FAQ: What is the maximum contractual penalty in Vietnam?
"What is the maximum percentage for a contractual penalty?" is one of the questions businesses — especially FDI enterprises — ask most often when negotiating contracts in Vietnam. The answer is not just one number, because it depends on the type of contract: commercial contracts are capped at 8%, while purely civil contracts leave the parties free to agree. This article answers the 10 most frequently asked questions about the maximum contractual penalty Vietnam 8% businesses need to understand, with specific legal bases so you can apply them correctly from the drafting stage.
Table of contents
- What is the maximum percentage for a contractual penalty?
- Does the 8% cap apply to civil contracts (house leases, sales between individuals)?
- 8% of what value?
- For multiple breaches, may the total penalty exceed 8%?
- What happens if the agreed penalty exceeds 8%?
- Can both a penalty and damages be claimed?
- If the contract has no penalty clause, can anything be claimed?
- Are there sectors where the penalty may exceed 8%?
- When is the breaching party exempt from penalties?
- How to draft a safe penalty clause?
1. What is the maximum percentage for a contractual penalty?
Short answer: For commercial contracts, the maximum penalty is 8% of the value of the breached contractual obligation. For purely civil contracts, the law sets no cap — the parties freely agree.
Explanation: This is the point businesses get wrong most often. The Commercial Law 2005 caps penalties at 8% because commercial contracts are professional business relationships, and the law wants to prevent one party from using penalty clauses to extract unreasonable profits from its partner. By contrast, the Civil Code 2015 respects the principle of freedom of contract in civil relations, so it sets no limit. That means: a goods sale contract between two companies (commercial) may penalize at most 8%, but a house lease between two individuals (civil) may agree 15%, 20% or any level both sides accept.
Legal basis: Article 301 of the Commercial Law 2005 (36/2005/QH11): the penalty for breach of a contractual obligation or the total penalty for multiple breaches as agreed in the contract, but not exceeding 8% of the value of the breached contractual obligation, except as provided in Article 266 of this Law. Article 418(2) of the Civil Code 2015 (91/2015/QH13): the penalty level is agreed by the parties, unless otherwise provided by relevant law — and the Commercial Law is precisely the "relevant law" that sets the 8% cap for commercial contracts.
Next step: Before drafting a penalty clause, determine whether your contract is commercial or civil. If at least one party participates for profit and is business-registered, the contract very likely falls under the Commercial Law. When unsure, consult a lawyer before fixing the penalty level.
2. Does the 8% cap apply to civil contracts (house leases, sales between individuals)?
Short answer: No. The 8% cap applies only to commercial contracts. In purely civil contracts the parties may freely agree any penalty level.
Explanation: A typical example: a house lease between two individuals agreeing a 20% penalty when one party unilaterally terminates unlawfully — this agreement is fully lawful. Courts in real cases have also upheld a 20% penalty in a house lease because the contract was civil in nature, not governed by the Commercial Law. The key test: commercial activity is activity for profit, including goods sales, services, investment and trade promotion (Article 3 of the Commercial Law 2005). If no party is doing business for profit in that transaction, the contract is civil.
Legal basis: Article 418(2) of the Civil Code 2015: the penalty level is agreed by the parties, unless otherwise provided by relevant law. For purely civil contracts there is no "relevant law" setting a cap, so the level is left to the parties.
Next step: If you are an individual signing a civil contract, take advantage of this freedom — but still calculate a reasonable penalty level, avoiding a penalty so high you cannot afford it if you breach. If you are a business dealing with an individual (e.g. leasing premises from an individual landlord), assess in advance whether the contract is classified as civil or commercial so the correct cap applies.
3. 8% of what value?
Short answer: 8% is calculated on the value of the breached contractual obligation, not on the entire contract value.
Explanation: This is an extremely important practical point because it determines the actual penalty amount. Suppose a supply contract worth VND 10 billion covers multiple delivery batches; the seller breaches the obligation of only one batch worth VND 1 billion. The maximum penalty is then 8% of 1 billion — VND 80 million — not 8% of 10 billion (VND 800 million). This reflects the principle of proportionality: the penalty must match the actual breach. When drafting, the parties should describe each obligation and its corresponding value, so that when a breach occurs, identifying "the breached obligation" does not become a new dispute.
Legal basis: Article 301 of the Commercial Law 2005 states clearly: "not exceeding 8% of the value of the breached contractual obligation".
Next step: When drafting large, multi-stage contracts (very common in FDI projects such as EPC contracts or long-term supply agreements), split the contract into obligations with defined values and state the penalty for each. This makes applying sanctions later transparent and easy to prove before a court or tribunal.
4. For multiple breaches, may the total penalty exceed 8%?
Short answer: No. The law states clearly: the penalty for one breach or the total penalty for multiple breaches as agreed by the parties may not exceed 8% of the value of the breached contractual obligation.
Explanation: This prevents circumvention by splitting a breach into several separate penalties to exceed the cap in total. For example, a contract cannot provide: 8% for late delivery, 8% for substandard goods, 8% for warranty breach — and then claim 24% when the seller commits all three. The total of all penalty amounts must stay within 8%. Note: this cap applies only to the penalty sanction. Damages are a separate remedy, calculated on actual loss, not limited by the 8% cap (see question 6).
Legal basis: Article 301 of the Commercial Law 2005: "The penalty for breach of a contractual obligation or the total penalty for multiple breaches as agreed in the contract, but not exceeding 8% of the value of the breached contractual obligation".
Next step: When drafting, do not design multiple separate penalties to beat the cap — such clauses will not survive disputes. Instead, focus on fully calculating actual damages that may arise (question 6), because damages are not limited to 8%.
5. What happens if the agreed penalty exceeds 8%?
Short answer: The excess part violates mandatory law and risks being declared void or reduced by a court in a dispute. The safest approach is to stay within 8% from the drafting stage.
Explanation: In practice many commercial contracts in Vietnam still state penalties of 10%, 15% or even 30% because the parties do not know the rule, or because one party has stronger bargaining power. When a dispute arises, the court will examine the legality of the penalty clause. Under the prevailing view in adjudication practice, the part exceeding the 8% cap violates a prohibition of law and is therefore not protected. However, current law prescribes no specific handling mechanism: will the court void the whole penalty clause, void only the excess, or adjust the penalty down to 8%? Courts' approaches are not yet fully consistent — a point businesses should note carefully.
Legal basis: Article 301 of the Commercial Law 2005 sets the 8% cap as a mandatory rule for commercial contracts. Article 123 of the Civil Code 2015: a civil transaction whose purpose or content violates a prohibition of law or social ethics is void.
Next step: If your current contract has a penalty above 8% (a commercial contract), proactively review and amend it back to the cap before any dispute arises. If you are the aggrieved party seeking an agreed penalty above the cap, prepare a fallback legal strategy and consult a lawyer on the adjudication trend of the competent court.
6. Can both a penalty and damages be claimed?
Short answer: It depends on the contract type. Commercial contracts: yes — under Article 307(2) of the Commercial Law 2005, where the parties have agreed a penalty, the aggrieved party may apply both the penalty and damages, even if the contract has no separate damages clause. Civil contracts: both only if agreed — under Article 418(3) of the Civil Code 2015, if the contract provides only for a penalty without more on damages, the breaching party bears only the penalty.
Explanation: Penalties and damages are two independent remedies with different natures: a penalty is deterrent, requiring no proof of actual loss; damages are compensatory, requiring proof of actual loss and the causal link with the breach (Article 303 of the Commercial Law 2005). The key difference between the two contract types: for commercial contracts, the law defaults to allowing both remedies together as soon as a penalty is agreed (Article 307(2) of the Commercial Law) — no separate damages clause needed; for civil contracts, Article 418(3) of the Civil Code limits recovery to what the parties agreed, so claiming both requires an express term. This is a strategic point in contract negotiation: because penalties are capped at 8% (commercial contracts) but damages are calculated on actual loss (no cap), a well-drafted contract keeps both remedies viable — state the damages sentence explicitly to be safe (especially for civil contracts) and preserve complete evidence of damages (invoices, replacement contracts, incurred costs) from the moment the breach occurs.
Legal basis: Article 307(2) of the Commercial Law 2005: where the parties agree on a penalty, the aggrieved party may apply both the penalty and damages, unless otherwise provided by this Law. Article 418(3) of the Civil Code 2015: where the parties agree on a penalty but not on bearing both the penalty and damages, the breaching party bears only the penalty. Articles 302 and 303 of the Commercial Law 2005 on damages and the grounds for damages liability.
Next step: When drafting, write one clear sentence: "In addition to the penalty above, the breaching party shall compensate all actual damages suffered by the aggrieved party." This single sentence can make a huge difference to the amount recovered in a dispute. At the same time, preserve complete evidence of damages (invoices, replacement contracts, incurred costs) from the moment the breach occurs.
7. If the contract has no penalty clause, can anything be claimed?
Short answer: No penalty can be claimed, but damages may still be claimed if the statutory grounds are proven.
Explanation: A penalty is an agreed remedy — without an agreement in the contract, there is no right to demand a penalty, even if the other party's breach is obvious (Article 300 of the Commercial Law 2005; Article 418 of the Civil Code 2015). This is a common mistake: many businesses, when the counterparty breaches, "demand the contract penalty" although the contract contains no penalty clause at all. The door is not fully closed, however: damages are a statutory remedy arising when three elements exist — a contractual breach, actual loss, and a causal relationship between the breach and the loss (Article 303 of the Commercial Law 2005). Compensable loss includes actual, direct losses and the direct benefit that would have been enjoyed absent the breach (Article 302).
Legal basis: Article 300 of the Commercial Law 2005: a penalty applies only "if agreed in the contract". Articles 302 and 303 of the Commercial Law 2005 on damages.
Next step: If your contract lacks a penalty clause, read the detailed analysis of this scenario: Scenario: contract without a penalty clause — can damages still be claimed? (link to be added at publish). In the long run, add a penalty clause to your company's contract templates by amendment, and set up a pre-signing contract review process.
8. Are there sectors where the penalty may exceed 8%?
Short answer: Yes — two notable exceptions: (1) inspection service contracts — up to 10 times the inspection fee; (2) construction contracts for public-investment or PPP projects — up to 12% of the value of the breached construction contract portion.
Explanation: The first exception is in Article 266 of the Commercial Law 2005: where a trader providing inspection services issues an inspection certificate with an erroneous result due to unintentional fault, the penalty as agreed by the parties may not exceed 10 times the inspection service fee. This is a special case, rare in ordinary business. The second exception matters more for FDI enterprises in infrastructure projects: Article 86(3) of the Construction Law 2025 (135/2025/QH15, effective 01/7/2026) provides that for construction works in public-investment or PPP projects, construction contract penalties may not exceed 12% of the value of the breached construction contract portion. Note: the 12% level applies only to public-investment and PPP projects, not to every private construction contract — private construction contracts between businesses still face the 8% Commercial Law cap where the relationship is commercial.
Legal basis: Article 266 of the Commercial Law 2005 (penalties and damages for erroneous inspection results). Article 86(3) of the Construction Law 2025 (135/2025/QH15), effective 01/7/2026.
Next step: If your business participates in public-investment or PPP projects as a contractor, note the 12% cap instead of 8% when negotiating penalty clauses. For construction contracts signed before 01/7/2026, also check the transitional provisions of the Construction Law 2025 to determine the applicable text.
9. When is the breaching party exempt from penalties?
Short answer: The breaching party is exempt from liability (including penalties) when falling under the statutory exemption cases: force majeure, breach entirely caused by the fault of the claiming party, or decisions of competent state authorities that the parties could not have known at signing.
Explanation: Article 294 of the Commercial Law 2005 lists the exemption cases: (1) an exemption case agreed by the parties occurs; (2) force majeure occurs; (3) a party's breach is entirely caused by the other party's fault; (4) a party's breach results from implementing a decision of a competent state authority that the parties could not have known at contract signing. A point worth noting for FDI enterprises: "force majeure" must be an event occurring objectively, unforeseeable and unremediable despite all necessary measures. Economic hardship, price fluctuations or ordinary policy changes do not automatically count as force majeure. The party invoking force majeure must also notify the other party immediately and prove the event.
Legal basis: Article 294 of the Commercial Law 2005 (exemption cases for breaches). Article 300 of the Commercial Law 2005: penalties do not apply in the exemption cases of Article 294.
Next step: When drafting, define "force majeure" for that contract (list examples: natural disasters, epidemics, war, government prohibitions) with notification duties and deadlines. When an unusual event occurs, notify the counterparty in writing immediately and preserve all evidence — a prerequisite for later exemption.
10. How to draft a safe penalty clause?
Short answer: A safe penalty clause states: the specific breach, how the penalty is calculated as a percentage of the breached obligation, the correct statutory cap (8% for commercial contracts), and a separate agreement on whether damages are additionally claimed.
Explanation: A good penalty clause is "self-executing" — when a dispute arises, the court or tribunal can apply it directly without further interpretation. In practice, many contracts merely say "the breaching party shall be penalized as prescribed by law" or "10% of the contract value" without saying 10% of what, calculated when, and whether it stacks with damages. Such vague clauses are hard to enforce and easy for the counterparty to exploit. For FDI businesses, one more layer of care: if the contract has foreign elements and a chosen governing law, determine whether Vietnamese law governs the sanctions portion, because the 8% cap only arises when Vietnamese law applies.
Legal basis: Articles 300 and 301 of the Commercial Law 2005 (conditions and levels of penalties); Article 418(3) of the Civil Code 2015 (agreement on the relationship between penalties and damages).
Next step: A 4-point checklist when reviewing a penalty clause before signing: (1) does the penalty exceed the statutory cap (8% commercial / 12% public-investment or PPP construction); (2) is the calculation basis stated (% of the breached obligation); (3) is it agreed whether additional damages may be claimed; (4) are exemption cases and notification duties listed. If needed, FLAT's lawyers can review your contract before signing — hotline 0988424851.
Your question is not here?
Every contract has its own context — transaction type, party structure, applicable law and risk level all affect how a suitable penalty clause is designed. If you are negotiating a high-value contract, a contract with a foreign counterparty, or facing a penalty dispute, contact FLAT Law Firm for advice tailored to your case.
- Hotline: 0988424851
- Further reading: Scenario: contract without a penalty clause — can damages still be claimed? (link to be added at publish)
Language versions
References
- Commercial Law 2005 (No. 36/2005/QH11), effective 01/01/2006 — Articles 292, 294, 300, 301, 302, 303, 266.
- Civil Code 2015 (No. 91/2015/QH13), effective 01/01/2017 — Article 418.
- Construction Law 2025 (No. 135/2025/QH15), effective 01/07/2026 — Article 86.
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