the Commercial Law and relevant laws

1. Commercial activities must comply with the Commercial Law and relevant laws.

2. Special commercial activities regulated in other laws shall apply the provisions of that law.

3. Commercial activities not regulated in the Commercial Law and in other laws shall apply the provisions of the Civil Code.”

Accordingly, commercial law is applied to regulate commercial activities. Commercial activities are understood as activities aimed at making profits, including buying and selling goods, providing services, promoting trade and other activities aimed at making profits.

3. How to determine the law applicable to a contract

To determine the law applicable to a contract, it is necessary to rely on two bases: the subject and the purpose of concluding the contract.

For civil contracts, the subject of the contract is an individual or legal entity with the purpose of concluding the contract to meet the needs of daily life and consumption; civil contracts may or may not generate profits.

For commercial contracts, the subject of the contract is a trader or an organization or individual with commercial activities; the purpose of concluding the contract is to make a profit.

4. Differences between civil contracts and commercial contracts

4.1. Penalty for breach of contract clause

Penalty is one of the clauses to force the parties to comply with the content committed in the contract. Article 310 of the 2005 Commercial Law stipulates penalties for violations as follows:

“The penalty for breach of contractual obligations or the total penalty for multiple violations is agreed upon by the parties in the contract but must not exceed 8% of the value of the breached contractual obligation…”

Accordingly, the commercial law only allows the parties to impose a penalty for breach of contract of up to 8% of the value of the breached obligation. In contrast, civil law does not set a maximum limit on the penalty for breach but allows the parties to agree and determine the penalty in the contract. Pursuant to Clause 2, Article 418 of the 2015 Civil Code, “The penalty for breach is agreed upon by the parties, unless otherwise provided by relevant laws”.

4.2. Compensation for damages clause

Regarding the compensation for damages clause, there is a clear difference between civil law and commercial law. Articles 302 and 303 of the Commercial Law 2005 stipulate that compensation for damages is the act of the breaching party compensating for losses caused by a breach of contract; the basis for compensation for damages includes: (i) there is a breach, (ii) there is actual damage, (iii) the breach is the direct cause of the damage. Based on the above provisions, the commercial law allows the parties to apply compensation for damages if there are sufficient grounds according to the law, without requiring the parties to agree on compensation for damages in the contract.

Meanwhile, the civil law stipulates that the compensation for damages clause can only be applied if the parties have an agreement in the contract. Pursuant to Clause 3, Article 418 of the 2015 Civil Code, in case the parties have an agreement to apply a penalty for violations without an agreement on compensation for damages, only the penalty for violations shall be applied, not compensation for damages.

This article is for reference only and is not intended to be used as advice. If you need advice, please contact us via email: info@barrso.com