Introduction
For nearly two decades, Vietnamese contract law has lived with an uncomfortable gap. Commercial parties routinely negotiate clauses that fix, in advance, the sum payable if one side is late or otherwise in breach — the technique common-law lawyers call liquidated damages, and Vietnamese contract drafters usually just call penalty (phạt). But neither the 2015 Civil Code (Civil Code) nor the 2005 Commercial Law (Commercial Law) ever used the term, and the two statutes that do apply — one to “civil” relations, the other to “commercial” ones — treat the underlying idea of a pre-agreed monetary consequence for breach in genuinely different ways. Courts have therefore had to improvise, at times stretching the interpretive tools available under the Civil Code (custom, analogy to law, and equity) to give effect to what the parties plainly intended.
Judgment No. 660/2022/KDTM-PT, issued by the Ho Chi Minh City People’s Appellate Court on 10 November 2022 (Judgment 660) in a construction-contract dispute between a subcontractor (Subcontractor) and a main contractor (Main Contractor), is a particularly clear illustration of that improvisation. Faced with a single set of delay clauses that blended penalty and damages language, the appellate panel had to work out, from first principles, what each clause actually was, which statute governed it, and — for the clause that most resembled a liquidated damages provision — how to give it legal effect at all.
Less than four years later, the National Assembly addressed part of this gap directly. Article 86 of the new Law on Construction No. 135/2025/QH15 (Construction Law), which entered into force on 1 July 2026, is the first provision in Vietnamese statute law to expressly authorise parties to agree “predetermined loss amounts” (mức thiệt hại định trước) as a basis for compensation, alongside actual, proven loss. This article uses Judgment 660 as a case study of what the pre-2025 legal landscape actually required of contracting parties and courts, and then examines how far Article 86 — now in force, but barely a month old and as yet untested by any reported decision — closes the gap the judgment exposed, and where it does not.
The Doctrinal Baseline before 1 July 2026
A. Penalty for breach under the Civil Code
Article 418 of the Civil Code defines a penalty for breach as follows:
- A penalty for breach is an agreement between the parties to a contract, under which the breaching party must pay a sum of money to the injured party.
- The level of penalty is as agreed by the parties, except where other relevant law provides otherwise.
- The parties may agree that the breaching party is liable for the penalty only, without damages, or for both the penalty and damages; where the parties have agreed on a penalty but not agreed on whether both apply together, the breaching party is liable for the penalty only.
Article 418 imposes no cap on the amount of the agreed penalty, and it lets the parties decide, expressly, whether the penalty stands alone or applies cumulatively with damages; if they are silent on that question, the default is that the penalty is the exclusive remedy. Under a purely civil-law analysis, a penalty clause can therefore function as a Vietnamese equivalent to a liquidated damages clause: the parties may fix the sum in whatever amount they choose and, on the right drafting, exclude any separate damages claim.
B. Penalty for breach under the Commercial Law
The Commercial Law 2005 takes a different — and, for transactions between traders, controlling — approach. Article 300 of the Commercial Law defines penalty as the injured party’s right to demand a sum “if agreed in the contract.” Article 301 of the Commercial Law then caps that sum at not more than 8% of the value of the part of the contractual obligation that was breached. Article 307 of the Commercial Law then draws the sharpest doctrinal line: where the parties have agreed a penalty, the injured party may claim the penalty and damages cumulatively — the two remedies are treated as legally distinct, not alternative expressions of the same compensatory idea.
C. Damages under the Commercial Law and Civil Code
Both statutes reserve a separate remedy, damages (bồi thường thiệt hại), for the loss actually caused by a breach. Articles 302 to 304 of the Commercial Law require the claimant to prove an actual, direct loss and that the breach was the direct cause of that loss; Article 360 of the Civil Code imposes an equivalent, full-compensation principle for civil relations. Neither text carves out any exception for cases where the parties have themselves pre-agreed the quantum — the statutory language assumes damages will always be assessed after the fact, against evidence of what actually happened.
D. The gap between the Civil Code and the Commercial Law
Read the Commercial Law and the penalty is capped at 8%, is not itself treated as a form of compensation, and can be stacked with a full, evidence-based damages claim. Read the Civil Code and the penalty is uncapped and can itself be the exclusive, self-contained remedy. Construction contracts between two commercial entities — the overwhelming majority of construction contracts in Vietnam — arguably are governed by the Commercial Law, so the 8% cap and the evidentiary burden for damages apply by default. Neither statute said anything about a third possibility that international construction practice, FIDIC forms prominent among them, treats as entirely ordinary: a genuinely pre-agreed damages figure, calibrated to a realistic pre-estimate of loss, that the injured party can invoke without reconstructing its actual loss after the fact.
Parameter | Civil Code 2005 | Commercial Law 2005 |
|---|---|---|
Penalty cap | None — parties may set any amount | 8% of the value of the breached obligation (Art. 301) |
Basis for penalty | Agreement between the parties (Art. 418(1))
| Right to demand a sum “if agreed in the contract” (Art. 300) |
Penalty + damages together? | Only if expressly agreed; penalty-only is the default (Art. 418(3)–(4)) | Cumulative as of right once a penalty is agreed (Art. 307) |
Damages (bồi thường thiệt hại) | Full-compensation principle; loss must be proven (Art. 360)
| Actual, direct loss must be proven; breach must be the direct cause (Arts. 302–304) |
Pre-agreed damages figure, no proof of loss? | Not addressed | Not addressed |
Typically governs | Civil relations generally | Commercial transactions between traders — governs construction contracts by default |
Recent Developments in Court Interpretation and Legislation
A. Judgment 660
The contract between Main Contractor and Subcontractor and its addenda contained three separate delay provisions, each labelled “phạt” (penalty) or blended with damages language:
- Article 10.1 of the original contract imposed 0.2% of the contract value per day of delay, capped at 10% of the contract value;
- Article 4.2 of Addendum A01 repeated that 0.2%/10% formula and added a general obligation to “compensate all damage caused by the delay”; and
- Section 3 of Addendum A02 repeated the same 0.2%/10% formula and then added a fixed sum of VND 300,000,000 for each day of delay past a newly agreed completion date of 10 March 2017.
This layering — a percentage-of-contract-value penalty, a general damages obligation, and a fixed daily sum — is precisely the kind of drafting that forces a court to decide, clause by clause, which legal regime each provision actually belongs to.
The percentage penalty: capped regardless of what the contract said
The appellate court held, without real difficulty, that the 0.2%-per-day clauses were a penalty governed by the Commercial Law, because the underlying transaction was commercial. It then applied Article 301 of the Commercial Law to override the parties’ own 10% ceiling, reducing it to the statutory 8% — describing the contractual 10% cap as “inconsistent with the nature of the penalty remedy in commercial transactions under law.”
The fixed daily sum: an admitted gap in the law
The VND 300,000,000-per-day clause in Addendum A02 was the harder question, and the court’s reasoning here is the heart of the judgment for present purposes. The panel accepted, expressly, that this was a species of a pre-agreed damages arrangement (thỏa thuận bồi thường thiệt hại tính trước), and that Vietnamese law simply had no rule for it. Rather than dismiss the clause for want of statutory footing, the court turned to Articles 5, 6 and 14 of the Civil Code — custom, analogy to law, and the basic principles and equity of civil law — to construct a workable rule from scratch.
What it built was a hybrid, not a true liquidated-damages doctrine. The court held that a clause of this kind is enforceable, but only if the injured party still proves an actual loss and that the breach directly caused it — precisely the burden Articles 302 to 304 of the Commercial Law impose on an ordinary damages claim, and precisely what a genuine liquidated-damages clause is designed to make unnecessary. On the facts, Main Contractor discharged that burden: it proved the project’s ultimate investor had itself fined Main Contractor VND 21,274,200,000 for the late handover, a loss the court found was directly traceable to Subcontractor’s delay. Only because that independent proof existed did the court treat the contractual formula (VND 300,000,000 × 37 days = VND 11,100,000,000, comfortably below the proven VND 21.27 billion loss) as enforceable — adding, as a further check, that a pre-agreed figure would “be revisited if it is excessively large relative to the injured party’s actual loss.”
B. Article 86 of the Construction Law
What Article 86 provides
Article 86, titled “Reward, penalty for breach of a construction contract, compensation for damage, and resolution of construction contract disputes,” entered into force on 1 July 2026, together with the rest of the Construction Law. Clause 1 requires that any bonus, penalty and compensation arrangement be agreed by the parties in the construction contract itself. Clause 2 is the operative innovation: compensation for damage “is determined based on actual loss, [or on] predetermined loss amounts corresponding to the contractual obligations breached, [and] the degree of the breach” — for the first time, giving predetermined loss amounts equal statutory footing alongside actual, proven loss.
Clause 3 caps the penalty, but only for public-investment and PPP construction projects, at 12% of the value of the breached portion of the contract — a higher ceiling than the Commercial Law’s general 8%, but expressly confined to state-related projects. Clause 4 addresses breaches caused by a third party, and Clause 5 opens the door to “dispute resolution models based on international practice” alongside negotiation, mediation, arbitration and litigation.
What Article 86 resolves
Clause 2 supplies, for construction contracts, the statutory basis that the Ho Chi Minh City court had to build for itself out of Articles 5, 6 and 14 of the Civil Code in Judgment 660. A predetermined damages figure is now an express, first-class basis for a compensation claim, not merely a contractual term a court might choose to recognise by analogy. On the reading offered by practitioners tracking the new law, Article 86(2) is understood to dispense with the need to prove actual loss for a properly agreed predetermined amount — the defining feature of a genuine liquidated-damages clause, and the one thing Judgment 660 pointedly declined to dispense with.
What Article 86 leaves open
The provision is narrower, and more incomplete, than that single change suggests.
First, the 12% penalty cap in Clause 3 applies only to public-investment and PPP projects. For privately funded construction contracts — the category Main Contractor’s and Subcontractor’s contract fell into, and the category most Vietnamese construction contracts fall into — Article 86 says nothing about a penalty cap at all. Whether that silence means private construction contracts are now free of any statutory ceiling, because the Construction Law, as the specialised law for construction contracts, displaces the Commercial Law’s general 8% cap, or whether Article 301 of the Commercial Law continues to apply by default absent an express carve-out, is a question Article 86 does not answer. Judgment 660 applied the 8% cap to a private construction contract without any suggestion that a specialised construction-law regime might override it — because, at the time, no such regime existed. Courts applying Article 86 for the first time will have to decide whether that assumption still holds.
Second, Article 86 is silent on cumulation — whether a predetermined damages amount under Clause 2 can be claimed on top of a penalty under Clause 1, in the way Article 307(2) of the Commercial Law expressly allows for penalty-plus-damages generally. That is exactly the combination Main Contractor pursued, and the court allowed, in Judgment 660: a percentage penalty under the 0.2%/day clauses, plus damages under the VND 300,000,000/day clause, awarded together. Article 86 does not say whether that combination remains available, or on what terms, under the new regime.
Third, Clause 2’s cross-reference to “the degree of the breach” supplies no quantitative test for when a predetermined amount is disproportionate. That leaves in place, without more, the same judicial moderation power the Ho Chi Minh City court exercised on its own initiative in 2022 — courts will still decide, case by case, whether an agreed figure is excessive relative to loss, just as before, only now with a one-clause statutory anchor rather than an analogy built from first principles.
Fourth, Article 86 applies only to construction contracts. It does not amend the Civil Code or the Commercial Law, and commentary on the new law is explicit that it is not intended to signal a general reform of Vietnamese damages doctrine. Every other category of commercial contract — supply, services, distribution, and so on — remains governed by the same fragmented Civil Code/Commercial Law framework described in Section II, with the same 8% penalty cap and the same evidentiary burden for damages that the Ho Chi Minh City court had to work around in 2022.
Practical Implications
For construction contracts now being negotiated under Article 86, the clearest lesson from Judgment 660 is to keep the penalty and the predetermined-damages provisions doctrinally and textually separate, rather than layering them under a single “penalty” label as Main Contractor’s and Subcontractor’s contract did. A clause intended to operate as a Clause 2 predetermined-damages arrangement should say so expressly, should be pegged to a realistic pre-estimate of the categories of loss the parties expect — mirroring what ultimately saved Main Contractor’s claim in 2022, an independently provable loss, even though a court applying Article 86 should no longer require that proof — and should state expressly whether it operates alongside or instead of any percentage-based penalty.
For publicly funded or PPP projects, the 12% cap under Clause 3 should be treated as a hard ceiling, in the same way the 8% cap was applied without exception in 2022. For privately funded projects, parties should not assume Article 86 has removed the Commercial Law’s 8% cap entirely; until a court holds otherwise, drafting within the more conservative 8%–10% territory litigated in Judgment 660 remains the safer course. And for every contract outside the construction sector, Article 86 changes nothing — the older, harder-edged framework the Ho Chi Minh City court applied in 2022 remains the only law in point.
Conclusion
Judgment 660 is a useful marker precisely because it shows a Vietnamese court doing, through interpretation, what Article 86 of the Construction Law has now started to do through legislation: recognising that commercial parties have long relied on pre-agreed damages figures, and that a legal system built only around “penalty” and “proven-loss damages” leaves that practice on an uncertain footing. Article 86, barely a month into force at the time of writing and not yet tested by any reported decision, answers the narrowest version of the question the Ho Chi Minh City court faced in 2022 — but only for construction contracts, only in part, and with as many open questions (the private-contract penalty cap, cumulation, and the standard for disproportionality chief among them) as it resolves.
The doctrine of liquidated damages under Vietnamese law is, in that sense, only partly revisited. The next test case — quite possibly a construction dispute much like Main Contractor’s and Subcontractor’s, litigated a few years later under Article 86 rather than by analogy to Articles 5, 6 and 14 of the Civil Code — will determine how much of the gap Judgment 660 exposed has actually closed.