A company receives a letter from its partner demanding an 8% contractual penalty on the contract value for a 20-day delivery delay. The contract is worth VND 10 billion — 8% means VND 800 million. The company’s director considers this excessive compared to the partner’s actual loss and wants it reduced. Is reduction possible? The answer lies not in “skillful negotiation” but in three legal questions to check first — and many companies have saved hundreds of millions of dong simply by answering these three questions correctly. This article systematizes five defensive layers in priority order.
1. Three things to check first
First — does the contract contain a penalty clause? Under Article 300.1 of the Commercial Law 36/2005/QH11, a breaching party is liable to a penalty only if the contract so agrees (except for cases of liability exemption under Article 294). No penalty clause in the contract → the partner has no right to demand a penalty (only damages, if actual loss is proven).
Second — what type of contract is it? The 8% cap applies only to commercial contracts (commercial activities under Article 1 and Article 3.1 of the Commercial Law). For a purely civil contract, the penalty is as agreed by the parties under Article 418 of the 2015 Civil Code — there is no 8% cap. Demanding a “reduction to 8%” under a civil contract starts from the wrong basis. For construction contracts on works under public investment or PPP projects: the maximum penalty is 12% of the value of the breached part of the contract (Article 86.3 of the Construction Law 135/2025/QH15 — the new law effective 01/07/2026, replacing the 2014 Construction Law; do not cite Article 146 of the old law).
Third — 8% of what base? This is the crux (see section 2).
2. The 8% cap: calculated on the breached obligation, not the whole contract
Under Article 301.1 of the Commercial Law, the penalty for breach must not exceed 8% of the value of the breached contractual obligation. Example: a VND 10 billion contract where the breached obligation (the late-delivered lot) is worth only VND 2 billion → the maximum lawful penalty is VND 160 million, not VND 800 million. This is the first and strongest ground for reduction — many penalty demands miscalculate the base from the very first figure.
The only statutory exception to the 8% level: Article 266 of the Commercial Law on erroneous inspection — the penalty must not exceed 10 times the inspection service fee. Apart from this special case, 8% of the breached obligation is the hard cap for commercial contracts.
3. Four cases of liability exemption — no penalty at all
If the case falls into one of the liability exemptions in Article 294 of the Commercial Law, the breaching party owes no penalty (and no damages either):
- (a) Exemption cases agreed by the parties in the contract;
- (b) Occurrence of a force majeure event;
- (c) The breach is entirely the fault of the other party (the party demanding the penalty);
- (d) The breach results from implementing a decision of a competent state authority which the parties could not have known at the time of contracting.
Skipping Article 294 means missing the ground for owing no penalty whatsoever — this defensive layer must be checked before discussing any “reduction”.
4. Will the court reduce an agreed penalty (below 8%) as “excessive compared to the loss”?
The candid answer: the 2005 Commercial Law does not empower courts to reduce a lawfully agreed penalty (unlike some international regimes such as PICC 7.4.13). Judicial practice is inconsistent:
- Many judgments only cut the portion exceeding the 8% cap: a penalty agreed above 8% is reduced to 8% — the penalty clause is not voided entirely. The notion that “exceeding 8% voids the clause so nothing is owed” is wrong;
- Reducing below 8% on disproportionality grounds remains debated, with no clear statutory basis.
Therefore, never promise that “the court will reduce it if the loss is small”. The right approach is negotiation based on evidence of low actual loss, the long-term business relationship and good-faith remediation — and if it goes to court, ask the court to recognize the penalty only within the statutory cap.
5. Five steps to negotiate a penalty reduction in practice
Step 1 — Check whether the contract has a penalty clause. None → reject the penalty demand; discuss only damages (if the partner proves them).
Step 2 — Identify the correct contract type. Commercial (8% cap — Article 301), purely civil (as agreed under Article 418, no cap), public-investment/PPP construction (12% cap — Article 86.3 of Construction Law 135/2025).
Step 3 — Recalculate the penalty base. Only on the value of the breached obligation, not the whole contract value. Require the partner to evidence the corresponding breached portion.
Step 4 — Invoke liability exemption (Article 294). Review the four exemption cases — if one applies, no penalty is owed.
Step 5 — Negotiate the reduction arguing: evidence that the partner’s actual loss is far below the penalty; the long-term cooperation; the breaching party’s good-faith remediation. At the same time, settle the damages portion in the same agreement — because under Article 301.3 of the Commercial Law, penalties and damages may apply concurrently: negotiating down only the penalty while forgetting damages leaves the total liability high. (Note: the Civil Code at Article 418.3 requires a clear agreement for penalty and damages to apply together — a difference worth noting between the two regimes.)
An additional tool when negotiating damages: the duty to mitigate loss (Article 305 of the Commercial Law) — if the aggrieved party fails to take loss-mitigation measures, the breaching party may request a corresponding reduction of damages.
6. Frequently asked questions
A partner demands 8% on the entire contract value — is that correct? Wrong base. The 8% cap applies to the value of the breached obligation (Article 301.1 of the Commercial Law) — ask the partner to recalculate.
Does the 8% cap apply to a civil (non-commercial) contract? No. Article 418 of the 2015 Civil Code leaves the penalty to party agreement, with no cap.
Is a 15% penalty clause void entirely? No. Judicial practice typically cuts only the excess above the cap back to 8% — the clause remains effective within the statutory limit.
Does force majeure exempt the penalty? Yes — force majeure is one of the four liability exemptions in Article 294 of the Commercial Law: no penalty and no damages are owed.
Legal basis: Articles 294, 300, 301, 302–305, 307, 266 of the Commercial Law 36/2005/QH11; Article 418 of the Civil Code 91/2015/QH13; Article 86.3 of the Construction Law 135/2025/QH15 (effective 01/07/2026, replacing Construction Law 50/2014). Checked on 14/10/2026.
Facing a penalty demand or a contract dispute? FLAT Law Firm advises on negotiation, drafting penalty — damages clauses and commercial dispute resolution. Contact us.
The information in this article is for general reference only, based on the laws in force at the time of writing (14/10/2026), and does not constitute legal advice for any specific matter.
Transparency note: This article was prepared by FLAT Law Firm’s AI content production system and is undergoing internal review (AI Legal Council QA and owner approval before publication). It has not been reviewed by a human lawyer.
