Supplier Disputes in Vietnam

Typical forms of supplier breach

In practice, supplier breaches usually fall into one of the following groups — each requiring a different response:

• Late delivery: delivery behind the committed schedule, disrupting the buyer’s production plan. Distinguish remediable lateness (make-up delivery) from lateness that defeats the contract’s purpose (e.g., materials for an export order already past the delivery deadline to the customer);
• Wrong specifications, poor quality: short quantities, wrong types, or failure to meet agreed quality standards — see the articles on goods quality disputes in Vietnam and delivery disputes in sale contracts;
• Supply stoppage or refusal to perform: the most serious form — the supplier unilaterally stops deliveries, usually citing rising input prices, financial difficulties, or having found a higher-paying customer;
• Unilateral changes to terms: demanding price increases, changing payment methods, shortening credit terms — while the contract does not allow it;
• Breach of ancillary obligations: failing to provide documents (CO, CQ, invoices), no warranty, disclosing confidential information, or selling to the buyer’s competitors despite an exclusivity commitment.

What most of these disputes share: the supply contract was signed sketchily, recording only price and quantity, entirely lacking clauses on schedules, quality standards, sanctions, and mechanisms for handling changes. The company is then left relying on the general provisions of the 2005 Commercial Law — which require proving more elements.

Fundamental or non-fundamental breach: the assessment that decides everything

Before applying any strong sanction (temporary suspension, cessation, cancellation of the contract), the buyer must assess: does the supplier’s breach constitute a fundamental breach of contractual obligations? This is the key concept of the 2005 Commercial Law: the sanctions of temporary suspension of contract performance (Articles 308–309), cessation of contract performance (Articles 310–311), and contract cancellation (Articles 312–313) apply only where the breach is one the parties agreed as a condition for application, or where one party fundamentally breaches contractual obligations.

The law does not pre-list what counts as “fundamental breach” for each contract type — it leaves the parties to agree in the contract, or the dispute resolution body to assess based on the extent of loss and the contract’s purpose. A well-drafted supply contract should therefore clearly list cases deemed fundamental breaches, for example:

• Late delivery beyond a specified number of days versus the schedule (e.g., over 30 days);
• Substandard deliveries in several consecutive instances;
• Supply stoppage without justifiable reason;
• Breach of exclusivity commitments or confidentiality obligations.

Conversely, for non-fundamental breaches (a few days late but made up, minor errors promptly fixed), the buyer should apply lighter sanctions such as demanding remedy, penalties, and damages — rushing to suspend or cancel the contract in such cases may make the buyer itself the breaching party.

Sanctions the buyer may apply when the supplier breaches

Article 292 of the 2005 Commercial Law lists 7 types of commercial sanctions: specific performance; penalties; damages; temporary suspension of contract performance; cessation of contract performance; contract cancellation; and other measures agreed by the parties not contrary to law. In supplier disputes, the most used are:

• Specific performance: requiring the supplier to continue delivering on schedule and to quality. This sanction suits cases where the source is hard to replace and the buyer still needs to maintain the supply relationship;
• Penalties: under Article 301, the penalty level is agreed by the parties but may not exceed 8% of the value of the breached contractual obligation. The important note in Article 300: penalties apply only where the contract so agrees — without a penalty clause, no penalty can be claimed, however clear the breach;
• Damages: under Article 302, covering actual, direct losses (higher replacement purchase costs, storage costs, production stoppage costs) and the direct profits that would have been earned (profits from affected orders). Article 303 requires three elements: a breaching act, actual losses, and the breach as the direct cause of the losses. The claiming party must prove the losses (Article 304) and must take reasonable measures to mitigate them (Article 305);
• Temporary suspension, cessation, cancellation of the contract: applied under Articles 308–313 where there is a fundamental breach or prior agreement. When a contract is suspended, the parties need not continue performing, and the party that has performed may demand payment or counter-performance (Article 311). On cancellation, the parties return to each other what they received (unless otherwise agreed) and the aggrieved party may claim damages.

A point favoring the buyer under Article 307: where the contract contains a penalty agreement, the aggrieved party may apply both the penalty and damages concurrently. Conversely, without a penalty agreement, only damages may be claimed. For details see the article on handling breaches of commercial contracts.

When the supplier suddenly stops supply: responding in the first 72 hours

Sudden supply stoppage is an operational emergency, not just a legal dispute. In the first 72 hours, the company must handle two fronts in parallel:

The operational front: activate the contingency plan — contact alternative suppliers, assess existing inventory, adjust the production plan, notify customers if their orders may be affected. All costs arising from replacement purchases (price differences, expedited shipping, costs of finding new suppliers) must be fully documented — these will be the basis for future damages claims.

The legal front: immediately send a written demand for the supplier to continue performing (specific performance), with a clear deadline; while fully reserving all sanction rights. If the supplier still refuses, the buyer has grounds to consider suspending its own payment obligations, suspending or cancelling the contract — depending on the breach severity and the contract’s terms.

Note the duty to mitigate under Article 305: the buyer cannot “sit and wait” for losses to balloon and then demand the supplier compensate everything. The law requires the aggrieved party to take reasonable measures to mitigate losses — e.g., proactively seeking replacement sources at reasonable prices instead of letting the production line stay idle. Losses that could have been mitigated but were not will be deducted from the compensation amount.

Where urgent measures are needed to protect goods, assets, or evidence, see the article on urgent measures in commercial disputes.

Terminating the supply contract: the procedure and consequences to plan ahead

Ending a relationship with a breaching supplier is not just sending a “contract termination” letter — it is a process to be calculated so as not to become the breaching party yourself:

• Termination grounds: expiry of the contract term; mutual agreement to terminate; unilateral termination when the other party breaches (check the contract’s terms and Articles 310–313 of the 2005 Commercial Law);
• Notice: send a written termination notice stating the grounds, the effective date, and requiring outstanding issues to be resolved. The notice must be sent by a provably received method;
• Settlement of accounts: reconcile two-way debts — unpaid goods, penalties, damages, deposits/escrow to be refunded;
• Handling goods: goods delivered but unpaid, goods in transit, the buyer’s materials/molds held at the supplier — agree on a recovery or handling plan;
• Post-termination obligations: warranty for delivered goods, confidentiality obligations, and non-compete obligations (if agreed) continue in effect per the agreement.

A common mistake: the buyer unilaterally withholds all outstanding payables to “offset” losses without a set-off agreement or a competent authority’s decision — this may be deemed a breach of the payment obligation, and the supplier may demand late payment interest under Article 306 (the average overdue debt interest rate on the market at the time of payment, corresponding to the delay period).

Exclusivity and confidentiality clauses in supply contracts

For companies with proprietary formulas, designs, or production processes, the following two clauses are worth no less than the price clause:

Exclusivity commitment: the supplier commits not to supply the same goods/services to the buyer’s competitors within a certain scope (territory, customer group) and period. Breaching this commitment is not just an ordinary contract breach — it may expose trade secrets and destroy the buyer’s competitive advantage. The contract should set a separate, sufficiently deterrent sanction for exclusivity breaches (within the 8% penalty cap or a proven damages mechanism).

Confidentiality obligations: covering technical information (drawings, formulas, processes) and commercial information (purchase prices, output, business plans) that the buyer shares with the supplier. The confidentiality clause should define: the scope of confidential information, the confidentiality period (usually extending beyond contract termination), exceptions (publicly available information, state authority requirements), and sanctions for breach.

Note: when drafting exclusivity clauses, companies must consider competition law limits — an exclusivity commitment with too broad a scope or too long a period may be examined as a competition-restricting agreement. This content needs case-specific assessment by a lawyer.

Switching suppliers: how not to “jump from the frying pan into the fire”

Terminating the old supplier is only half the job — the other half is establishing the new supplier relationship without repeating old mistakes:

• Transition phase: maintain an overlap period between old and new suppliers where possible, or keep buffer inventory sufficient for the transition; clearly agree on recovering molds, equipment, and technical documents held at the old supplier;
• Evaluating the new supplier: not just price comparison — assess actual production capacity (factory visits), financial health, current client lists, quality management systems (ISO), and responsiveness to fluctuations;
• Framework contract + purchase orders: for long-term supply relationships, sign a framework contract setting general terms (quality, price or price adjustment mechanism, sanctions, dispute resolution) and implement through specific purchase orders/delivery orders — instead of a single rigid contract that is hard to adjust;
• Price adjustment mechanism: to avoid the “input prices rose so we demand more” scenario, the contract should have a price adjustment clause tied to objective indices (published material prices, exchange rates) with clear bands and procedures — rather than leaving it to one party’s unilateral decision.

Supply-chain risk management from the contract drafting stage

The best dispute is the one that never happens. A well-designed supply contract should include the following “layers of defense”:

• Performance security: deposits, escrow, or bank guarantees for delivery obligations — especially with new suppliers or high-value contracts;
• Quality inspection clauses: the right to inspect at the supplier’s factory, acceptance procedures, independent inspection clauses in case of disagreement;
• Graduated sanctions: daily/weekly late delivery penalties, quality breach penalties, and clauses listing fundamental breach cases as grounds for suspension/cancellation;
• Force majeure and changed circumstances clauses: clearly distinguishing exempt cases (Article 294) from mere economic hardship — rising material prices are, as a general principle, not force majeure;
• Dispute resolution clauses: negotiation — mediation — arbitration/court, with specific negotiation time limits to avoid indefinite dragging;
• Supply diversification: strategically, never depend 100% on a single supplier for critical materials — this is a management lesson, not just a legal issue.

See commercial disputes and arbitration for an overview of resolution methods when disputes are unavoidable.

The dispute resolution roadmap with a supplier

Article 317 of the 2005 Commercial Law provides three forms of dispute resolution: negotiation between the parties; mediation through an intermediary chosen by agreement; and resolution before arbitration or courts. In practice, most supplier disputes should follow an escalation roadmap:

Step 1 — Direct negotiation: send a written document stating the breach, the contractual basis, and demanding remedy within a specific time. Many disputes are resolved at this step if the buyer prepares a tight dossier and offers a practical solution (e.g., conditional extension with a penalty). Where agreement is reached, put it in writing — see the article on settlement agreements in commercial disputes.

Step 2 — Mediation: through a commercial mediation center or an independent mediator. Mediation suits cases where both parties still want to maintain the long-term supply relationship.

Step 3 — Arbitration or courts: when negotiation and mediation fail. The choice between arbitration and courts depends on the contract’s dispute resolution clause, the cross-border nature of the transaction, and confidentiality needs. Note the current legal framework: the 2010 Law on Commercial Arbitration (No. 54/2010/QH12) has been amended and supplemented by Law No. 81/2025/QH15 dated 24/06/2025, effective from 01/07/2025 — to be distinguished from Resolution No. 81/2025/UBTVQH15 (also effective from 01/07/2025), which concerns court organization, concentrating jurisdiction over requests to set aside arbitral awards in the People’s Courts of three cities: Hanoi, Da Nang, and Ho Chi Minh City.

In all cases, the limitation period for commercial disputes is 2 years from the time the lawful rights and interests were infringed (Article 319) — companies should not let negotiations drag until the limitation period expires.

When to contact a lawyer

• The supplier shows signs of breach and the breach level needs assessing, with appropriate sanctions chosen before acting;
• Sudden supply stoppage, needing both alternative supply secured and the right to claim damages preserved;
• Needing to draft remedy demands and notices of temporary suspension/cessation/cancellation in proper legal sequence;
• Disputes over exclusivity, confidentiality, or price adjustment mechanisms;
• Needing to calculate and prove losses and negotiate settlements with the supplier;
• Negotiations have failed and suit must be filed before arbitration or courts within the limitation period;
• Drafting a new framework supply contract with a complete preventive clause system.

How FLAT LAW FIRM helps

FLAT LAW FIRM accompanies companies through the entire lifecycle of the supply relationship — from prevention to dispute resolution:

• Reviewing and drafting supply contracts and framework contracts with clause systems on quality, schedules, sanctions, exclusivity, confidentiality, and dispute resolution;
• Advising on handling supplier breaches: assessing fundamental breach, choosing sanctions, drafting legal documents;
• Representing clients in negotiation and mediation with suppliers; calculating and proving losses;
• Advising on supplier-switching strategy, handling payables and asset recovery on contract termination;
• Representing clients in filing and pursuing cases before commercial arbitration or competent courts.

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