The seller warranted the company had no hidden tax exposure — after closing, the buyer discovers a large tax reassessment going back two years. Who bears it? This is the classic breach of representations & warranties scenario in M&A. The first thing to know: Vietnamese law provides no standalone remedy for “breach of reps & warranties” — everything is handled under the general breach-of-contract remedies. This article maps the 3 default remedies and 6 safety valves for capping damages that every seller must know.
1. No standalone remedy for R&W breach — general remedies apply
Unlike some legal systems with dedicated rules on warranties in business acquisitions, Vietnamese law sets no separate remedy for breach of representations and warranties in M&A. R&W in an SPA are contractual obligations — breach is treated as ordinary breach of contractual obligations under the Civil Code 2015 (and the Commercial Law 2005 for commercial contracts). The three default remedies below therefore apply directly to R&W breaches.
2. Remedy 1: full damages (Article 360)
Under Article 360 of the Civil Code 2015, the obligor must compensate all damage caused by the breach — “unless otherwise agreed”. That quoted phrase is the legal basis for every contractual damages cap negotiated in SPAs: caps, baskets, exclusions of indirect loss… — all lawful because the statute permits the parties to agree otherwise.
The scope of compensable damage is determined under Articles 361 and 419 of the Civil Code: covering the benefit the entitled party would otherwise have enjoyed under the contract, costs incurred due to non-performance (not duplicating the benefit compensation), and other reasonable losses as prescribed.
3. Remedy 2: penalties for breach (Article 418) — and the trap in clause 3
Under Article 418 of the Civil Code, a breach penalty applies only if agreed — no agreement, no penalty. This fundamentally differs from damages, which apply by default.
The practical trap in clause 3, Article 418: if the parties agree only on a penalty without agreeing that the breaching party is “subject to both penalty and damages”, then the breaching party bears only the penalty — the aggrieved party loses the right to claim damages exceeding the penalty. In M&A, where actual loss (e.g. a tax reassessment, latent environmental liability) often dwarfs the agreed penalty, this trap can wipe out the buyer’s recovery of the difference. The lesson: in the SPA, always state expressly that the breaching party is “subject to both penalty and damages” if you want both remedies to apply.
4. The 8% penalty cap (Article 301, Commercial Law) — commercial contracts only
Under Article 301 of the Commercial Law 2005, the maximum breach penalty is 8% of the value of the breached contractual obligation — but this applies only to commercial contracts. For a purely civil SPA (share sale between individuals without commercial purpose), the 8% cap does not apply — the penalty follows the parties’ agreement under the Civil Code with no 8% ceiling. Characterising your SPA correctly directly affects the maximum penalty you can agree, and must be assessed deal by deal.
5. Remedy 3: cancellation / unilateral termination for material breach
Where the R&W breach is material — e.g. the seller deliberately concealed a large debt fundamentally altering the deal’s value — the buyer may invoke cancellation or unilateral termination under Articles 423–424 of the Civil Code. This is the heaviest remedy, typically used when the breach defeats the transaction’s purpose, alongside a damages claim.
6. Six safety valves capping damages every seller must know
Because Article 360 permits parties to “agree otherwise”, sellers in M&A always negotiate these limits into the SPA:
- Cap: a ceiling on total damages, usually as a percentage of deal value (e.g. 10–30% of the purchase price);
- Basket / de minimis: damages only above a threshold — filtering out nuisance claims;
- Survival period: R&W “live” only for a fixed period after closing (e.g. 12–24 months; longer for tax) — claims expire afterwards;
- Exclusion of indirect loss: agreeing out consequential damages, lost future profits…;
- Escrow / holdback: retaining part of the purchase price in escrow to set off against damages if breaches emerge;
- W&I insurance (Warranty & Indemnity): shifting R&W breach risk to an insurer — note there is no dedicated legal framework for this product in Vietnam yet; it operates under the current Law on Insurance Business.
These six valves do not eliminate liability — they quantify and bound it at levels the parties can accept, letting the deal close instead of collapsing over risk allocation.
Frequently asked questions
Does Vietnamese law have a standalone remedy for R&W breach?
No. There is no dedicated remedy for breach of reps & warranties — general breach-of-contract remedies apply (Civil Code, and Commercial Law for commercial contracts).
What if we agreed a penalty but said nothing about damages?
Under clause 3, Article 418 of the Civil Code, the breaching party bears only the penalty — the aggrieved party loses the damages claim. To have both, state “subject to both penalty and damages” expressly.
Does the 8% penalty cap apply to every SPA?
No. Article 301 of the Commercial Law (8% cap on the breached obligation’s value) applies only to commercial contracts; purely civil SPAs follow the Civil Code with no such cap.
Is W&I insurance recognised under Vietnamese law?
There is no dedicated framework for W&I insurance yet; it operates under the current Law on Insurance Business.
Sources
- Civil Code 2015: Article 360 (full damages for breach of obligation; “unless otherwise agreed” — the basis for all caps: cap, basket…); Articles 361, 419 (scope of compensable damage: benefit that would have been enjoyed, non-duplicative costs incurred); Article 418 (breach penalty only if agreed; clause 3 — the “penalty-only” trap); Articles 423–424 (cancellation/unilateral termination for material breach);
- Commercial Law 2005 — Article 301 (penalty capped at 8% of the breached obligation’s value; commercial contracts only);
- Law on Insurance Business (the framework under which W&I insurance operates — no dedicated rules yet).
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This article is for reference only and does not constitute legal advice. The content was drafted by AI and will undergo quality review by the AI Legal Council of FLAT Law Firm before any approval for publication; it is not the legal opinion of a licensed human lawyer. Laws and regulations may change; verify the current legal texts before applying them.
Negotiating warranty terms in M&A? Contact FLAT Law Firm for advice.