Liquidated Damages under Vietnam’s Law on Construction 2025

Liquidated damages are widely used in international contractual practice as a mechanism for allocating risks and improving predictability in contract performance.

Under this mechanism, the parties agree in advance on an amount payable if a specified contractual breach occurs.

Vietnamese law historically did not expressly recognize liquidated damages, leading to uncertainty regarding the validity and enforceability of such clauses.

The Law on Construction 2025 marks a significant development by formally recognizing liquidated damages as an independent remedy, alongside penalties for breach and compensation for actual damages.

Section 1

Legal Framework on Liquidated Damages

1.1. Origin of Liquidated Damages

Liquidated damages originated and developed within the Common Law legal tradition, particularly in England and the United States.

Unlike punitive remedies, liquidated damages are intended to compensate for losses anticipated to arise from a contractual breach, especially where actual losses may be difficult to assess or prove.

Parties may agree in advance on a sum payable as damages, provided that the amount is reasonable and proportionate to the foreseeable loss at the time of contract formation.

The amount may remain enforceable even where the actual damage is lower than anticipated.

A manifestly excessive amount may be regarded as punitive and therefore unenforceable.

In some jurisdictions, courts may reduce an excessive amount to a reasonable level.

The distinction between liquidated damages and contractual penalties is central to enforceability.

Liquidated damages have subsequently been recognized in international contractual practice and commercial instruments, including the United Nations Convention on Contracts for the International Sale of Goods.

International construction practice: The FIDIC Red Book 1999 and 2017 provide for pre-agreed damages in cases of delay or breach, reducing disputes over proof of actual loss.

1.2. New Regulations under Vietnamese Construction Law

Clause 1, Article 86 of the Law on Construction 2025 provides that bonuses, contractual penalties and compensation for damages must be agreed upon by the parties in the construction contract.

Clause 2 provides that compensation may be determined based on:

Actual damages.

Pre-determined levels of damages corresponding to the breached contractual obligations.

The degree of the relevant breach.

The Law on Construction 2025 therefore formally recognizes liquidated damages as a permissible contractual remedy.

It creates a clearer legal basis for liquidated damages clauses.

It aligns construction law with the principle of freedom of contract.

It brings Vietnamese practice closer to international contractual standards.

It enhances predictability and stability in construction transactions.

Section 2

Civil Law Approach and Practical Application

2.1. The Law on Construction and the Civil Code 2015

Under the Law on Construction 2025, liquidated damages are recognized as an independent remedy, separate from contractual penalties and compensation for actual damages.

Article 360 of the Civil Code 2015 provides that where damage is caused by a breach of obligation, the obligor must compensate for the entire damage unless otherwise agreed by the parties or otherwise provided by law.

Article 419 additionally allows the aggrieved party to claim:

Compensation for contractual benefits that it would otherwise have received.

Expenses incurred due to failure to perform contractual obligations, provided that there is no overlap.

Compensation for non-pecuniary damage where ordered by a court.

Compensation for actual damages in Vietnamese practice generally requires proof of:

A contractual breach.

Actual damage.

A causal link between the breach and the damage.

2.2. Distinction between the Available Remedies

Liquidated Damages

A pre-agreed amount intended to compensate anticipated losses, generally without requiring proof of actual loss.

Actual Damages

Compensation determined after the breach based on proven losses and causation.

Contractual Penalties

A remedy intended primarily to deter or sanction breach rather than compensate anticipated loss.

A clause may be labeled as liquidated damages but operate in substance as a penalty if it is designed primarily to deter or punish a breach.

2.3. Potential Impact on Judicial Approaches

Vietnamese judicial practice has historically lacked consistency in its treatment of liquidated damages.

Some courts rejected claims where actual damages were not proven.

Some clauses were treated as contractual penalties and subjected to statutory limitations.

More recent judgments have shown greater willingness to recognize reasonably drafted and non-punitive clauses.

Judgment No. 660/2022/KDTM-PT dated 10 November 2022 of the Ho Chi Minh City People’s Court adopted a progressive approach in a construction contract dispute.

Key approach: The aggrieved party was not required to prove actual damages and only needed to establish that the relevant contractual breach had occurred.

The Court nevertheless confirmed that an amount may be adjusted where it is manifestly excessive in comparison with the actual damage.

2.4. Drafting Liquidated Damages Clauses

Breaches suitable for liquidated damages

Delay in completion.

Failure to meet contractual milestones.

Delay in handover or commissioning.

Other time-related obligations measurable by days, weeks or other time units.

Breaches generally unsuitable for liquidated damages

Quality defects.

Failure to meet technical standards.

Regulatory or legal non-compliance.

Breaches where losses depend heavily on actual consequences.

Drafting principles:

Categorize the relevant contractual breaches clearly.

Link each amount to foreseeable and reasonably quantifiable loss.

Ensure that the clause is compensatory rather than punitive.

Include reasonable calculation methods and maximum caps.

Tailor the clause to the scale and commercial realities of the project.

Section 3

Conclusion and Recommendations

The recognition of liquidated damages reflects a broader shift toward greater predictability in contractual risk allocation and closer alignment with international construction practice.

Further implementing regulations should clarify:

The legal status of liquidated damages as an independent remedy.

The relationship between liquidated damages, contractual penalties and compensation for actual damages.

The conditions and limitations applicable to each remedy.

Whether the remedies may be applied concurrently.

Parties should draft liquidated damages clauses specifically and transparently, linking them to obligations where losses are foreseeable and quantifiable.

Regardless of whether damages are pre-determined or based on actual loss, the aggrieved party remains responsible for taking reasonable steps to mitigate its damages.