Commercial disputes are conflicts arising when one or more parties in a commercial contractual relationship fail to perform or improperly perform the agreements during the implementation of such contract. Understanding the main causes leading to commercial disputes allows the contractual parties to anticipate measures and minimise the risk of disputes. This article will outline some common causes that give rise to commercial disputes as reference for individuals, organisations, and businesses.
Objective causes leading to commercial disputes
Incomplete legal regulations
Incomplete legal regulations are one of the notable causes for many commercial disputes. When legal regulations contain gaps, deficiencies, conflicting provisions, or when the application of the law in a specific situation leads to contradictions due to differences in interpretation an environment where disputes can easily arise is created.
For example, in Vietnam, there are differences between penalties for violations and compensation for damages is not uniformly regulated between the Commercial Law 2005 and the Civil Code 2015. According to Article 418.3 of the 2015 Civil Code, in cases where parties agree on penalties for violations but do not agree on simultaneous imposition of penalties and compensation for damages, the breaching party is only liable for the penalties for the violation. However, Article 307.2 of the 2005 Commercial Law stipulates that as soon as a violation occurs, the violated party may apply both penalties for violations and compensation for damages, even if there is not any provision in the contract on simultaneous application of penalties with compensation for damages, or does not include a provision for compensation for damages. The lack of consistency in these regulations has created difficulties in the practical application of the law and led to the possibility of disputes arising between parties.
Differences in business practices
An important factor leading to commercial disputes is the differences in business practices between countries. Conducting business in a way that one party views as “normal” may not align with the practices of the other party. Understanding and adherence to business practices can sometimes become ambiguous, leading to conflicts in commercial contract relationships.
Matters such as negotiation methods, delivery times, delivery locations, product quality, or even payment methods can significantly differ in each country. When parties in a commercial relationship do not understand or acknowledge these differences, commercial disputes can arise.
For example, in international sales contracts, the point at which the risk is transferred between the buyer and the seller can be determined at the port of shipment, the port of discharge, or on board the vessel, depending on the agreement on shipment conditions between the parties. If the parties do not agree on this matter, each party applying its own interpretation based on its practices can lead to differences in determining the point of risk transfer, thus giving rise to disputes.
Force majeure events
Force majeure events are also one of the common factors leading to commercial disputes. When a force majeure event occurs, the parties may face a number of difficulties leading to being unable to properly and fully perform their obligations under the contract. When an event arises that results in one party being unable to perform its contractual obligations, the parties will have disagreements and conflicts about whether that event is considered a force majeure event, whether the party that violates its obligations is exempted from liability to compensate the violated party for damages. Typically, the views of the parties and the court on whether covid 19 is considered a force majeure event or not also vary depending on each dispute and from time to time.
According to Article 156.1 of Civil Code, a force majeure event is an event that meets the following conditions: (i) it occurs objectively, (ii) it is unforeseeable, and (iii) it cannot be remedied even though all necessary measures and capabilities have been applied. Such events can include natural disasters, wars, economic recessions, or global pandemics.
Subjective causes leading to commercial disputes
Conflict of interest
When engaging in commercial business activities, interests are one of the primary objectives for all parties involved. Therefore, conflicts related to interests are among the top causes of commercial disputes. Each party in a commercial contract relationship has its own profit goals, and when there is a conflict over how to share these interests, disputes can easily arise.
Violation of obligations by each party
Article 351.1 of Civil Code 2015 defines a violation of obligations as when a party having an obligation fails to fulfil that obligation on time, or doesn’t fully perform such obligation, or doesn’t perform it correctly. The violation of obligations by one party in a commercial contract relationship brings negative effects to the legal rights and interests of the other party and results in undesired damages. If the parties cannot agree on solution to disputes regarding compensation on these damages or to apply sanctions for the violation of obligations, disputes become inevitable.
Lack of understanding of legal knowledge
Commercial disputes can occur when one or both parties in a transaction do not understand, are not fully aware of the laws, and carry out actions that are not in compliance with legal regulations, affecting the rights and interests of the other party. In most cases, commercial contracts do not comprehensively specify the legal rights and obligations of each party but rather refer to the law for application. Therefore, besides fulfilling their obligations under the contract, the parties must also be well-versed in the additional obligations stipulated by the law to ensure appropriate actions in commercial relationships and minimise the likelihood of disputes.Especially during the development of international trade, commercial relations between the parties will be governed by national law, international law and international commercial customs.
Above is the general content of main causes of commercial disputes. If you have difficulty in finding a Law Firm to advise and support in legal aspect related to main causes of commercial disputes, please contact us. Phuoc & Partnersis a professional consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms specializing in business law in Vietnam that has leading practice areas in the legal market such as Labour and Employment, Taxation, Mergers and acquisition, and Litigation. We are confident in providing customers with optimal and effective service.