When entering a contract, there is a very important right that all parties in a contractual relationship should acknowledge and apply, that is, the right to amend the contract when there is a change in circumstance, as provided in the Vietnamese Civil Code 2015, Article 420. This provision is recognised as a new improvement to the Civil Code 2015, in line with the spirit of international laws on contract performance hardships, which was embedded in the UNITDROIT Code of Conduct on the Principles of International Commercial Contracts (PICC), Principles of European Contract Law (PECL) and the 1980 Vienna Convention.
According to Article 420 of the Civil Code 2015, in the course of performing a valid contract, if there is a fundamental change in circumstances, the affected party has the right to request the other party to enter a negotiation for a change in contractual terms within a reasonable deadline.
1. What is considered a fundamental change in circumstances?
Clause 1, Article 420 provides for a fundamental change in circumstances when the following five conditions are met:
• The change of circumstances due to objective causes which occurs after the finalization of the contract;
• At the time of entering into the contract, the parties could not foresee such change in circumstances;
• The change in circumstances is too major that if the parties had known in advance, the contract would not have been concluded or would have been concluded under different terms;
• The continuation of the contract without changing the contractual terms will cause serious damage to one party;
• The affected party has applied all necessary measures in its ability, in accordance with the nature of the contract, but cannot prevent or minimize the negative impact on their interests.
Thus, according to the provisions of the Law, only when all of the above factors are satisfied, will it be considered as a fundamental change in circumstances, and the affected party has the right to request the other party for a contract renegotiation.
2. What are the solutions if the parties cannot agree on an amendment of the contract within a reasonable deadline?
Clause 3, Article 420 stipulates that when such event arises, the parties may request a settlement by the Court under one of the following options:
(i) Termination of the contract, or
(ii) Modify the contract to balance the legitimate rights and interests of the parties.
It should be noted that the Court may only decide to amend the contract in cases where the termination of the contract will cause more damage than the costs to perform the contract if it is amended. Besides, in the process of negotiation between the parties and awaiting a settlement verdict by the Court, the parties must continue to perform their original contractual obligations, unless otherwise agreed.
3. Other matters not regulated by law that the parties can and should agree when entering into a contract:
(i) If the change in circumstances is insufficient to be a fundamental change in circumstances, are the parties still entitled to modify the contract?
In our opinion, the parties still have the right to amend the contract to accommodate the new circumstances, provided that at the time of entering into the contract the parties have agreed in writing that the contract can be modified in case of a change in circumstances. This is in accordance with the provisions of the Civil Code on the principle of voluntary agreement of the parties in a contractual relationship and is protected by law. However, it should be noted that the voluntary agreement of the parties on the conditions for amending the contract will not be considered and resolved by the Court, if the parties wish for a contract modification when a dispute arises. This is because the Court has the power to apply Article 420 to modify the contract only when the circumstances change fundamentally.
(ii) What is considered a “major” change?
Law makers did not provide specific guidelines on what changes are considered “major changes”, but only “quantifies” that the change must be so serious that if the parties had known in advance, the contract would not have been formed or signed under different terms.
In contract negotiation, the parties should clarify the concept of "major change" with a specific quantity, on the basis of determining what the basic obligation of the contract is. For example, in a construction contract, one of the basic obligations of the contractor is to complete and hand over the project on schedule. When a serious change in circumstances arises, such as the order to stop construction activities according to Directive No. 12/CT-TU dated July 22, 2021 of the Ho Chi Minh City People Committee, which strengthens measures to ensure epidemic prevention and control of the Covid 19 disease according to Directive 16/CT-TTg of the Prime Minister dated March 21, 2020 can be considered a "major change" that prevents the contractor to perform their contractual obligations timely.
(iii) What constitutes a “reasonable time” for the parties to re-negotiate?
This continues to be a non-qualitative regulation that the parties when negotiating a contract will have to clarify and draft in specific provisions corresponding with the nature of the transaction they will enter into.
(iv) On what basis will the Court deliver a verdict to modify the contract?
According to Clause 3, Article 420, the Court may only decide to amend the contract in cases where the termination of the contract will cause more damage than the costs to perform the contract if it is amended.
Thus, the basis for the Court to deliver a verdict to amend or terminate the contract when circumstances change is based on the determination of the extent of damage and costs affecting the interests of the parties. How to accurately determine the extent of damages and assess the cost to perform the new terms (which the Court imposed) is a dilemma for the law makers themselves, especially to balance the interests of the contracting parties without changing the (voluntary) will of the contracting parties.
(v) Other importation points to keep in mind:
· Negotiate and specify the terms to modify the contract in case there is a change in circumstances before finalizing the contract!
Whether you are negotiating an investment agreement, a business partnership, a purchase or sale of goods, import and export, a long-term lease of premises, a construction contract, even a prenuptial agreement, especially transactions of great value or strategic importance, this provision should be considered a “pocket provision”. Put a "bulletproof vest" on every type of contract that you will sign with a model clause, referring to Article 420.
· Clearly define specific concepts, definitions, and quantifications on the basis the law applicable for the agreement you are about to enter into!
· Promptly notify and come up with a solution: When the contractual circumstances change, it is necessary to immediately notify the other party of the contract, and at the same time, make every possible effort to remedy and minimize the consequences.
· Make use of time to negotiate: Reasonable time must be specified in the contract! And don't waste this golden time! Make an effort to negotiate to reach an agreement!
· Seek jurisdiction to protect your interests as soon as negotiations fail: While making every effort to achieve a positive outcome, it is necessary to be prepared for a situation where the negotiation fails and requires arbitration!
· Sincerity, Equality, Respect, Mutual benefit are the golden rules in negotiation that would remove any deadlock!
* This article is a general opinion of Lawlink Vietnam (“LLVN”), is for reference only and is not intended to be a specific advice of LLVN for any situation and/or specific case. LLVN as well as any lawyers, associates and employees of LLVN will not be responsible for any organization or individual using this article for any other purpose other than for reference purposes, or use this article to make the decision of that individual or organization for their particular case.