Take-or-pay clause in Vietnamese law contracts

In Vietnam, take-or-pay arrangement is quite common in long term supply or off-take contracts especially those relating large scale infrastructure projects with foreign sponsors  which require project financing.  A take-or-pay arrangement is essentially an agreement whereby the buyer agrees to either: (1) take, and pay the contract price for, a minimum contract quantity of goods annually (the TOP Quantity); or (2) pay the applicable contract price for such TOP Quantity (TOP Liability) if it is not taken during the applicable year.

It is not clear under Vietnamese law if the payment of TOP Liability by the buyer under in a long term contract could be viewed as a penalty. This is because:

  • Article 300 of the Commercial Law defines “penalty for breach” as a remedy whereby the aggrieved party requires the defaulting party to pay a penalty sum for breach of contract if so agreed in the contract; and
  • One can argue that the buyer’s failure to take TOP Liabilities is a breach of the long term contract and therefore the TOP Liability is a penalty to be paid by the Buyer.

If the TOP Liability is characterised as a penalty for breach then it is subject to a limit of 8% of the value of obligations which are in breach. To avoid this potential characterisation, the parties to a long term contract with a take-or-pay arrangement may consider characterising TOP Liability payment as adjustment to the sale price or payment for reservation of supplying capacity of the supplier. 

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Vietnam Business Law Blog

Below is a list of key approvals and contracts required for a wind farm project in Vietnam (the Project):

  • Permission by provincial People’s Committee for the Project to carry out wind measurement;

  • Report on wind measurement result to the provincial People’s Committee;

  • Approval of the Pre-Feasibility Study of the Project;

  • Approval of the basic design part of the Feasibility Study of the Project;

  • In-principle Approval of the Project under the Investment Law 2014;

For a project financing or limited recourse financing in Vietnam, a mortgage over shares (or equity capital) of the project company usually forms part of the security package due to the ease of creating and perfecting a mortgage over shares. That said, when an enforcement event occurs and if the borrower or the project company does not cooperate, the lenders (usually foreign lenders), who wish to immediately taking over the mortgaged shares, may find it difficult to actually enforce the mortgage due to the need to complete various licensing procedures for the sale or transfer of the mortgaged shares.

Thanks to the flexibility offered by the Enterprises Law 2014 and the Investment Law 2014, lenders may now consider taking some extra measures to increase their ability to enforce the mortgaged over shares of a project company in Vietnam. In particular,

On 29 March 2019, the State Bank of Vietnam (SBV) issued Circular 3/2019 to amend and supplement some articles of Circular 32 of the SBV dated 26 December 2034 on restrictions in using foreign exchange within the territory of Vietnam (Circular 32/2013). Circular 3/2019 will take effect from 13 May 2019.

First, a bit of background, under the Foreign Exchange Ordinance, “in the territory of Vietnam” all transactions, payment, price denomination must not be made in foreign currencies except as permitted by the SBV. The SBV usually takes quite a restrictive (and, in our opinion, not reasonable) on what transactions are considered to occur “in the territory of Vietnam”.

The following is a non-exhaustive list of licenses, permits and requirements on environment which an industrial park in Vietnam need to comply with.

1. Environment impact assessment report (EIAR – Báo cáo đánh giá tác động môi trường) or environment protection plan (EPP – Kế hoạch bảo vệ môi trường).

2. Confirmation on completion of the environmental protection works (Xác nhận hoàn thành công trình bảo vệ môi trường).