“Liquidated damages”, a clause normally seen in an international contract, is not specifically provided under Vietnamese law. As a general understanding, the amount of the liquidated damages is determined by reference to an estimate of the likely loss suffered by the non-defaulting party as a result of the breach. In other words, the amount of damages is pre-agreed and does not depend on the non-defaulting party demonstrating the amount of loss actually suffered.

On the other hand, Vietnamese law provides for two  types of monetary remedies for breach of contract, namely: (1) penalty for breach (phạt vi phạm); and (2) compensation for damages (bồi thường thiệt hại). The parties to a commercial contract under Vietnamese law may agree that (i) the defaulting party must pay only a penalty for breach without having to compensate for damage, or (ii) the defaulting party must pay both a penalty for breach and compensation for damage.

If liquidated damage is characterised as a penalty for breach then the amount of such liquidated damage may be subject to a cap of 8% under the Commercial Law or 12% under the Construction Law.

If liquidated damage is characterised as compensation for damages then one may rely on the second sentence of Article 422.3 of the Civil Code  to argue that it is possible for the parties to a contract to pre-agree on the amount of damages. The second sentence of Article 422.3 of Civil Code reads: “If there is no prior agreement on the amount of compensation for damage, compensation must be made for all damage”. In this case, liquidated damages is not a penalty for breach and, therefore, is not subject to the limitations applicable to penalty as mentioned above.

However, there are various qualifications regarding reliance on Article 422.3 of the Civil Code including:

• The basis for this approach is provided under the Civil Code while the construction contract between the parties is primarily subject to the Commercial Law. Article 4.3 of the Commercial Law provides that commercial activities not regulated by the Commercial Law and other laws will be subject to the Civil Code. It is not clear if Article 422.3 of the Civil Code can apply to a commercial contracts. This is because Article 302.2 of the Commercial Law already provides that the amount for compensation for damages include, among others, "actual and direct losses" incurred by the non-breaching party.
• If the parties agree to characterize the "liquidated damages" as a pre-agreed  damages under Article 422.3 of the Civil Code then the parties cannot claim for actual damages. On the other hand, if the parties agree to treat the "liquidated damages"  as "penalty" under the Commercial Law then under Article 307.2 of the Commercial Law, unless the parties expressly agree to waive for compensation for damages, the non-breaching party will be able to claim for both (1) 8% penalty and (2) compensation for actual damages. 
• Vietnamese law does not have a clear concept of liquidated damages. And as far as we understand, liquidated damages is untested before Vietnamese courts and arbitration.  

In light of the above qualifications, in contemplating a liquidated damages under Vietnamese law, it may be more prudent to comply with the 8% threshold limit for penalty. The parties may decide to rely on Article 422.3 of the Civil Code to characterize the "10% penalty" as a pre-agreed liquidated damages if this point is commercially critical and the parties are prepared to accept the above qualifications.