Risk Sharing By Adjusting Price Amid Covid-19

July 04, 2021

Taking advantage of the law, businesses can negotiate with each other and adjust contract value to minimize loss and share risk in difficult times.

Faced with the pandemic, businesses suffer major financial problems. The government only provides short-term support. In the long run, businesses should come up with their own solutions to maintain operation until after the epidemic. Taking advantage of the law, businesses can negotiate with each other and adjust contract value to minimize loss and share risk in difficult times.

Utilizing renegotiation

When there are basic changes in circumstances or force majeure, the parties can agree to renegotiate or extend the contract. This is a new amendment of Vietnamese law that offers more opportunities to continue contract performance and reduce losses when faced with an unpredictable situation.

In terms of form, renegotiation is different from negotiating a contract because the positions of the two parties are no longer equal. Renegotiation is required when parties’ interests are affected and it is necessary to amend the contract for performance. Therefore, negotiation creates more flexibility and concessions compared to being fixated on win-lose results.

In terms of content, contract terms are the results of parties’ agreement in accordance with the law. Thus,  the issue of price adjustment and cost-sharing are no exception.

In construction, contract value adjustments are specifically regulated by the provisions of Law and legal normative documents. In Lawyer Ho Kim Minh Chau’s - Executive Lawyer of Chau Ho Law Firm & Partner - Member of the Vietnam International Arbitration Center (VIAC) - opinion, in most construction contracts, price adjustment terms are usually agreed upon by the parties due to the constantly changing nature of work. Depending on the type of contract, the parties will draft different price adjustment conditions.

For lump-sum contracts or fixed-price contracts, the price adjustment clause is usually not very important;. However, for an adjustable price contract or a combination contract that is both fixed-price and adjustable, the price adjustment clause should be considered in detail so as to avoid later ambiguity. In case this term does not exist in the original contract, the parties can still negotiate later. However, it also greatly depends on the goodwill of the Investor because they may pay a larger contract sum if the parties successfully negotiate.

For example, in a lump-sum contract, the steel prices fluctuate around 20% - 30% globally. If the Investor does not agree to subsidize the price, the Contractor will surely terminate the contract and choose to pay a penalty of 8-10% of the contract price rather than going bankrupt. At this time, the Investor cannot engage another Contractor for a lower price, therefore, both parties agree to amend the contract price and share risk to counter objective obstacles (steel price increases).

In sales of goods and services, price renegotiation and cost-sharing are not governed by any specific regulations. However, fundamentally, parties can renegotiate the contract when there are basic changes in circumstances to share costs and risks reasonably. To ensure the interests of both parties, businesses are advised to refer to market prices before renegotiating.

For example, for agricultural products such as rubber, coffee, etc., enterprises will refer to domestic and foreign market prices; assess their situations and offer a negotiated "acceptable" price for partners. Businesses can also consult industry associations to estimate a suitable price and overcome difficulties.

According to VCCI’s March 2015 publication named "The journey towards integration" in collaboration with a number of international organizations, at present, associations are having policies to actively support members in many ways.

With regards to statistics and market price assessment, many associations such as VINASME, VASEP, VPA, etc. are proactive in updating market prices daily and week. They publish such results on websites or written reports to members. Thanks to their effort, member businesses are more informed in considering prices (especially small and medium businesses)and having a suitable and more synchronous basis for renegotiation when the market context has strong fluctuations.

However, renegotiation is not always successful based on the will of the parties. In many cases, the parties need a third party intervention to negotiate faster and save time. Depending on the field, the parties need to consider and choose the appropriate settlement. For example, for the construction industry, nowadays, businesses tend to choose mediation to resolve conflicts. Accordingly, in price adjustment, the mediator will assist the parties to amend the contract by analyzing the pros-cons of each party, thereby subtly guiding the parties to balance their interests.

In sales of goods and services, if parties cannot negotiate, the law provides for the next step, which is adjudication. Accordingly, Clause 3, Article 420 of the 2015 Civil Code (hereinafter referred to as the Civil Code) stipulate two cases where the Court will decide on behalf of the parties when negotiation fails as follows: either terminate or amend the contract and balance the rights and legitimate interests of the parties.

Arbitrator’s jurisdiction over the above content is not clear in the law, however, arbitrators can decide on contract amendment (in case the parties choose arbitration to resolve disputes). Clause 1, Article 14 of Civil Code 2015 stipulates: "If a particular civil right is violated or is under a dispute, the protection of such right shall be implemented as prescribed in procedural law at the court or arbitrator." This clause is considered to be an overarching and broad-oriented term of arbitration jurisdiction and also governs Clause 3 of Article 420. As such, the arbitral tribunal will still have jurisdiction over the contract amendment if one or both parties request legally.

Seeking third party assistance

However, in some cases, after unsuccessful negotiations, instead of requesting a court or arbitrator to help negotiate, the parties decide to resolve the dispute in a litigation or arbitration proceeding. In practice, this type of dispute is common, requiring the court or arbitration tribunal to carefully consider the rights and interests of the parties.

As a private dispute resolution, arbitration greatly emphasizes "equality" in the entire settlement process; and this nature is best reflected through the application of fairness in adjudication. Fairness has been applied in many cases at VIAC before being officially recognized in Article 6 of the Civil Code 2015. This is one of the key differences between arbitration and litigation.

As a public adjudicative body, the Court has the right and obligation to comply with the provisions of the law, therefore, only after the 2015 Civil Code allows "fairness" can the court apply this doctrine and make it more common.

Meanwhile, this doctrine has been applied in arbitration thoroughly and is re-affirmed later in Civil Code 2015. For example, a case at VIAC has applied fairness as follows:

Claimant signs a rice sale and purchase contract with the Respondent. Accordingly, the Respondent commits to deliver the goods with the correct quality on time. To facilitate the receipt of goods, the Claimant has signed a contract with Company A for transportation and customs clearance.

Company A contacts the Respondent for the delivery of the goods, however, after many requests, the Respondent does not respond. Afterward, the Respondent sends a notice to Company A and the Claimant to extend the time for delivery. At the same time, the Respondent also received notice from the Claimant to delay delivery since the Claimant is awaiting the Directive from the Government of the Philippines (force majeure event)

After much discussion from the parties and the shipping company hardship, the Claimant and the Respondent have agreed to delay delivery for a reasonable period upon the Claimant's notice. However, by the time the Claimant issued the order for delivery, the Respondent failed to deliver the goods and notified the Claimant asking for an increase in rice prices. If the Plaintiff does not pay the price increase, the Respondent will not be able to make deliveries.

Due to the Respondent's breach of obligations, in order to settle the dispute, the Claimant filed a Request for Arbitration at the Vietnam International Arbitration Center (VIAC).

After considering the evidence provided by the parties, the Arbitral Tribunal found that: First, although the Respondent did not deliver the goods, the Respondent did spend money on preparing for the delivery (labeling, standard warehouse, means of transport, etc. ). Second, the delay is partly due to force majeure the Claimant faces (instructions from the Philippine Government). This delay inadvertently reduces the quality of the goods, incurring an additional cost for the Respondent to restore the goods. Therefore, following the principle of fairness, the arbitral tribunal decides that the Claimant must share the Respondent's expenditure. The tribunal only partially accepts the Claimant's claim for advance payment.

In conclusion, trade is constantly changing while it is difficult for enterprises to predict all possible outcomes. Prudence is essential, but in the absence of foreseeability or accurate predictions, businesses need to look for better methods. Negotiating to amend a contract or seeking an authorized third party to determine a loss-sharing rate are a number of ways that an enterprise can apply depending on the situation and the level of goodwill between the parties. These solutions not only solve problems quickly but also maintain good business relationships.

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