Legal provisions on the payment of compensation after contract termination

Currently, contracts serve as an essential legal instrument to establish the rights and obligations between parties. However, in practice, contractual breaches still frequently occur for various reasons such as delays in execution, improper fulfillment of contractual obligations, or unlawful unilateral termination of contracts. In such cases, the breaching party may be liable to pay compensation to the other party in accordance with the law. The following article by NPLaw analyzes the legal provisions governing the payment of compensation after contract termination.

I. Current situation regarding the payment of compensation after contract termination

Delayed or non-payment of compensation following contract termination remains a fairly common issue in practice, particularly in areas such as construction, purchase and sale of goods, service contracts, labor supply, and land-use rights transfers.

Statistics indicate that contractual disputes relating to breach of obligations and claims for damages account for a significant proportion of civil and commercial litigation. In many cases, even after a judgment requiring compensation has been rendered, the breaching party deliberately fails to comply, leading to delays or backlogs in civil judgment enforcement.

The main causes include:

• Lack of goodwill on the part of the breaching party;
• Difficulty in proving specific damages;
• Absence of effective enforcement mechanisms;
• Poorly drafted contracts lacking compensation clauses;
• Enterprises’ reluctance to litigate at Court or their limited legal knowledge.

II. Legal provisions on the payment of compensation after contract termination

1. Definition of payment of compensation after contract termination

Although current legislation does not provide an explicit definition, the payment of compensation after contract termination can be understood as an act whereby the breaching or injuring party performs its obligation to compensate the injured party in monetary form, with the purpose of restoring material and/or moral losses arising from the contractual breach.

Such payment may be made pursuant to:

• An agreement between the contracting parties; or
• A decision rendered by a competent authority such as a court or commercial arbitration agency. 

2. Conditions giving rise to compensation payment after contract termination

Under Articles 419 and 360 of the Civil Code 2015, the conditions giving rise to the obligation to compensate include:

• The occurrence of a contractual breach (non-execution, improper execution, or incomplete execution of obligations);
• Actual damage suffered (loss of property, income, or additional expenses incurred);
• A direct causal connection between the breach and the damage;

In certain cases, proof of fault by the breaching party is also required (unless the parties have agreed otherwise).

Note: In commercial relations governed by the Commercial Law 2005, a breaching party may still be liable for damages even in the absence of fault, provided that a breach has occurred and resulted in loss.

3. Provisions on compensation clauses in contracts and the right to claim payment after contract termination

Under Article 302 of the Commercial Law 2005, the parties are entitled to agree on the level, method, and time of compensation payment.

In the absence of specific contractual terms, compensation shall be determined based on the actual and direct damage suffered by the injured party, including any profit that could have been earned had the contract been properly executed.

The injured party may claim payment of compensation through:

• Negotiation or mediation;
• Filing a lawsuit with a competent court; or
• Requesting commercial arbitration if an arbitration clause exists.

In addition to compensation, the breaching party may also be required to pay interest on late payment if such delay infringes upon the lawful interests of the injured party.

III. Questions on the payment of compensation after contract termination

1. Basis for determining the amount of compensation payable after contract termination

The compensation amount shall be determined based on:

• The actual and direct loss caused by the breach (e.g., property loss, damage, incurred expenses, loss of revenue);
• The benefits lost had the contract been properly executed (e.g., expected profits);
• Reasonable expenses incurred to prevent or mitigate losses;
• Reasonable expenses incurred to verify and protect legal rights (e.g., legal fees, appraisal costs).

If the contract contains a specific compensation or penalty clause (e.g., fixed damages, liquidated damages), such agreement will serve as the basis for calculation.

2. Competent authorities for resolving disputes related to compensation payment after contract termination

Disputes concerning compensation obligations after contract termination may be resolved by:

• The competent People’s Court (where the defendant resides, where the contract is executed, or as agreed by the parties); or
• A commercial arbitration center, if the parties have a valid arbitration agreement.

The choice of dispute resolution authority depends on the terms of the contract or the applicable legal provisions.

3. Burden of proof on the party claiming payment of compensation after contract termination

According to the general principle under Article 91 of the Civil Procedure Code 2015, the claimant takes the burden of proof to establish:

• The existence of a valid contract and its contents;
• The other party’s breach of contractual obligations;
• Actual damage incurred and the causal relationship between the breach and the damage;
• The specific value of the damage, supported by evidence such as invoices, vouchers, quotations, expert conclusions, and accounting records.

If the claimant fails to substantiate these elements, the compensation claim may be dismissed.

IV. Legal consultancy services on the payment of compensation after contract termination

The foregoing article by NPLaw provides a comprehensive overview of the legal provisions concerning the payment of compensation after contract termination. Should clients have any questions regarding the aforementioned matter or other legal issues, please contact NPLaw for direct consultation and professional guidance from our experienced legal team.