“The complicated situation caused by the Covid-19 epidemic has greatly affected the business activities of many enterprises, especially those related to commercial transactions. Sales contracts which are in the process of implementation are experiencing delays due to disruptions in the supply chain of goods or application of social distancing policies. This leads to violations of the seller’s time of delivery. Such violations attract penalties and compensation for damage (if any) to the aggrieved party. During this time, the benefits of commercial transactions have not been achieved, but enterprises are still having to bear losses.”
In sales contracts, the delivery time should be agreed upon clearly. This stipulation affects the production, business efficiency, and profits of the parties, especially the buyer.
Usually, the causes of the delay in delivery can be attributed to the location of the seller’s warehouse being too far away, affecting the inspection and collection of goods. It is always seen that sales, accounting and warehouse management do not have a harmonious synergy. The order quantities are too large to be supplied without any disruptions. However, during the Covid-19 pandemic, additional factors such as the disruption of the supply chain and social distancing measures have also been major factors causing the delays in deliveries.
Disruptions to the supply chain: Delay in the delivery of goods is a caused by the inability of the supplier to deliver the goods to the seller according to the original schedule or the delay in delivery due to many reasons (for example, impact on the supply chain of goods, transportation process, delay in export and import procedures etc.). When there is a direct agreement between the seller and the buyer, the seller faces risk of having to compensate for damage or to be fined for breach of the contract.
The parties may agree with each other on the contractual rights and obligations of each party during the performance of the contract as well as consequences of breach of contract. In the absence of such an agreement, when a breach occurs, the parties shall decide and settle the dispute based on the legal provisions governing the contract. According to the contract law, a breach of contract is the failure of one party to perform, or incomplete performance, or improper performance of an obligation as agreed between the parties or as under the provisions of the Commercial Law 2005.
In a commercial contract, the aggrieved party is fined only if such penalty for breach is agreed upon by the parties to the contract. In case the parties do not agree on such violations, the aggrieved party is only entitled to claim compensation for damage. If the parties agree on fines for violations, the violating party must pay fine and compensate for damage caused to the aggrieved party.
However, the penalty for breach of contractual obligations or the total penalty for multiple violations is agreed upon by the parties and is stipulated in the contract. However, such penalty shall not be more than 8% of the value of the portion of the contractual obligation violated. Hence, the parties need to determine the value of the goods, the delivery of which was delayed as a basis for determining the fine, but not the entire contract value.
When a breach of contract occurs, an important factor to consider is whether the breach is exempted from liability as agreed upon by the parties or falling under the provisions of the Commercial Law. Since Article 294 of the Commercial Law 2005 lays down that the party violating the contract is exempt from liability if there is a provision of liability exemption as agreed by the parties, or if a force majeure event occurs, or if the breach by one party is entirely due to the fault of the other party, or if the breach occurred due to the decision of a state agency that the parties could not have known at the time of entering into the contract. In such a case, the party responsible for the breach of the contract is obliged to prove the exemption.
On the contrary, if the delivery deadline is violated and the exemption does not apply, the violating party will be responsible for paying fines in accordance with the provisions of laws as discussed above.
In addition to fines, the violating party must also pay compensation to the aggrieved party for the losses caused by the breach of contract. The aggrieved party is obliged to prove that the losses it has suffered include the actual and direct loss, and the direct benefits that the aggrieved party should have otherwise been entitled to if it had not been for the breach.
To avoid the above risks, the seller needs to regularly monitor the progress and situation of the supply chain to take timely measures when problems arise. In case the supplier is late or unable to deliver the goods on time, the seller needs to request an official notice clearly stating the reason. Based on these documents, the seller can send an update notice to the buyer and propose other alternatives to minimize the consequences of breach of contract. One of the alternatives is to find another supplier that offers the same or similar goods (but with the consent of the buyer). These rules must be stricty followed to avoid a breach of time of delivery resulting in full or partial unenforceability of the contract.
Due to the Covid-19 epidemic, social distancing measures were issued and applied in a short time without notice. Therefore, the transportation of goods is greatly affected as a result of having to maintain physical distancing measures. Further, hiring unloading workers, and transporting goods and obtaining necessary documents for transportation have made it more difficult when transporting goods across provinces or districts in the same area. Therefore, the parties to the contract need to update themselves of the situation and take appropriate measures to notify each other about the delivery status as well as other factors affecting the delivery. The notification must be made in a timely and clear manner and be accompanied by relevant supporting documents.
The parties also need to pay attention to the terms of the agreement and anticipate bad situations while negotiating the terms and conditions of the contract in the occurrence of force majeure events, or the application of exemption to liability. These situations are likely in the current times due to the prevailing outbreak of Covid-19 which may lead to violation of the contractual time of delivery. The seller may consider negotiating with the other party on extending the time for delivery of goods in comparision with normal situation. Adding another clause to consider the Covid-19 epidemic and provide extension for delivery is also needed.
The complicated situation caused by the Covid-19 epidemic has affected goods sales contracts. Violation of the contractual time of delivery may result in liability such as fine or compensation.
If such a situation occurs, the parties must clearly understand the scope of their responsibilities according to the provisions of the contract and the law. In addition, enterprises need to pay attention to the application of preventive measures and strictly comply with the contractual stipulations to avoid damages arising from breach of obligations as mentioned above by the PLF in this article.
The article is based on current laws at the time as above and may no longer be relevant at the time readers access this article due to changes in applicable laws and specific cases that the reader wants to apply. Therefore, the article is for reference only.