“Penalty of 15% of contract value” — this clause appears in many Vietnamese commercial contracts, and it is unlawful. Under Article 301 of the Commercial Law 2005, contractual penalties in commercial contracts must not exceed 8% — but 8% of what, computed how, and when both penalty and damages may be claimed, are widely misunderstood.
This article dissects the 8% cap mechanism: a phrase-by-phrase reading of Article 301, three worked numerical examples, combining penalties with damages (Article 307), and the boundary with civil contracts (no 8% cap).
1. What does Article 301 say? Phrase by phrase
Article 301 of the Commercial Law 2005: “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, except as provided in Article 266 of this Law.”
Three key points:
- “Value of the breached contractual obligation” — computed on the breached portion, not the whole contract value. The most misunderstood point;
- “Aggregate penalty for multiple breaches” — three or five breaches, the total still cannot exceed 8%;
- “Except Article 266” — the sole exception: penalties and damages for erroneous inspection results. Citing Article 301 without this phrase is an incomplete citation.
2. Three worked examples
Example 1 — single breach: a VND 10 billion contract; seller late-delivers a VND 2 billion lot → maximum penalty VND 160 million (8% × 2 billion), not VND 800 million (8% × 10 billion).
Example 2 — multiple breaches: the contract sets 5% per breach of the breached obligation; three breaches occur → total penalty still ≤ 8% of the breached obligation, not 15%. The excess is cut.
Example 3 — unlawful clause: a contract states “15% of contract value” → in dispute, courts/arbitrators recognise only up to the 8% cap; the excess is void. Fix it at drafting, not at dispute.
3. No penalty clause — then what? (Articles 300, 307)
Article 300: penalties apply only if agreed in advance (except Article 294 exemptions). Not written = no penalty.
Article 307 governs the relationship between the two remedies:
- No penalty agreed → the aggrieved party may claim damages only;
- Penalty agreed → both penalty and damages may be applied.
This contradicts the popular belief “once penalised, no damages”. The maximum-protection formula: a penalty clause (within 8%) + full proof of loss for damages — because damages are not subject to the 8% cap.
4. When does the 8% cap NOT apply?
- Pure civil contracts: under Article 418 of the Civil Code 2015, penalty levels are freely agreed, with no cap (unless related laws provide otherwise). E.g. private loan contracts — parties may agree 20% or 30% without breaching the 8% cap;
- Construction contracts: subject to construction law’s own penalty regime (previously a 12% cap for state-funded works under the Construction Law 2014; note the new Construction Law 135/2025/QH15);
- Article 266 cases (erroneous inspection results) — the statutory exception.
Many “hybrid” contracts (civil + commercial elements) spark disputes over whether the 8% cap applies — drafters should fix the relationship’s nature and governing law in the contract’s general provisions.
5. Checklist for drafting penalty clauses
- State the computation base: “8% of the value of the breached obligation”, never “8% of contract value”;
- List each breach with its rate (within the cap), adding “aggregate penalties shall not exceed 8%”;
- State expressly that the aggrieved party may concurrently claim damages (anticipating Article 307);
- Do not copy 10–20% penalty clauses from foreign templates without adjusting to the 8% cap;
- For payment obligations: separate late-payment interest from penalties — distinct mechanisms that apply in parallel.
6. Frequently asked questions
Q: A signed contract states 12% — now in dispute?
A: The excess over 8% is unenforceable for commercial contracts. The breaching party owes at most 8% of the breached obligation (plus proven damages).
Q: Any lawful way to “exceed” the 8% cap?
A: Not via a penalty clause. The only lawful route is proving and claiming full damages (uncapped) — which is why preserving loss evidence determines actual recovery.
Q: Are penalties taxable?
A: Penalty receipts are taxable income under tax law; parties should agree on invoicing and declaration duties.
Drafting a commercial contract and need optimal penalty and damages clauses? Contact us for advice.
Prepared by the FLAW AI Legal Council. This content is pending QA Council review before submission for approval; it is for reference only and does not replace legal advice for your specific case.
