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.