A commercial contract lacking robust penalty clauses is akin to an army marching into battle without weapons.

The line between a friendly cooperation agreement and a financial protection tool lies in the ability to anticipate worst-case scenarios and establish corresponding legal safeguards. The strategic analysis below goes beyond merely listing regulations; it delves into the operational logic of the Civil Code and the Commercial Law, empowering businesses to decipher enforcement mechanisms and transform contractual terms into effective tools for addressing violations.

1. Identifying contractual violations under Article 351 of the Civil Code 2015

The foundation of any dispute lies in the accurate identification of a breach. However, from a legal perspective, a violation is not simply a failure to act but a matter of timing, quality, and method of performance. Correctly identifying the nature of a violation under Article 351 of the Civil Code 2015 is a decisive step for businesses to trigger the appropriate sanctions, thus avoiding the misapplication of tools that could lead to losing in litigation.

• Violation of deadlines:
  • This is the most common and often the most superficially handled error. The legal logic here is “Time is money”. Businesses must distinguish between delayed performance that can be rectified and delays that nullify the contract’s purpose.
  • If the contract does not stipulate the deadline as a critical element, the breaching party may argue they are making efforts to perform, thereby prolonging the timeline. Therefore, clauses should be specific: “If delayed for [x] days, this act shall be deemed a fundamental breach, allowing the non-breaching party to terminate the contract immediately without further notice.”
• Violation of quality/subject matter:
  • This refers to discrepancies between what is committed in writing and the actual delivery. The key point here is the acceptance process.
  • If the receiving party signs the acceptance minutes without reserving their opinion, their right to sue for quality violations will be significantly limited. Provisions for latent defects – issues not detectable by visual inspection at the time of delivery – should be included to protect long-term rights.
• Violation of non-action obligations:
  • Examples include breaches of confidentiality or non-compete clauses. These violations are notoriously difficult to quantify in terms of damages.
  • Instead of a general statement like “shall compensate for damages”, it is more effective to stipulate a fixed, high penalty for each violation. Proving actual damages for the disclosure of trade secrets is nearly impossible.

2. Selecting appropriate sanctions

When a breach occurs, the law provides a diverse array of sanctions. However, not all tools are equally effective. The choice between penalties (contractual fines), compensation (damages), or termination depends not only on legal provisions but also on the ultimate objective: Is the business aiming to salvage the partnership or to cut losses and recover capital quickly?

• Compelled performance of contract – Article 297 of the Commercial Law 2005:
  • This is a coercive measure. However, the biggest risk is the time involved. Litigation that drags on for one to two years can render the compelled performance valueless compared to its original economic benefit at the time of agreement.
  • This sanction should only be used when the contract’s subject matter is unique (e.g., a specific piece of land, proprietary technology). For common goods, opt for termination and damages to quickly procure replacements from another supplier.
• Contractual penalties – Articles 300, 301 of the Commercial Law 2005:
  • This serves as a deterrent and preventive measure. However, note that the maximum penalty is 8% of the value of the obligated part that was breached, not the total contract value.
  • Why 8%? This is a policy to protect economic order and prevent dominant parties from imposing excessive penalties. For example, in a 10 billion VND contract, if a delivery worth 1 billion VND is missed, the maximum penalty is 80 million VND (8% of 1 billion VND). If a business drafts a penalty of 8% on the total 10 billion VND, the remaining 720 million VND may be deemed invalid by the court.

3. The complex interplay between penalties and damages

This is where the most significant disputes and financial losses arise in practice. The differing logic between the Commercial Law and the Civil Code regarding the relationship between “penalties” and “damages” often creates legal pitfalls. Understanding this relationship helps businesses establish synergistic clauses to maximize recovery without risking invalidation by the courts.

• Principle of “choice of law”:
  • For contracts between businesses (commercial contracts), the Commercial Law applies. Article 307 of the Commercial Law 2005 stipulates that if a contractual penalty is stipulated, the right to claim further damages is automatically granted.
  • However, Article 418 of the Civil Code 2025 applies if a party’s objective is not profit-driven (civil matters). In such cases, if only a “penalty” is stipulated, you cannot claim damages.

Therefore, always use the phrase: “The breaching party shall pay a penalty of x% and compensate for all resulting damages incurred by the non-breaching party” to cover all legal scenarios.

4. Mechanisms for exemption from liability (violations without penalties) – Article 294 of the Commercial Law 2005

Effective business strategies involve not only offense but also understanding the opponent’s defenses. The law provides scenarios for “excuses” for breaching parties under the guise of force majeure or concurrent fault. Understanding these exemption conditions allows businesses to proactively counter fallacious arguments and anticipate barriers to enforcing obligations against partners.

• Force majeure:
  • Not every epidemic or natural disaster qualifies for exemption. The logic here is the inability to perform. If an epidemic occurs, but the government still allows goods to circulate, and a seller fails to deliver due to increased shipping costs, this is a business risk, not force majeure.
  • However, be mindful of the notification obligation according to Article 295 of the Commercial Law 2005: This is a trap. If the breaching party encounters force majeure but fails to promptly notify the other party in writing, they may lose their right to exemption.
• Fault of the non-breaching party:
  • The law promotes fairness: If you also contributed to the damage, you cannot claim full compensation. For example, Party A delivers a faulty machine (breach), but Party B, knowing it’s faulty, continues to operate it, leading to further damage (fire). In this case, Party A will only compensate for the damage caused by the faulty machine, while Party B must bear the damages resulting from their intentional operation.

5. Practical application

The law provides a framework, but the sophistication of a contract lies in how businesses flexibly apply it to real transactions. Focus on practical steps: evidence storage, establishing self-help mechanisms, to empower businesses to maintain absolute control, turning contracts into tools for exercising power even before resorting to courts or arbitration.

• Establish self-help mechanisms:
  • Do not solely rely on courts or arbitration for justice. Include provisions in the contract for the right to retain assets according to Article 346 of the Civil Code 2015 or the right to offset. For example, if Party B breaches their payment obligation, Party A has the right to offset the penalty directly against Party B’s debts or assets held by Party A. This helps businesses recover capital faster than going to court.
• Build a clean evidence chain:
  • In contract disputes, the common logic is “he who holds the evidence, wins”. All telephone exchanges should be confirmed via email. All meeting minutes must be signed by the authorized person.
  • In practice, courts and arbitration often consider emails from company domains or messages from phone numbers registered in the contract as valid evidence (according to the Law on Electronic Transactions).

In conclusion, a robust violation clause is not one filled with threatening language, but one that accurately anticipates the worst-case scenarios and establishes the shortest legal path to recovering losses.