The Law on Construction 2025 will take effect from July 1, 2026, with the latest regulations on contractual liabilities in construction activities.

The most notable aspect is the provision allowing parties to pre-agree on the level of damages corresponding to each violated contractual obligation and the severity of the violation, as specified in Clause 2, Article 86 of the Law on Construction 2025.

1. Principles of damage compensation

Previously, Vietnamese law applied the principle of compensating for actual damages, requiring the aggrieved party to clearly prove:

• The act of breaching the contractual obligation.
• The actual damages incurred.
• The direct causal relationship between the act of breach and the damages.
• Damages that can be proven with documents and figures.

This has created many difficulties in practice, especially for large-scale, complex construction projects where intangible damages, such as lost opportunities or damage to reputation, are difficult to quantify precisely. The Law on Construction 2025 does not negate this principle but supplements it with a mechanism for pre-agreeing on damage amounts to refine the process of determining liability.

2. Regulations on pre-agreed damage amounts

According to Clause 2, Article 86 of the Law on Construction 2025:

Damages are determined based on actual damages and pre-determined amounts corresponding to the breached construction contractual obligations and the severity of the breach.

This means that:

• Parties have the freedom to agree: They can specify pre-determined damage amounts for each contractual obligation, such as delays in progress, failure of the construction quality to meet standards, or non-performance of warranty obligations.
• The damage amount must be consistent with the severity of the violation: Courts or arbitration tribunals have the right to review and adjust the agreed amount if it deviates significantly from the actual damages incurred.
• Causation must be proven: Even with pre-agreements, parties must still prove the act of violation and its connection to the actual damages.

The mechanism of pre-agreed damage amounts offers several practical benefits:

• Compels parties to perform contracts: Clearly defined damage amounts will encourage parties to prioritize fulfilling their contractual obligations.
• Increases transparency and facilitates dispute resolution: Reduces the time and cost of dispute resolution by eliminating the need to prove detailed actual damages.
• Aligns with international practices: Conforms to international construction contract models like FIDIC, attracting foreign investment and international cooperation in the construction sector.

3. Notes on applying pre-agreed damage compensation

Despite the clear regulations, applying this mechanism in practice still presents challenges:

• Incorrect terminology: Many previous construction contracts used the term “penalty for breach” instead of “pre-agreed damage compensation,” leading to misunderstandings regarding the legal basis for application.
• Lack of clarity on priority: The Law on Construction 2025 has not clarified whether pre-agreed compensation excludes the right to claim actual damages, potentially causing disputes when parties wish to apply both mechanisms.
• Need for detailed sub-law guidance: Detailed guiding documents are needed to address practical questions, such as how to calculate pre-agreed damage amounts and under what circumstances they can be adjusted.

To ensure the legal validity of pre-agreed damage compensation agreements, parties should note:

• Clearly state this clause in the construction contract from the outset.
• Precisely identify the violated obligation and the corresponding degree of violation.
• Set pre-agreed amounts that are consistent with reality, neither too high nor too low compared to potential damages.
• Review and comply with specific regulations for each type of contract (especially those funded by state capital).

The regulation on pre-agreed damage compensation in the Law on Construction 2025 is an important step forward, helping to complete the legal framework for construction activities in Vietnam and align with global trends and international practices. However, the application of this regulation requires careful consideration, accompanied by detailed sub-law guidance and lessons learned from dispute resolution practice.