How to reduce legal risks when working with suppliers in Vietnam

When working with suppliers in Vietnam, many foreign businesses often focus on price, schedule, and quality, but overlook a crucial factor: legal risks. In reality, there have been numerous cases where companies have transferred deposits and signed full contracts, yet still face situations where suppliers fail to deliver, fall behind schedule, or cease operations. At that point, the issue is no longer about who is right or wrong, but whether the business has the tools to protect itself.

1. Common legal risks when working with suppliers in Vietnam

Lack of understanding of the law and its enforcement in Vietnam

Many foreign businesses assess risk based on their experience in their own markets, but the legal environment in Vietnam has its own unique characteristics.

A valid contract under the Civil Code and the Commercial Law remains in effect, but its enforcement depends heavily on the actual situation of the partner. If the partner business ceases operations or no longer has assets, protecting one's rights becomes much more difficult.

Risks from prepayment

This is one of the most vulnerable points to losses. When businesses transfer funds in advance without any control mechanism, they almost certainly lose their competitive advantage.

In reality, many disputes stem from:

• Pay the majority of the contract value upfront.
• Do not link payment obligations to project progress.
• There are no clear acceptance criteria.

When problems arise, businesses are forced to rely on the goodwill of their partners or enter into legal disputes.

Difficulties in litigation and enforcement of judgments

Filing a lawsuit is not as simple a solution as many people think. In Vietnam, the dispute resolution process can be lengthy and costly.

More importantly, after a judgment is issued, enforcement is the decisive factor. If the other party no longer has assets or their assets cannot be identified, the chances of recovering the money are very low. This has led many businesses to realize that the cost of litigation sometimes does not match the results achieved.

2. Why is the risk often inherent in contracts?

The contract lacks a control mechanism

A good contract not only specifies obligations but also ensures the fulfillment of those obligations. If the contract only states "Party A must deliver the goods," but lacks mechanisms to control cash flow or progress, then when a breach occurs, the business will not have sufficient tools to address it.

Do not check the partner before signing

Many businesses skip the partner vetting step and rely solely on trade agreements. Meanwhile, some risk indicators can be identified early on with careful investigation.

For example, consider:

• Business registration status and legal representative
• Operating history and legal changes
• Financial capacity and actual scale

This helps avoid signing contracts with partners who lack the necessary capabilities.

The dispute resolution clause is unrealistic.

Some contracts opt for international dispute resolution mechanisms, but these are not suitable for enforcement in Vietnam. When both the assets and the parties are located in Vietnam, the most important factor is not the place of adjudication, but the enforceability of the contract.

3. How to reduce legal risks when working with suppliers in Vietnam.

Pre-contract control

Prevention is always the most important step. Conducting legal due diligence on partners and assessing risks initially helps businesses avoid many problems later on.

The cost of this step is usually low, but the value it provides is enormous compared to the potential damage.

Design contracts with a focus on balance and control

Instead of focusing on general terms, businesses should pay attention to how risks are allocated in a contract. Some important principles include:

• Pay in installments instead of paying the full amount upfront.
• Link payments to progress and performance results.
• Clearly define the right to suspend or terminate the contract.

These factors help businesses maintain leverage throughout the collaboration process.

Drafting clauses that comply with Vietnamese law.

According to the Commercial Law, the penalty for breach of contract typically does not exceed 8% of the value of the breached obligation. Therefore, the clause needs to be both legally sound and practical.

In addition, the compensation clause needs to be clear to avoid disputes regarding the scope and method of calculating damages.

Work with a lawyer right from the start.

This is what makes the difference. Lawyers not only review contracts but also help businesses understand risks from a practical perspective.

In many cases, the initial consulting fee is only a fraction of the cost of dispute resolution. More importantly, businesses can avoid risks that would be difficult to recognize without experience.

Legal risks when working with suppliers in Vietnam are not uncommon, but they are entirely manageable if businesses prepare properly. A well-designed contract, along with the involvement of a lawyer from the outset, will significantly reduce the risk of financial losses and prolonged disputes.

Are you preparing to sign a contract with a supplier in Vietnam or concerned about legal risks? Contact DEDICA for strategic advice tailored to your business operations.

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