A liquidated damages clause is a common contractual provision. However, its validity is still a question mark in Vietnam’s legal system since there is no specific definition or regulation about the clause. It causes quite a lot of disputes on the liquidated damages clause when performing it in Vietnam. How are parties performing and clause recognition in reality according to Vietnam’s law?

Liquidated Damages definition

Liquidated damages – LD is a monetary compensation measure to remedy the damage caused by a breach of contract. This provision is widely applied in many legal systems. Liquidated damages provide for the contracting parties to pre-fix a reasonable amount of damages that one party can remedy if the other party breaches.

This clause is applied when:

– Damages arising from a breach of contract are hard to estimate and proving the actual damages is basically impossible;

– Compensation must be reasonable and commensurate with actual or foreseeable damage.

Regulations on liquidated damages in Vietnam’s law

Vietnam’s law currently regulates two types of monetary compensations due to a breach of contract. These are:

(i) Fines against contractual breach; and

(ii) Compensation for damages.

According to Article 302, Civil Code 2015, “damages caused by a breach of obligations comprise physical damages and mental damages”.

Article 302, Commercial law 2005 stipulates: “The value of damages covers the value of the material and direct loss suffered by the aggrieved party due to the breach of the breaching party and the direct profit which the aggrieved party would have earned if such breach had not been committed”.

In other words, Vietnam’s law only regulates actual and direct damages due to a breach of contract. There is no article that mentions liquidated damages. If the compensation clause is not stipulated in a contract when there is a breach and the aggrieved party successfully proves the loss, the articles on damages and compensation will still be applied.

The application of the liquidated damage clause in Vietnam

The purpose of applying this provision is to reduce the burden of proof of damages. For example, in the case of the purchase of shares in a company, it is difficult to prove the loss of intermediary fees, as is the case with many other practical cases where the damages are unprovable. Then the actual damage clause will maximize its effect.

As mentioned above, Vietnamese law does not provide for liquidated damages and in fact, there have been many cases of disputes related to this provision in courts that have not been recognized.

However, if the contract includes a foreign party, it is common to find an agreement on this provision. At that time, both parties should choose an arbitrator as a dispute resolution body to ensure that the clause has a chance to be recognized. Because the law does not prescribe but also does not prohibit such compensation and arbitrators tend to respect the agreement of the parties (unless such agreement is contrary to morality and law).

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