In Vietnam, a contractual penalty is only payable if the contract provides for it, and in commercial contracts governed by the Commercial Law the penalty is capped at a percentage of the value of the breached obligation, widely applied as 8%. Compensation for actual loss is a separate remedy that must be proved, and late payment carries interest even when the contract is silent, at a rate set by statutory rules.
Foreign parties used to common-law "liquidated damages" often draft clauses that look strong but are cut down by a Vietnamese court or tribunal. This guide explains how the three remedies fit together and how to write terms that will actually be awarded. Laws in this area are under review, so verify the current figures before you rely on them.
Penalty versus compensation: two different remedies
Vietnamese law separates two ideas that English-language contracts often blend. A penalty for breach (phat vi pham) is a sum the breaching party pays because the contract says so, whether or not the other side suffered loss. Compensation for damage (boi thuong thiet hai) is payment for loss actually suffered and proved, such as the value of damaged goods, lost profit that can be shown with reasonable certainty, and reasonable costs of mitigating the harm.
The Civil Code allows parties to agree on a penalty and gives them wide freedom over the amount, subject to any limits in specialised laws. The Commercial Law, which governs commercial activities between traders, adds a cap on penalties. Because most contracts between companies are commercial, the cap is the rule a foreign business will meet most often.
The two remedies can coexist. Under the Commercial Law, if the parties agreed a penalty, the aggrieved party can generally claim both the penalty and compensation unless the contract says otherwise. Under the Civil Code, if the parties agreed a penalty but did not agree that damages are also payable, the breaching party may only have to pay the penalty. The safest course is to state expressly in the contract whether both remedies are available.
In English drafts, the term "liquidated damages" is frequently translated as a penalty. That is not necessarily wrong, but be aware that the label you choose decides which set of rules a Vietnamese court will apply.
Quick comparison of the three money remedies
The table sets out the usual position. Specific laws, such as those on construction or public procurement, can contain their own rules.
| Remedy | Needs a contract clause? | Needs proof of loss? | Limit |
|---|---|---|---|
| Penalty for breach | Yes | No, only proof of breach | Capped under the Commercial Law for commercial contracts; specialised laws may differ; Civil Code contracts more flexible |
| Compensation for damage | No, available by law | Yes, actual and direct loss plus reasonably certain lost profit | Reduced if the claimant failed to mitigate or contributed to the loss |
| Interest on late payment | No, available by law | No, it follows from late payment | Contract rate within legal limits; otherwise a statutory basis applies |
| Deposit forfeiture | Yes, deposit agreement | No | Value of the deposit unless agreed otherwise |
Read the table as a map rather than a rulebook. The cap, the interest basis and the treatment of lost profit are areas where practice and amendments evolve; check the current rules with a licensed lawyer before calculating a claim.
The penalty cap in commercial contracts
The Commercial Law provides that the total penalty for breaches of a commercial contract may not exceed a fixed percentage of the value of the breached part of the obligation, and that percentage has for many years been 8%. Two words in that rule matter. "Total" means that several penalties for the same breach are added together and then capped. "Breached part" means the cap is calculated on the value of the obligation that was not properly performed, not on the full contract price.
Hypothetical example: a contract for 1,000 units contains a penalty of 10% of the contract price for late delivery. The seller delivers 800 units on time and 200 units late. The cap applies to the value of the 200 late units, not to the whole order, and at 8% rather than 10%. The clause is not void; the excess is simply not awarded.
Some sectors have their own rules. Construction contracts and certain public contracts have specific provisions, and contracts governed purely by the Civil Code, such as some contracts with individuals, are not subject to the Commercial Law cap. Contracts governed by foreign law are a separate matter, though a Vietnamese court asked to enforce an award may still consider whether a very large penalty offends fundamental principles of Vietnamese law.
Proving compensation for loss
Damages in Vietnam are compensatory, not punitive. A claimant has to show three things: a breach, a loss, and a direct causal link between them. What usually works as evidence:
- Invoices, receipts and bank records showing money actually spent because of the breach, such as buying replacement goods at a higher price.
- Contracts with your own customers that you lost or had to pay penalties under because of the other side's failure.
- Accounting records showing profits you would reasonably have earned, with a credible basis, not a hopeful forecast.
- Inspection and assessment reports on damaged goods, ideally from an independent assessor.
- Records showing you took reasonable steps to limit the loss, since failure to mitigate reduces recovery.
- Correspondence showing the other side knew about the risk, which supports foreseeability and causation.
Tribunals in Vietnam are cautious about lost profit claims and frequently reduce them for lack of proof. A modest, well-documented claim often recovers more than an ambitious one supported only by projections.
Interest on late payment
When a party pays late, the creditor is entitled to interest on the overdue amount for the period of delay. This follows from the law even if the contract says nothing about interest. Under the Commercial Law, the default basis has been an average market rate for overdue loans at the time of payment, unless the parties agreed otherwise or the law provides differently. The Civil Code ties interest to a statutory ceiling for agreed rates and provides a fallback rate where the parties agreed interest without fixing a figure.
In practice, courts and tribunals often have to decide which rate applies and how to evidence the "market rate", which may involve rates published by several commercial banks. That uncertainty is a good reason to put an explicit late-payment interest rate in your contract, set at a level within the legal limits, with a clear start date such as the day after the invoice due date.
Late-payment interest is separate from the penalty cap. A contract can provide for both a penalty for late payment and interest, though a court will look closely at whether the combined result is reasonable and consistent with the law. Keep a running calculation from the due date, because interest builds up quietly while negotiations drag on.
Drafting remedies and termination rights a tribunal will uphold
A short checklist for the remedies section of a commercial contract:
- Name each remedy separately: penalty, compensation for damage, late-payment interest, termination rights.
- Set penalties as a percentage of the value of the breached obligation and keep the total within the applicable cap.
- State expressly that the aggrieved party may claim both the penalty and compensation for proven loss.
- Fix a late-payment interest rate and the date from which it runs.
- Define what counts as a breach for each penalty, with dates and measurable standards, so there is no argument about whether it occurred.
- List any exclusions or caps on liability you want, remembering that exclusions for intentional breach or serious fault may not be enforced.
- Make sure the Vietnamese text uses the correct terms for each remedy.
Remedies drafted this way look modest on paper but survive scrutiny. Remedies drafted with headline figures and vague triggers often shrink dramatically once a tribunal applies the rules.
Money remedies are only part of the picture. A serious breach may also give you the right to suspend your own performance or terminate the contract. Under the Commercial Law, termination is generally available when a breach is fundamental, meaning it causes such damage that the aggrieved party cannot achieve the purpose of the contract, or when the contract lists specific termination events. Terminating does not wipe out your right to the penalty and compensation already accrued.
Timing matters. A party that keeps accepting late deliveries for months and then suddenly terminates may face the argument that it tolerated the breach. If you plan to rely on a breach, send a written notice identifying it, giving a cure period where the contract requires one, and stating the consequences. That paper trail supports both the termination and the money claim that follows.
Equally, a party that terminates without a sound basis can itself become the party in breach. Check the termination clause and the statutory test before acting, particularly in long-term supply or distribution relationships where the sums involved grow with every month of lost business.
Mistakes foreign parties often make
Assuming the penalty clause is self-executing. A penalty is not paid automatically. If the other side refuses, you must claim it through negotiation, arbitration or court, and you need to prove the breach.
Applying the cap to the full contract price. The cap attaches to the breached obligation. Claims calculated on the entire contract value are reduced.
Ignoring mitigation. If you could have bought replacement goods quickly but waited months, part of your loss may be treated as your own responsibility.
Forgetting interest. Claimants focus on the principal and penalty and leave out late interest, which over a long dispute can be significant.
Copying a foreign template unchanged. Templates written for English or New York law often stack liquidated damages, indemnities and service credits. Translated into Vietnamese, several of these may be treated as penalties and added together under the cap.
Not reserving rights. Accepting late goods without a written reservation can later be argued as a waiver of the penalty. When you accept a late delivery, say in writing that you reserve your right to claim the penalty and damages.
Unclear limitation of liability. A clause excluding "all indirect loss" means little if indirect loss is not defined. Define what you exclude.
When you need a Vietnamese lawyer
Any contract where penalties or damages could reach significant sums deserves a review by a licensed Vietnamese lawyer at the drafting stage. They will check which law governs the remedy, whether a specialised cap applies to your sector, and whether the Vietnamese text says what the English text intends. That review is far cheaper than discovering at a hearing that your penalty was cut by most of its value.
Once a breach occurs, a lawyer can calculate a realistic claim: the penalty within the cap, compensation supported by evidence, and interest at a rate a tribunal is likely to accept. They can also advise whether to send a demand first, negotiate a settlement or file. Ask them to show you how each figure was reached, so your finance team understands what is achievable before you commit to a strategy.
Penalty caps, interest rules and the relationship between the Civil Code and the Commercial Law are subjects of ongoing legislative review. Before you rely on a percentage in this guide, check the current rules with a licensed lawyer or the tribunal that will hear the case.
Frequently asked questions
Is a 20% penalty clause enforceable in Vietnam?
In a commercial contract governed by the Commercial Law, the penalty above the statutory cap will not be awarded, though the clause is not void. In contracts governed only by the Civil Code or by specialised laws, different limits may apply. Check which law governs your contract.
Can I claim both a penalty and damages?
Under the Commercial Law, generally yes unless the contract excludes it. Under the Civil Code, you may be limited to the penalty unless the contract also provides for damages. State in the contract that both remedies are available to avoid argument.
Do I need to prove loss to claim a penalty?
No. A penalty requires proof of the breach, not proof of loss. Compensation for damage is different and requires evidence of actual loss and a direct causal link to the breach.
What interest can I charge on a late invoice?
The rate agreed in the contract, within legal limits. If none was agreed, statutory rules provide the basis, which under the Commercial Law has been linked to market rates for overdue loans. Ask a lawyer to calculate the figure a court is likely to apply.
Are lost profits recoverable in Vietnam?
Lost profit can be recovered if it is a direct consequence of the breach and you can prove it with reasonable certainty. Tribunals tend to reduce speculative claims, so supporting records such as previous sales or signed orders make a big difference.
Does a limitation of liability clause protect me fully?
Not always. Clauses excluding liability for intentional breach or serious fault may not be enforced, and vague exclusions are read narrowly. Define clearly what is excluded and keep the clause consistent in both language versions.