Penalty for Breach and Damages in Commercial Contracts in Vietnam

When a commercial contract is breached in Vietnam, two distinct remedies commonly arise: a contractual penalty and compensation for damages. They serve different purposes and are treated differently under the Commercial Law 2005. Understanding how they interact — and the statutory limit on penalties — is essential when negotiating and enforcing commercial agreements.

Contractual penalty

A penalty is a sum the breaching party agrees to pay the aggrieved party for a breach. Under the Commercial Law 2005, a penalty applies only if the parties expressly agreed to it in the contract. Importantly, the total penalty for breach of a commercial contract is capped at approximately 8% of the value of the breached contractual obligation. Any agreed penalty above this ceiling is limited to the statutory maximum on enforcement.

Compensation for damages

Damages compensate the aggrieved party for actual loss and direct lost profit caused by the breach. Key features include:

• Damages arise from the breach itself and, in commercial contracts, generally do not require a prior agreement in the contract.
• The claiming party must prove the breach, the actual loss, and the causal link between them.
• The aggrieved party has a duty to take reasonable measures to mitigate its loss.

How penalty and damages interact

Under the Commercial Law 2005, if the parties agreed on a penalty, the aggrieved party may claim both the penalty and damages. If there is no penalty agreement, only damages may be claimed. This differs from some other legal regimes, so the drafting of the penalty clause directly determines what remedies are available.

Frequently asked questions

Can we agree a penalty higher than 8%?

You may write a higher figure, but for commercial contracts the enforceable penalty is limited to roughly 8% of the value of the breached obligation. The excess is generally not recoverable.

Do we need a clause to claim damages?

For commercial contracts, damages can generally be claimed even without a specific clause, provided the loss and causation are proven. A penalty, by contrast, requires an express agreement.

Can we claim both penalty and damages together?

Yes, if the contract contains a valid penalty clause. Without such a clause, only damages are available.

How LTV Law helps

LTV Law drafts enforceable penalty and remedy clauses and advises on claiming penalties and damages when disputes arise in Vietnam — contact our team.

This article is for general information only and does not constitute legal advice.