Amount of penalty under VCL 2005

1. Introduction - The amount of penalty of breaching the contract regulated in Vietnam.

Contract Penalty – definition:
A penalty clause (also called a fixed sum) is defined as a pre-determined sum of money which is to
be due under the situation of a breach of contract. The rationales of a penalty clause are to reduce
legal costs, to provide time for producing evidence, and to mitigate the risk of losing litigation or
arbitral proceedings due to the required level of proof not being met
Law on Commerce 2005
Article 301. - Fine level
The fine level for a breach of a contractual obligation or the aggregate fine level for more than one
breach shall be agreed upon in the contract by the parties but must not exceed 8% of the value of the
breached contractual obligation portion, except for cases specified in Article 266 of this Law.

 Exception
Article 266. - Fines and damages in case of incorrect assessment results
1. Where traders providing assessment services issue assessment certificates showing incorrect
results caused by their unintentional faults, they must pay fines therefor to customers. The fine level
shall be agreed upon by the parties but must not exceed ten times the assessment service charge.

2. Where traders providing assessment services issue assessment certificates showing incorrect
results caused by their intentional faults, they must pay compensations for damage caused to
customers that directly request the assessment.

3. Customers are obliged to prove that assessment results are incorrect and traders providing
assessment services are at fault.
 Addition
Article 306. - Right to claim interest on delayed payment Where a contract-breaching party delays
making payment for goods or payment of service charges and other reasonable fees, the aggrieved
party may claim an interest on such delayed payment at the average interest rate applicable to
overdue debts in the market at the time of payment for the delayed period, unless otherwise agreed
or provided for by law.
2. When do we need this penalty?
Article 300. - Fine for breach
Fine for breach means a remedy whereby the aggrieved party requests the breaching party to pay an
amount of fine for its breach of a contract, if so agreed in the contract, except for cases of liability
exemption specified in Article 294 of this Law.
Example:
A and B signed a contract. A supposed to pay B the amount of 10000 USD in exchange of 100
products that B manufactures. Both parties agreed if A doesn’t pay at due, they have to pay an
additional amount of fine on each overdue date and if B doesn’t deliver 100 products on time of
agreement, they will have to pay a fine for each additional date.
So if A just pay 9900 USD and the other 100 USD are late in payment, they will be fined. Same
goes to B, if B deliver 99 products on the due date and the last one on the next day, they will
certainly be punished for such a late delivery.

3. Comparison
 The penalty regulated within CISG 1980 and VCL 2005
In CISG 1980
The provisions relating to penalty are not directly mentioned. The main reason for such
incident lies in the different perspectives between civil law and common law shared by the
contracting states. According to nations with civil law systems, penalty is accepted under the form
of fixed sums payable upon a specified breaching act. However, the story is complicated under
common law as common law classifies between liquidated damages and penalty stipulations,
enforcing the former while invalidating the latter. Therefore, in order to harmonize the trade
laws across countries with different legal systems, UNCITRAL decided to avoid the mention
of penalty directly in the draft of CISG 1980. However, with Article 4, the Convention
implicitly relegated the remedy of penalty to otherwise the applicable domestic national law.
This approach creates the flexibility for application and enforcement of penalty, as the
remedy is valid in some jurisdictions while invalid in others.
In VCL 2005
In contrast to CISG 1980, penalty clause is indicated straightforwardly in the texts of VCL
2005 as Vietnam is a civil-law nation. This remedy is regulated in Article 300 and 301 of VCL
2005. As per Article 300, penalty can be applied regardless of whether the breaching acts had
caused any damage. Therefore, besides compensating the aggrieved party of any occurred damage,
penalty in Vietnamese law also acquires the function of deterring any action that causes the contract
breach. Another notable feature is the level of penalty, which is stipulated in Article 301 that the
maximum amount shall not exceed eight per cent of the value of the contractual obligation which is
the subject of the breach.
Briefly, up to the present, contract penalty is only stipulated in VCL 2005, while CISG 1980
avoids mentioning the remedy in its legal texts.

 VCL 1997 and VCL 2005

VCL 1997
Article 226 - Penalty for breach
Penalty for breach is a remedy whereby the
aggrieved party requests the breaching party to
pay a certain penalty sum for breach of contract
if it is so agreed in the contract or prescribed by
law.
VCL 2005
Article 301 - Fine level The fine level for a
breach of a contractual obligation or the
aggregate fine level for more than one breach
shall be agreed upon in the contract by the
parties but must not exceed 8% of the value of
the breached contractual obligation portion,
except for cases specified in Article 266 of this
Law.

 Civil code 2015, Law on Construction 2014 and VCL 2005

Civil code 2015
Article 418. Agreements on
fines against violatio
2. The fine levels shall be
agreed among the parties,
unless otherwise prescribed
by relevant laws.
Law on Construction 2014
Article 146. - Rewards and
fines for construction
contracts, compensations for
damage caused by violations
and settlement of disputes over
construction contracts.
2. For works using state funds,
the fine level must not exceed
12% of the value of the violated
contract.
VCL 2005
Article 301.- Fine level
The fine level for a breach of
a contractual obligation or
the aggregate fine level for
more than one breach shall
be agreed upon in the
contract by the parties but
must not exceed 8% of the
value of the breached
contractual obligation portion

4. Law cases
Penalties are a deterrent measure to increase the sense of respect for the contract and the
liability of the parties. Nevertheless, to avoid the possibility of the parties agreeing a "heavenly"
penalty, each specialized law sets limits on penalties, thereby enabling this form of “punishment” to
fulfil its purpose.

Under a commercial contract, in the absence of an agreement, when any dispute arises, the
interest rate for the overdue debt on the market will be applied. In some cases, according to
previous customs, the court applies average interest rates of overdue debt of 3 banks namely
Vietcombank, BIDV and Agribank.

In reality, in the course of the proceedings, there was a situation: Although initially agreed on the
fine, but when the dispute occurred, the party sought to evade and proposed to reject the
agreed interest. The calculation of debt principal, interest, penalty ... thereby become complicated,
causing the long-term and hard to resolve case.
An example is the case between Phu Thang Company Limited and Song Da Petroleum
Investment and Trading JSC (SDP code, HNX). In the appeal filed to the People's Court of Ho
Chi Minh City. Hanoi in March, Phu Thang mentioned the content of the request to accept a fine for
breach of contract (389 million) for SDP in the contract signed in 2011.

The argument given by Phu Thang is that the contractual basis is mutually agreed, in the case of
delinquent SDP, a penalty of 1% per month on the payment amount (12% per annum). Compared to
the capital amount of over 6 billion, the fine is quite modest; however, this level of penalty yet led
to some serious dispute.

According to Article 301 of the Commercial Law, the fine for breach of contractual obligations or
the total fine for many violations shall be agreed upon by the parties in the contract, but not
exceeding 8% of the value of the breach of contractual obligations. Therefore, SDP thinks that the
interest rate of 12% per year is too high, so they proposed penalty of 8%. However, Phu Thang
disagrees with this fine, leaving the case complicated and the dispute even harder to solve.

Another Case:
The verdict of the District Court in District 10, Ho Chi Minh City to handle the case of the company
SCHINDLER VN sold to the company Tan Hoang Than 02 elevator, the contract agreement
penalty is 1% / month, maximum 5% of the value of the contract, and the agreement on ownership
of the property if the other party breaches, the aggrieved will have full authority to retain the
property.
The content of the agreement stipulated in the contract is appropriate for fine, property hold, but the
agreement penalty of 5% of contract value is not in accordance with Article 301 VCL stipulated that
this level cannot exceed 8% of the value violated.
The SCHINDLER company is installing elevators but does not have two card chips installed. This
company has exercised its right to suspend performance of its obligations when the other party
failed to pay. The court considered the two parties to be in violation of the contract and force Tan
Hoang Than to pay, force SCHINDLER VN to deliver the two card chips.

5. Supporting ideas: Why 8%?

 Protect taxpayers’ money
If the SOEs make a mistake, they will have to pay the penalty. If the penalty is too high, they have
to rely on gov budget, which means citizens have to pay more taxes.
  Costs are more than benefits
Rational people think of the margin. We compare marginal costs and marginal benefits if we
demand penalty is too high.
Marginal benefits: The penalty we receive
Marginal costs: No contracts is going to be signed.
We will lose all the benefits of the contract to receive the amount of penalty.
But what if penalty is higher than the contract?
The breaching party may not have enough finance to cover the penalty. In this case it is not sure that
the aggrieved party receive full benefits.
 Vietnam have a majority of small firms which contributes a large amount in the export
section
Gov needs to protect the small firms to survive to protect Vietnamese export economy
 Protect the nature of the contract
Too high a penalty will create inequality between parties.
Inequality if contract penalty is too high occurs when both parties to the contract honest, willing and
trying the best to implement the contract. Party A for some reason fails to fulfill its obligation to
Party B, therefore, causing damages to Party B. Party A not only has to compensate party B for the
damages (so can be considered as Party B does not lose anything) but also have to compensate a
large amount of money for party B again. So what does this penalty mean? If the fine is greater than
the benefits received by Party B, will Party B expect this contract to be implemented or not? At the
time whether the contract parties are still free, honest, goodwill to implement anymore or not? For
this reason, too high fines will lose the nature of the contract.