Summary. Vietnamese law does not have a clear concept of liquidated damages. There are strong legal provisions supporting for the use of liquidated damages. However, due to the lack of clear legal ground for liquidated damages, it appears that in practice, relying on certain provisions on calculation of damages, some courts in Vietnam appear to have not recognised and enforced an agreement on liquidated damages.

We discuss below the arguments supporting an agreement on liquidated damages and the enforceability of such an agreement in a commercial dispute under the law of Vietnam.

Arguments supporting liquidated damages:

In our view, Vietnamese law allows the parties to agree on liquidated damages. In particular,

Under Article 360 of the Civil Code 2015, where there is any loss and damage resulting from a breach of an obligation, the obligor must compensate for the total loss and damage, unless otherwise agreed or provided by law. This provision suggests that the parties to a contract may agree on the amount of compensation for damages;
The Commercial Law 2005 does not have similar provision like Article 360 of the Civil Code 2015. However, the Commercial Law 2005 generally allows the parties to freely to reach agreements, which are not inconsistent with law, fine customs and social ethics and the State will respect such agreement. Based on this principle, an agreement on liquidated damages should be recognised by the State; and
In civil disputes, during the prepration process for the first-instance hearing, the court must organise a conciliation meeting between the disputing parties and must recognize the agreement of the parties (if any). As such, if upon the conciliation meeting, the parties agree on specific damages that a party has to pay, the court must accept such agreement. The agreement on damages in this case by nature is an agreement on liquidated damages.
Some international treaties to which Vietnam is a party include the concept of liquidated damages or allow the parties to agree on liquidated damages or to allow pre-established damages including the United Nations on Convention on Contracts for the International Sale of Goods, 1980 (CISG), Agreement on Trade-related aspects of Intellectual Property Rights (TRIPS), and Agreement between the United States of America and the Socialist Republic of Vietnam on Trade Relations (US-VN BTA).
Under Circular 14/2015 of the Ministry of Transport, in the event of denied boarding, flight cancellations or long delays of flights departing from Vietnam, the passengers are entitled to “non-refundable fixed compensation”. “Non-refundable fixed compensation” means a compensation payment in cash or other appropriate forms which is paid to passengers by the carrier in accordance with regulations of law, irrespective of actual damage of the passengers. The specific compensation rates are provided under Article 8 of this Circular 14/2015, which can be deemed as a form of liquidated damages; and
Under Decree 37/2015 applicable to construction contracts in projects using State capital, organisations and individuals are encouraged to use FIDIC conditions of contracts for the formulation and implementation of construction contracts, subject to appropriate amendment for consistency with the law of Vietnam. Accordingly, the construction contracts may include agreement on liquidated damages under the delay damage clause which is popular in all forms of FIDIC conditions of contract. Although the use of FIDIC conditions of contracts is still subject to adjustment in accordance with Vietnamese law, Decree 37/2015 seems to be opened for the possibility to apply liquidated damages.

Enforceability of agreement on liquidated damages under the Commercial Law 2005

Article 302.2 of the Commercial Law 2005 provides that the value of damages for loss will comprise the value of the actual and direct loss which the aggrieved party has borne due to the breach of the defaulting party as well as the direct profits which the aggrieved party would have earned in the absence of such breach. Under Article 303 of this Law, the grounds giving rise to the liability of compensation for damages requires that there must be actual loss. As such, the Commercial Law 2005 only clearly recognizes the following types of damages: (1) actual and direct loss; and (2) direct profits. Accordingly, one can take the strict view that liquidated damages being pre-defined loss and damages is not permitted by the Commercial Law 2005. We do not agree with such a strict view since it is not consistent with Article 11 of the Commercial Law 2005.

Enforceability of agreement on liquidated damages under the Civil Code 2015:

Under Article 360 of the Civil Code 2015, where there is any loss and damage resulting from a breach of an obligation, the obligor must compensate for the total loss and damage, unless otherwise agreed or provided by law. This provision suggests that the parties to a contract may agree on the amount of compensation for damages. However, the Civil Code 2015 is still not clear at which time the parties may agree on the loss and damages (i.e., at the time the parties entered into the contract, or upon the occurrence of the breach). In the former case, the prior agreement between the parties on the amount of damages is the basis for an agreement on liquidated damages.

Under Article 4 of the Civil Code 2015,

the Civil Code is the general law governing civil relations;
other related laws governing civil relations in specific sectors must not be inconsistent with the basic principles of civil law prescribed in Article 3 of this Civil Code; and
where other related laws do not contain provisions on civil relations or contain provisions which are in breach of the principle above, the provisions of the Civil Code 2015 will apply.

The Commercial Law 2005 can be considered as the specialized law governing the commercial sector. Therefore, as between the Civil Code 2015 and the Commercial Law 2005, the Commercial Law 2005 should be the prevailing law regarding the determination of damages arising from a breach of contract.

As far as we know until recently, relating to a commercial dispute, the Chief Justice of the Supreme Court of Vietnam decided to protest against the decision of the Judges’ Council of the Supreme Court’s branch in Ho Chi Minh City regarding, among other issues, the Judges’ Council’s acknowledgment of an agreement on liquidated damages of the relevant parties. Accordingly, the Chief Justice protested the decision of the Judges’ Council on the ground that the claimable damages must be the actual and direct loss as provided under Articles 302, 303, and 304 of the Commercial Law 2005. Accordingly, it appears that the courts in Vietnam do not have a consistent view as to whether liquidated damages should be recognised and enforced.

This post is written by Nguyen Quang Vu, Nguyen Bich Ngoc, and Trinh Phuong Thao.

Vietnam Business Law