Penalties for Breach of Contract Under Legal Regulations

Penalties for breach of contract serve as a crucial legal mechanism to ensure compliance with contractual obligations and address violations effectively and fairly. In Vietnam’s current legal framework, regulations on contractual penalties vary across different sectors-civil, commercial, and construction, to  protect parties’ rights and ensure transactional transparency. In this article, TNTP presents comprehensive information on “Penalties for Breach of Contracts Under Legal Regulation”.

1. Penalties for Civil Contracts Breaches: Preserving Contractual Freedom

According to Article 418 of the 2015 Civil Code, one of the fundamental principles in civil law is respect parties’ freedom to commit and agree on contractual terms. This principle is clearly reflected in the regulations on contractual penalties.

Principle of Freedom of Agreement: Parties are entitled to freely negotiate and determine penalty amounts without being restricted by specific limits on percentages or monetary values (unless otherwise provided by law). This flexibility reflects the adaptable nature of civil law, allowing parties to establish contractual provisions that fit their specific transactions.

The law does not mandate a singular method of liability enforcement. Contracting parties may agree that the breaching party shall bear both penalties and compensation for damages, or alternatively, only a penalty without further compensation obligations

This regulation promotes both compliance with contractual obligations and flexibility, while reducing potential legal disputes.. However, to minimize the risk of legal disputes, penalty clauses should be explicitly stated in contracts.

2. Penalties for Commercial Contracts Breaches: Ensuring Fairness Through Penalty Caps

In the commercial sector, Articles 300 and 301 of the 2005 Commercial Law establish specific guidelines for contractual penalties. A notable distinction is the statutory limitation that penalties for breach of contract cannot exceed “8% of the value of the breached contractual obligation”.

The imposition of this cap ensures a balanced approach and prevents excessive penalties on the breaching party. Unlike civil law, which does not set a maximum limit on contractual penalties.

Furthermore, the Commercial Law specifies instances where liability may be waived, such as force majeure events or breaches caused by the non-breaching party. This ensures that the breaching party is not held accountable in situations beyond its control. However, any party seeking exemption from liability must provide evidence to support their claim.

The provisions of the 2005 Commercial Law aim to promote fairness in commercial transactions while preventing disproportionately high penalties. This cap enables parties to better evaluate risks and draft reasonable contractual terms, promoting a fair and transparent business environment. Additionally, it provides a legal basis for dispute resolution bodies to ensure equitable adjudication.

3. Penalties for Construction Contracts Breaches: Strict Regulations for State Capital Project

Construction contracts face stricter regulations due to the frequent involvement of public or state capital. Thus, the law establishes clear regulations on penalties and liabilities for construction contracts under Article 146 of the Construction Law 2014:

• Privately Funded Projects: For projects without public investment or state capital, penalties must be clearly negotiated and specified in the contract.
• State-Funded Projects: For projects funded by public investment or non-public state capital, penalties for breach of contract cannot exceed “12% of the value of the breached contractual obligation”. This limit helps ensure effective and purposeful use of public investments.. In addition to penalties, the breaching party must also compensate for damages suffered by the injured party and any affected third parties.

Thus, construction contracts establish penalty provisions based on mutual agreement, with a statutory cap of 12% for contracts involving state capital. The imposition of this maximum penalty ensures the protection of public investment while mandating strict adherence to contractual obligations by project stakeholders. Additionally, clearly defined reward-penalty mechanisms in construction contracts reduce disputes and enable swift, effective resolution when violations occur.

TNTP hopes that this article provides valuable insights, offering readers a comprehensive understanding of “Penalties for Breach of Contract Under Legal Regulations”.

Sincerely,