Security for Obligations in Transactions

Why security must be designed when the contract is drafted

Security for obligations is a backup arrangement for the scenario where a party fails to perform — by “locking” in advance an asset, a sum of money, or a third party’s undertaking:

First, once the counterparty is insolvent, every measure comes too late. Mortgages, guarantees, and escrows all require the counterparty to still have assets and credit standing. Security is a preventive tool, not a cure.

Second, security creates pressure to perform. A contractor that knows the bank has issued a performance guarantee — and will seek reimbursement from it if payment is made — will think carefully before delaying the schedule.

Under Article 293 of the 2015 Civil Code, an obligation may be secured in part or in full; absent an agreement on scope, the security covers the whole obligation — including interest, penalties, and damages. The secured obligation may be a future or conditional obligation.

Map of the 9 security measures under the 2015 Civil Code

Article 292 of the 2015 Civil Code lists 9 measures securing the performance of obligations:

In commerce, prestige-based guarantee is virtually never used. The following sections examine the measures businesses encounter most.

Pledge, mortgage, deposit: the three most-used measures

Pledge and mortgage differ on one decisive point: a pledge delivers the property into the secured party’s possession; a mortgage does not — the mortgagor keeps and uses the property, only “locking” its right of disposal through registration of the security transaction. Pledges suit savings books, shares, warehouse goods; mortgages suit factories and machinery that must keep operating. For mortgages, registration of the security transaction is a must — without it you lose priority to an earlier registrant (Section 6).

Deposit (Article 328 of the 2015 Civil Code) carries a breach penalty: the depositor who refuses to perform loses the deposited property; the deposit-taker who refuses must return it and pay a penalty equal to its value, unless otherwise agreed. Two common dispute points: whether an advance sum is a “deposit” or a “prepayment” (prepayments carry no penalty — for the penalty to apply, the contract must use the word “deposit”); and the penalty level, which may be agreed differently from the statutory default. For large transactions, the common structure is a 10–30% deposit, the balance tied to delivery and acceptance milestones.

Bank guarantees and parent company guarantees

A guarantee is a third party’s undertaking to perform if the obligor fails. In foreign-invested transactions, two forms are most used — but their legal nature differs:

Bank guarantees are usually issued as independent letters of guarantee: the bank pays when the beneficiary presents a demand conforming to the conditions stated in the letter, without needing to prove the dispute in the underlying contract. This “independence” is its greatest strength — the entitled party gets paid quickly.

Parent company guarantees are a foreign parent’s undertaking for the obligations of its Vietnamese subsidiary. In practice, these are often accessory in nature: the parent must perform only once the subsidiary’s breach is established. Their real value depends on the parent’s actual financial capacity and cross-border enforceability.

When negotiating: if the counterparty is a newly established subsidiary in Vietnam, demand a bank guarantee or a parent guarantee accompanied by the parent’s financial statements; read the letter’s payment conditions and validity period carefully.

Escrow, retention of title, retention of property

Escrow is the placement of money or valuables in a blocked account at a credit institution. Unlike a deposit (handed directly to the counterparty), escrowed funds sit with a neutral third party — used where high neutrality is needed: investment project escrows, auction escrows, and escrow accounts in M&A.

Retention of title lets the seller keep ownership of the property until the buyer pays in full — even though the property has been delivered for the buyer’s use. It is ideal for deferred-payment sales and distribution. The agreement must be in writing, and registration of the security transaction is advisable to assert rights against third parties.

Retention of property (Article 346) is the right of the party lawfully holding property to retain it when the obligor fails to perform properly — e.g. a repair shop keeping the vehicle when the customer does not pay. This measure applies only in bilateral contracts; the retention right permits only retaining the property — not unilaterally selling it to set off the debt.

Registration of security transactions and payment priority

Asset-based security is only truly “solid” when registered. The key principle of Decree 99/2022/NĐ-CP: payment priority among parties secured over the same assets follows the order of registration — whoever registers first ranks first. A registered measure has effect against third parties from the time of registration (Article 308 of the 2015 Civil Code).

Practical consequence: if a mortgage contract is not registered and the mortgagor pledges the asset to a bank (which registers first), your priority ranks behind the bank’s. Some transactions must be registered for third-party effect — e.g. mortgages over land use rights; for other measures, registration is not mandatory but advisable to preserve priority.

When disposing of secured property to recover the debt, the secured party must follow the agreed and statutory procedures (notice, valuation, auction where the law requires). Unauthorized seizure or improper sale can expose the secured party to a counterclaim for damages.

Which measure for which transaction

There is no “best” measure for every transaction — only the most suitable one:

In many transactions several measures should be layered — e.g. an EPC contract with a performance guarantee, an advance repayment guarantee, and delay penalties.

Five mistakes that render security “as good as nothing”: failing to write the word “deposit”; having a mortgage contract but not registering it; a guarantee letter expiring before the obligation is fulfilled; a “hollow” parent guarantee without checking financial capacity; and forgetting to secure “secondary” obligations such as breach penalties and indemnities.

How FLAT LAW FIRM Helps

FLAT LAW FIRM accompanies FDI enterprises in designing a “safety net” for each transaction, from the negotiation stage:

• Advising on the choice of security measures suited to each transaction type and risk appetite;
• Drafting and reviewing security clauses: deposits, mortgages, pledges, retention of title, guarantees;
• Reviewing bank guarantee letters and parent company guarantees — payment conditions, validity period, cross-border enforceability;
• Carrying out registration of security transactions and advising on payment priority;
• Building standard security clause templates for consistent enterprise-wide application.

If your business is preparing to sign a high-value transaction or deal with a new counterparty, contact FLAT LAW FIRM for suitable advice.

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