Contract Penalty Clause Vietnam: A Costly Lesson

1. Note on the scenario in this article

The scenario below is an illustrative one, built on dispute patterns commonly seen in Vietnamese courts' and arbitrations' handling of commercial cases. Company names, figures and some details are fictionalized and rounded for legal analysis purposes. The scenario does not refer to any specific business, case or judgment. The article's value lies in the legal lessons drawn, not in the story's authenticity. Every contract penalty clause Vietnam dispute follows the same pattern: the clause everyone skimmed becomes the clause that costs the most.

2. Background: a VND 30 billion components supply contract

An Phat Company (a fictional name) manufactures electronic equipment in Bac Ninh. Early in the year, An Phat signed a VND 30 billion electronic-components purchase contract with Bao Tin Company (a fictional name), a domestic supplier. The contract detailed component types, technical standards, delivery schedules by batch, prices and payment terms. The two sides had known each other for years, so negotiations went quickly in an atmosphere of trust.

But in the nearly 20-page contract, there was not a single penalty clause. No penalty for late delivery, no penalty for substandard goods, nothing on the relationship between penalty and damages. When asked, An Phat said they "trusted the partner" and "didn't want to put penalty clauses in and sour the relationship." That was the most expensive mistake of the whole story.

3. What happened: the supplier delivered 90 days late

The first two batches went smoothly. Then the third batch — the most important one, serving An Phat's largest export order of the year — arrived 90 days late against the committed schedule, because Bao Tin's supply chain had problems. A chain reaction hit An Phat: production lines idled for weeks, An Phat breached delivery deadlines with foreign customers and paid penalties under the export contracts, its reputation with a major customer was seriously damaged, and several follow-on orders were cancelled.

An Phat calculated its losses: penalties paid to foreign customers, factory upkeep costs during the shutdown, profits lost from cancelled orders — totalling about VND 8 billion. An Phat sued Bao Tin, claiming VND 8 billion in damages and a VND 3 billion "contractual penalty," arguing the amount was reasonable against the scale of the breach. And this is when the blank clause came back to bite its drafter.

4. Why the VND 3 billion "evaporated" in court

An Phat's VND 3 billion "penalty" claim was rejected entirely, for a simple and indisputable reason: the contract contained no agreement on penalties. Article 418(1) of the 2015 Civil Code defines a contractual penalty as "an agreement between the parties in the contract" — no agreement, no penalty, however serious the breach, however "reasonable" the proposed amount. A court cannot invent a penalty level the parties never agreed on.

For the VND 8 billion damages claim, An Phat faced an arduous battle of proof under Article 419 of the 2015 Civil Code and Article 302 of the 2005 Commercial Law. The aggrieved party must prove: what actual loss occurred, the specific extent of the loss, and the causal link between the breach and the loss. An Phat proved the penalties paid to foreign customers and part of the shutdown costs, but "lost profits," "damaged reputation" and "cancelled future orders" were treated as indirect, hard-to-quantify losses lacking solid evidence. Result: An Phat was awarded only about VND 5 billion in damages — VND 3 billion less than the actual loss it believed it had suffered.

The painful lesson: with a penalty clause in the contract, An Phat could have received the penalty without proving loss — because a contractual penalty is an independent sanction, applied when there is a breach and an agreement, independent of proving actual loss.

5. Legal analysis: Articles 418 and 419 of the 2015 Civil Code

Article 418 of the 2015 Civil Code builds the penalty regime on three pillars. First, a penalty must rest on agreement — the fundamental difference from damages, which arise by law when there is a breach. Second, the penalty level is agreed by the parties, except where the relevant law provides otherwise — for purely civil contracts, the law sets no cap. Third, the relationship between penalty and damages is for the parties to decide: they may agree on penalty only without damages, or on both penalty and damages; if they agreed only on a penalty without agreeing on combined penalty-plus-damages, the breaching party bears only the penalty.

Article 419 governs damages: the breaching party must compensate all actual loss, including material loss and reasonable costs to prevent, limit and remedy the loss. But "all actual loss" is a concept that must be proved with evidence — invoices, documents, contracts, minutes, assessments. In adjudication practice, the accepted loss is usually significantly lower than what the aggrieved party feels, because many claimed losses lack complete documentation or are treated as indirect, hard-to-determine losses.

Comparing the two sanctions: a penalty is easy to apply (only breach and agreement need proof) but must be agreed in advance; damages need no prior agreement but are hard to prove. A wise business uses both: a penalty clause for the "certain sum," a damages clause for losses exceeding the penalty.

6. Commercial contracts: damages available but capped

One important distinction applies if the An Phat–Bao Tin contract is characterized as a commercial contract. Under Article 307 of the 2005 Commercial Law, where the parties agreed a penalty, the aggrieved party may apply both the penalty sanction and damages concurrently — more favorable than for civil contracts. And even without an agreed penalty, the aggrieved party still has the right to claim damages.

However, commercial law caps the penalty: Article 301 provides that the penalty for breach of a contractual obligation, or the aggregate penalty for multiple breaches, as agreed by the parties, must not exceed 8% of the value of the breached contractual obligation. For a VND 30 billion contract, if the entire obligation was breached, the maximum penalty the parties could agree on is VND 2.4 billion — still a significant sum An Phat lost by not agreeing on it.

7. Five lessons for drafting penalty clauses

Lesson 1 — Always have a penalty clause, however much you trust the partner. Trust is a human relationship; a penalty is a legal tool. The two do not conflict — a tight contract protects both sides and in practice makes partnerships more durable.

Lesson 2 — Specify which acts are penalized and the exact level. Never write a vague "the breaching party bears penalties as prescribed by law" — that sentence is meaningless because the law sets no general penalty level. State: which breach (how many days late, what defect rate), how much (a specific sum or a percentage of which value — the breached portion or the whole contract).

Lesson 3 — Tier the penalty by breach severity. For example: under 15 days late, 2%; 15–30 days late, 5%; over 30 days late, 8% of the value of the breached obligation, with the aggrieved party entitled to cancel the remaining work. Tiering is both fair and creates incentives for early cure.

Lesson 4 — Decide clearly the relationship between penalty and damages. State "the breaching party bears both the penalty and all actual damages exceeding the penalty" if you want concurrent application (for commercial contracts), or "the penalty is set off against damages" if you want to avoid overlap. Saying nothing lets the law decide — and civil law will give you only one of the two.

Lesson 5 — Back the penalty with performance security. However high the penalty, it is meaningless if the breaching party cannot pay. For high-value contracts, consider requiring a bank performance guarantee, a deposit, or retaining part of the payment until completion.

8. Comparing penalty regimes across three contract types

9. Frequently asked questions

Without a penalty clause, can I still recover money when the counterparty breaches? You can still claim damages, but you must prove actual loss and the causal link to the breach. Under Article 418(1) of the 2015 Civil Code, a contractual penalty is "an agreement between the parties" — no agreement, no penalty. Damages under Article 419 require the aggrieved party to prove the actual loss suffered, its extent and the breaching party's fault — a heavy burden of proof.

What is the maximum contractual penalty? It depends on the contract type. Purely civil contracts: the penalty level is agreed by the parties with no statutory cap (Article 418(2) of the 2015 Civil Code). Commercial contracts: maximum 8% of the value of the breached contractual obligation (Article 301 of the 2005 Commercial Law). Construction contracts (works under public-investment or PPP projects): the contractual penalty may not exceed 12% of the value of the breached construction contract portion (Article 86(3), Construction Law 2025 — before 01/07/2026, Article 146 of the 2014 Construction Law applied with the same 12% cap). Other specialized laws may set their own limits.

Can I claim both a penalty and damages? It depends on the contract type and the agreement. For civil contracts, Article 418(3) of the 2015 Civil Code lets the parties agree on penalty only or on both penalty and damages; if they agreed only on a penalty without agreeing on combined penalty-plus-damages, the breaching party bears only the penalty. For commercial contracts, Article 307 of the 2005 Commercial Law provides that where a penalty is agreed, the aggrieved party may apply both penalty and damages concurrently.

What should a penalty clause contain to be enforceable? At least five elements: which acts count as breaches subject to penalty; the specific penalty level (a sum or a percentage of which value); the relationship between penalty and damages (penalty only, or both); when and how the penalty is paid; and reduction or exemption mechanisms for force majeure. The more specific the clause, the easier to apply and the fewer disputes.

Is the scenario in this article a real case? No. It is an illustrative scenario built on dispute patterns commonly seen in Vietnamese courts' and arbitrations' handling of commercial cases. Company names, figures and details are fictionalized and rounded for legal analysis purposes and do not refer to any specific business or case.

Can a late payer be penalized for late payment? Only if the contract agrees a penalty for late payment. Without an agreed penalty, the aggrieved party may still claim interest on the late sum under Article 357 of the 2015 Civil Code: the rate as agreed by the parties but not exceeding 20% per year, or 10% per year under Article 468(2) if not agreed. Penalty clauses should therefore cover payment obligations, not just delivery.

10. When to work with a lawyer

Businesses should have a lawyer review contracts when: the contract is high-value; the counterparty is an organization or individual never worked with before; the contract has foreign elements or is governed by foreign law; the contract falls in a specialized field with specific penalty caps (commercial, construction, insurance, credit); and when a breach has occurred and the options for claiming penalties and damages need assessment. Reviewing one contract always costs far less than what can be lost to one blank clause.

FLAT Law Firm supports businesses in drafting, negotiating and reviewing contracts with a comprehensive protective clause system: penalties, damages, performance security, dispute resolution. Contact our hotline at 0988424851 before you sign your next important contract — don't let one blank line become an expensive lesson.

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