Penalty for breach of contract in Vietnam: the 8% cap and how to draft a penalty clause

What is the penalty for breach of contract in Vietnam and when does it apply?

A contractual penalty is a sum the breaching party pays the injured party under an agreement in the contract. The Commercial Law defines it as the injured party's right to require the breaching party to pay a penalty for breach if the contract so provides (Article 300). The Civil Code is similar: a penalty is an agreement between the parties in the contract under which the party in breach must pay a sum to the injured party (Clause 1, Article 418).

A penalty is only one of the six commercial remedies, alongside an order to perform, damages, suspension, termination and cancellation of the contract (Article 292).

Two conditions for a penalty:

1. The contract has a penalty clause. No agreement, no penalty (Article 300 of the Commercial Law; Clause 1, Article 418 of the Civil Code).
2. No exemption applies under Article 294 of the Commercial Law (see below).

An important difference from damages: Article 300 does not require proof of loss for the penalty, whereas damages need a breach, actual loss and a direct causal link (Article 303), and the claimant must prove the loss (Article 304). That is why injured parties usually want a penalty clause.

What is the maximum penalty for breach of contract in Vietnam: 8% or agreed freely?

Two laws give two answers, and which law governs the contract decides the lawful amount.

How to decide which law applies:

• The contract is a commercial activity (for example a sale of goods or a services contract for profit between traders): the Commercial Law applies, so the penalty in the clause must be no more than 8% of the value of the breached part of the obligation.
• The contract is not a commercial activity: the Civil Code applies and the parties agree the penalty themselves. Classify the contract before fixing the penalty, because not every contract falls within the Commercial Law.
• A special law applies: Article 418 leaves room for related laws to provide otherwise, and the Commercial Law sets its own cap for inspection services, not more than ten times the inspection fee where a wrong certificate results from a non-intentional fault (Clause 1, Article 266, referred to by Article 301). For contracts in fields with sector laws, such as construction or public procurement, check the sector law's own amount; this entry does not state those amounts.

The Commercial Law does not state the legal consequence of a clause that sets a penalty above 8%. Article 301 says only that the penalty is "not more than" 8%. A court or arbitral tribunal may therefore not accept the excess, and a commercial contract governed by Vietnamese law should not set a rate above the cap. For contracts with a foreign element, decide the governing law first, because the 8% cap is a rule of the Vietnamese Commercial Law.

Watch for change: the Standing Committee of the National Assembly agreed to submit a bill amending the Commercial Law, the Competition Law, the Law on Foreign Trade Management and the Law on Consumer Protection to the National Assembly for debate and adoption at its second session (planned for 17 October to 21 November 2026). Under the first draft, the bill repeals Chapter VII (Articles 292 to 319, including the 8% cap in Article 301, damages, exemptions from liability and the limitation period in Article 319) from 1 March 2027, with no transitional rule for contracts already signed; the text put to the Assembly may differ. As of 14 October 2026 the bill has not been passed, so Article 301 still applies. Long-term contracts should have a clause for review if the law changes.

Penalty clause in a contract in Vietnam: how to draft it so it works

A penalty clause that works says which breach is penalised, how the amount is calculated, the maximum, and whether it adds to damages. The table below separates what has a legal basis from drafting practice:

Sample clause for reference for a commercial sale-of-goods contract, to be adapted to the actual contract:

"If Party B delivers late against the deadline in Article X, Party B shall pay a penalty of 0.5% of the value of the goods delivered late for each day of delay. The total penalty shall not exceed 8% of the value of the goods delivered late. This penalty does not exclude Party A's right to claim damages for actual loss. Party A shall give written notice of the breach and Party B shall pay the penalty within 10 days of receiving the notice. The parties are not liable to pay the penalty in the exemption cases under Article Y."

The point of the sample: the penalty is tied to the value of the goods delivered late rather than the whole contract, it has an 8% cap, and it states that damages are added.

Penalty or damages for breach of contract in Vietnam: can you claim both?

Combining the two: if the contract has a penalty clause the injured party may apply both the penalty and damages, unless the Commercial Law says otherwise (Clause 2, Article 307). Without a penalty clause there is a right to damages only (Clause 1, Article 307). A civil contract goes the other way: without an agreement to add damages, the party in breach pays only the penalty (Clause 3, Article 418).

Two items that can overlap and should be spelled out:

• Interest on late payment. Article 306 of the Commercial Law lets the injured party claim interest on the late sum at the average overdue interest rate on the market, unless the parties agreed otherwise. To avoid an argument about counting twice for the same late payment, say whether the penalty replaces interest or is added to it.
• Loan contracts. A court deals with a failure to repay on time on the principle of dealing once with each failure, even where the contract has both a penalty clause and interest on overdue principal (Article 12 of Resolution 01/2019/NQ-HDTP).

When is no penalty payable, and which contracts need special care?

Exemption. Article 294 of the Commercial Law lists four cases in which the breaching party is exempt: an exemption event the parties agreed; force majeure; a breach caused entirely by the other party's fault; and a breach caused by carrying out a decision of a competent state authority that the parties could not have known of when they signed. The breaching party must prove it (Clause 2, Article 294) and must notify the other party in writing immediately of the exemption event and the likely consequences; a failure to notify, or late notice that the event has ended, makes it liable for damages (Article 295).

Contracts needing care:

• Employment contracts and work rules. The Labour Code prohibits fining or cutting pay in place of labour discipline (Clause 2, Article 127). Do not put a commercial-style penalty clause in an employment contract. See the service on employment law advice.
• Loan contracts. The deal-once principle above (Article 12 of Resolution 01/2019/NQ-HDTP).
• Inspection services. The amount is agreed but may not exceed ten times the inspection fee where the result is wrong through non-intentional fault (Clause 1, Article 266).
• Contracts in fields with sector laws. Check any separate amount (Clause 2, Article 418).

How to calculate the penalty for breach of contract in Vietnam: three examples

The examples are hypothetical, to show the calculation; they are not advice on a specific contract.

Example 1: the 8% cap is measured on the breached part. A commercial sale contract worth VND 10 billion with three batches. The second batch, worth VND 4 billion, is delivered late. The penalty clause says 0.5% per day of delay on the value of the late batch, with a total cap of 15% of the contract value.

• Cap under the law for this breach: 8% x VND 4 billion = VND 320 million (Article 301), not 8% x VND 10 billion = VND 800 million, and not 15% x VND 10 billion = VND 1.5 billion.
• Daily penalty: 0.5% x VND 4 billion = VND 20 million a day, reaching the VND 320 million cap after 16 days. The excess over the cap in the clause risks not being accepted.

Example 2: penalty plus damages in a commercial contract. The same contract has a penalty clause. The buyer proves actual loss from the delay of VND 500 million. Under Clause 2, Article 307 the buyer may claim both the VND 320 million penalty and VND 500 million in damages, VND 820 million in total, provided it proves the loss (Article 304), has mitigated it (Article 305) and the seller has no exemption (Article 294).

Example 3: a civil contract. The contract is not a commercial activity. The parties agree a penalty of 20% of the value of the obligation breached and say nothing about damages. The Civil Code sets no general cap (Clause 2, Article 418), so the 20% is not limited by a general ceiling; check separately whether a related law sets its own amount. Because the parties did not agree to add damages, the party in breach pays only the penalty (Clause 3, Article 418).

A penalty clause usually sits in the main contract; if the parties have only signed a framework agreement, check whether it contains enough terms for a penalty to apply. A dispute over a penalty can go to commercial arbitration if there is an arbitration agreement.

Checklist before fixing a penalty clause

1. Classify the contract: commercial activity (Commercial Law) or civil (Civil Code), and whether a sector law sets its own penalty.
2. For a commercial contract: state a penalty of not more than 8% of the value of the breached part of the obligation, and cap the total for several breaches at 8% too.
3. Separate the obligations to set the base (by batch, phase or item) instead of one rate on the whole contract.
4. State whether damages are added (Clause 2, Article 307; Clause 3, Article 418).
5. Set the relationship between the penalty and interest on late payment (Article 306).
6. Add force majeure, immediate written notice and proof (Articles 294 and 295).
7. Set the breach notice procedure, a cure period and the time for paying the penalty.
8. For a contract with a foreign element: fix the governing law and dispute forum first, because the 8% cap is a rule of the Vietnamese Commercial Law.
9. For a long-term contract: add a clause for review if the law changes.

If you need penalty, damages and force majeure clauses drafted or reviewed, see the service on drafting and reviewing commercial contracts. For M&A deals, see also what is due diligence in Vietnam on reviewing the target's key contracts. The summary of the Commercial Law 2005 is in the legal library.

Common mistakes

• Calculating 8% on the whole contract value instead of the breached part of the obligation, or setting a rate above the cap without noticing.
• Applying the 8% cap to a civil contract, or applying the Civil Code's freedom of agreement to a commercial contract.
• Not saying how penalty and damages relate. A civil contract that is silent means penalty only; a commercial contract with a penalty clause allows both.
• A vague penalty ("breach of the contract carries a 10% penalty") not tied to a specific obligation, so the base is unclear.
• Not giving force majeure notice properly. Failing to notify, or notifying late when the event ends, means paying damages (Clause 2, Article 295); the law does not say whether late notice when the event occurs forfeits the exemption.
• Putting a fine clause in an employment contract (Clause 2, Article 127 of the Labour Code).
• Missing the limitation period. 2 years for a commercial dispute (Article 319), 3 years for a civil contract (Article 429).