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September 30, 2021

The Enforceability of Liquidated Damages Clauses in IP-Related Agreements in Vietnam

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As the world of business changes at a breathtaking pace, the growing importance of knowledge and innovation has placed intellectual property (IP) assets under the spotlight and highlighted the necessity of effectively taking advantage of such assets, while minimizing the risk of infringement. To that end, IP rights holders rely on a variety of measures when cooperating with third parties for IP commercialization. One such measure is a liquidated damages clause (“LD clause”), a quick and straightforward way to determine the amount of compensation payable by a breaching party to the aggrieved party in the event of IP infringement or another contract violation.

The enforceability of the LD clause in Vietnam remains a controversial topic, but some recent IP-related cases may shed some light on the applicability of such provision.

The Liquidated Damages Clause in Vietnam’s Legal Framework

Liquidated damages can be understood as a pre-agreed fixed amount paid by one party to another as compensation for loss or damage resulting from a breach of contract. Liquidated damages, accordingly, do not require any proof of the loss; all that is needed is to demonstrate the specific breach of contract. For an intangible asset like IP, proving concrete damages that are actual and direct consequences of an infringement or breach would be exceedingly cumbersome for the rights holder. Hence, LD clauses are commonly found in IP-related contracts.

Under Vietnam’s 2015 Civil Code, there is no restriction on contractual parties’ agreement on liquidated damages. Particularly, Article 360 of the Civil Code prescribes that “with respect to damage caused by breach of an obligation, the obligor must compensate for the whole damage, unless otherwise agreed or prescribed by law”. Thus, compensation for a breach can be subject to the parties’ agreement, which may be unrelated to the damages, and may also be higher or lower than the actual and direct damages.

However, under the 2005 Commercial Law, there is no similar clause. Instead, under Article 302, the compensation for breach of contract includes only (i) the value of actual, direct damages suffered by the aggrieved party caused by the breaching party, and (ii) the direct profit that the aggrieved party would have been entitled to if there were no breaching act. Some have argued that liquidated damages are applicable as a penalty, rather than compensation, under the Commercial Law. Even so, such penalty for each breach is capped at 8% of the value of the breached portion of the contractual obligation. If the liquidated damages exceed 8% of the value of the component of the contract that was breached, the authorities would consider applying the maximum penalty as prescribed by law (≤8%), and declare the excessive amount (over 8%) invalid.

A recent decision of the Supreme Court of Vietnam on a commercial dispute (Decision on appeal against cassation No. 11/2020/KN-KDTM dated June 9, 2020) provides an example of the view of “pre-agreed fixed compensation” in practice. According to this decision, the Supreme Court did not accept liquidated damages as compensation that the parties could agree on under Vietnamese law on the basis that pre-estimated damages were not appropriate, and compensatory damages must instead be calculated based on actual and direct damage as specified under the Commercial Law. As such, with the current scope of damage compensation under Vietnam’s commercial regime that only accepts actual and direct damages resulting from the breach, the LD clause in Vietnam might not yet be enforceable.

Under Articles 204 and 205 of the 2005 IP Law (as amended in 2009 and 2019), if a plaintiff in an IP infringement lawsuit wishes to make a claim for compensation, the plaintiff must prove its actual loss and damage, which forms the basis for determining the amount of compensation for damages. Such basis might be (i) the total material damage calculated as a monetary amount, plus profit derived by the defendant from conducting the infringing act, or (ii) the licensing price of the IP asset (with the assumption that the defendant was licensed by the plaintiff to use that object under a license contract within a scope corresponding to the act of infringement which was committed), or (iii) material damage by another calculation method provided by the rights holder in accordance with the provisions of law. In the event that the plaintiff cannot determine the amount of material damages through these methods, the plaintiff might request the court to consider pre-established damages, as stipulated in Article 205.1(d) of the IP Law, and the court, depending on the extent of loss, can itself grant pre-established damages not exceeding VND 500 million (approx. USD 22,000). (The concept of such pre-established damages rendered by the court will not be analyzed here.)

Case Study: Feasibility of Enforcing a Liquidated Damages Clause in an IP-Related Agreement

IP-related contracts such as licensing/franchising agreements and technology transfer agreements are commonly entered into “for profit purposes.” If this is the case, under Vietnamese law, such contracts are governed by the Commercial Law and IP Law (as specialized laws), instead of the Civil Code. Thus, as analyzed above, an LD clause in IP-related contracts might not be enforceable. To the best of our knowledge, there has not yet been any case recorded in Vietnam which crystallizes the validity of the LD clause in the realm of IP. However, the following case study may reveal some noteworthy aspects as well as potential hurdles in enforcing the LD clause in terms of IP infringement.

Case summary: Company A, based in the U.S., is the owner of the trademark “X” in Vietnam. In the course of business, Company A found a Vietnamese entity was using their exact trademark “X” to register and establish a company named “X Vietnam Joint Stock Company”. In light of this, Company A filed a lawsuit against the Vietnamese entity requesting them to change the company name so as not to infringe the trademark “X”.

During the court proceedings, the two parties reached a mutual settlement via conciliation, whereby the parties had come up with an agreement in which, among other things, the Vietnamese entity would be held liable to compensate Company A a pre-determined amount of USD 1,000 per day for each act of infringement in the future. The People’s Court of Hanoi issued a decision recognizing the parties’ agreements, which includes the liquidated damages provision.

The question herein is whether, if the Vietnamese entity continues to infringe Company A’s IP rights in the future, Company A can trigger the agreement on liquidated damages in the above-noted decision (which, in nature, is similar to an IP-related agreement) to claim compensation at the pre-fixed amount?

In an ideal scenario, upon Company A’s request to enforce the Hanoi Court’s decision, the Civil Judgment Enforcement Agency (CJEA) would agree to enforce and request the judgment debtor to pay a specified sum based on the agreed-to formula. However, the CJEA might be reluctant to enforce the decision in this case and instead assert that it has no jurisdiction to determine whether an act of IP infringement has occurred. Consequently, there is a high possibility that Company A would need to initiate another lawsuit to request compensation pursuant to the decision. Once this legal issue is resolved by the court, the judgment creditor can proceed with enforcement at the CJEA as usual.

If a new lawsuit is filed, it could be considered either (i) a civil dispute or (ii) a business/trade dispute. This division stems from an inconsistent recognition by the courts. Some courts do not view an IP infringement dispute as being “for profit purposes,” and will thus categorize it as a civil dispute (per Article 26 of the Civil Procedure Code). Other courts take a contrary view, based on Article 6.2 of Resolution No. 03/2012/NQ-HDTP dated December 3, 2012, in which “profit purposes of individuals and organizations in business and trade activities” is defined as “desires of such individuals/organizations to collect profits, regardless of whether or not such profits are collected from such business/trade activities.” Since the dispute comes from two parties who both aim to collect profits, such IP infringement disputes are regarded as business/trade disputes (per Article 30 of Civil Procedure Code).

This principal difference in the court’s view of the nature of the dispute might deliver different outcomes of the enforceability of an LD clause. If viewed as a civil dispute, the parties’ agreement on liquidated damages, theoretically speaking, stands a good chance of being enforceable.

The court in this particular case did explicitly recognize the parties’ agreement on liquidated damages in its written decision. Hence, it is reasonable that the court ruled on the enforcement of the liquidated damages amount in accordance with its decision. If the case is viewed as a business/trade dispute, there is a high possibility that an LD clause might not be enforceable.

However, in practice, regardless of the type of dispute, the Vietnamese courts in most cases have tended to grant the winning party (such as an IP rights holder) compensation based only on actual and direct damages/losses suffered.

Outlook

Even though the enforceability of liquidated damages in IP-related agreements remains unclear, it is still recommended for IP rights holders to include such a clause as a deterrent to any potential infringement from the other contracting parties. As for dispute settlement, if the two parties end up at the conciliation stage, an LD clause is once again recommended to be included in the conciliation agreement, with the purpose of posing a serious deterrent should an adverse party recommit the infringement.

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