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Penalties for breach of contract according to Vietnamese Law are one of the forms of sanctions applied when handling contractual violations. So how does the law stipulate penalties for breach of contract, and what are the levels of these penalties?
What is a Penalty for Breach of Contract?
A penalty for breach of contract is an agreement within a contract where the party being violated has the right to demand that the breaching party pay a penalty due to the breach.
When is a Penalty for Breach of Contract Applicable According to Vietnamese Law?
Penalties for breach of contract under Vietnamese law are applicable if the following conditions are met:
- The parties have agreed within the contract on the obligations that, if violated by one party, will result in a penalty, and the specific penalty amount.
- There is an actual occurrence of a breach of the aforementioned contractual obligations.
However, the breaching party will not be subject to penalties for breach of contract in the following cases:
- Occurrence of an event of exemption from liability agreed upon by the parties in the contract;
- Occurrence of a force majeure event;
- The violation by one party is entirely due to the fault of the other party;
- The breach occurs due to the execution of a decision by a competent state authority that the parties did not know or could not have known at the time of contract signing.
The breaching party must prove that they fall into one of the above exemption cases.
The Relationship Between Contract Penalty and Compensation for Damages According to Vietnamese Law
Penalties for breach of contract and compensation for damages are two common sanctions in contracts under Vietnamese law. The relationship between these two sanctions in different disputes is as follows:
1/ For Civil Contracts
In civil contracts, the parties may agree that the breaching party only needs to pay the penalty without compensating for damages, or the breaching party must pay both the penalty and compensate for damages. If the parties agree on penalties but do not mention compensation for damages, the breaching party only needs to pay the penalty without compensating for damages. In other words, in civil contracts, for compensation for damages to be applicable, it must be explicitly agreed upon in the contract.
2/ For Commercial Contracts:
In commercial contracts, if there is no agreement on penalties, the non-breaching party does not have the right to demand penalties but can only claim compensation for damages. If there is an agreement on penalties, the non-breaching party can demand both penalties and compensation for damages. In other words, in commercial contracts, compensation for damages is automatically applicable without needing explicit agreement in the contract.
Penalty Levels for Breach of Contract According to Vietnamese Law
Penalty Levels According to the Commercial Law
According to the 2005 Commercial Law, the penalty for a breach of obligations in commercial contracts or the total penalty for multiple breaches agreed upon by the parties can be a maximum of 8% of the value of the breached portion. If a trader providing inspection services issues an incorrect inspection certificate due to their negligence, the trader must pay a penalty to the customer according to the agreed amount but not exceeding ten times the inspection service fee.
Penalty Levels According to the Civil Code
According to the 2015 Civil Code, the penalty for a breach of obligations in civil contracts is entirely agreed upon by the parties without a maximum limit.
Penalty Levels According to the Construction Law
According to the 2014 Construction Law, the penalty for a breach of obligations in construction contracts is agreed upon and stated in the contract. However, for construction contracts using public investment capital or state capital outside public investment, the maximum penalty is 12% of the value of the breached portion.
