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When foreign businesses sign contracts in Vietnam, the risk doesn't lie in whether or not there's a contract, but in how the contract is designed and managed from the outset. Many businesses only realize the problem when their partner fails to deliver, delays progress, or fails to pay – and at that point, the cost of resolving the issue is often much higher than the initial preventative measures.
In the legal and practical context of Vietnam, a contract is not just a document confirming an agreement, but the most important tool for protecting rights. If this tool is not sufficiently robust, resolving disputes later will be severely limited.
Many foreign businesses underestimate the "enforcement" factor when signing contracts in Vietnam. Theoretically, Vietnamese law provides fairly clear regulations on contract validity, penalties for breach, and compensation for damages under the 2015 Civil Code and the 2005 Commercial Law. However, the problem lies in its practical application.
A contract may be legally sound but still not strong enough to protect a business if the clauses are not properly designed. For example, provisions on penalties for breach in commercial contracts are often limited, so relying solely on this clause without supplementary mechanisms will not effectively deter the partner.
Furthermore, the major risk doesn't come from breach of contract itself, but from the partner's inability to fulfill their obligations. In many cases, Vietnamese businesses may cease operations, lose assets, or face prolonged dispute resolution processes. This makes recovering the money difficult, even if you have a legal basis.
From a practical perspective, many contracts encounter problems not because of a lack of content, but because of a lack of enforceability.
Some contracts are drafted according to international templates but are not adapted to Vietnamese law. This leads to situations where, in the event of a dispute, some clauses are inapplicable or ineffective.
Furthermore, many businesses transfer deposits or advance payments without specific conditions attached. When the partner fails to fulfill their obligations, the contract lacks a sufficiently strong mechanism to protect the transferred funds.
Another often overlooked point is the dispute resolution clause. Without clearly specifying the applicable law, the dispute resolution body, and the location, businesses can waste a significant amount of time just trying to determine "where to resolve the dispute."
Contract review is not just about checking the language, but about assessing the entire risk structure. A contract needs to be adjusted to comply with Vietnamese law and include safeguards in case the partner fails to fulfill their obligations.
Many businesses skip this step to save costs, but in reality, it's the most valuable step.
Instead of simple installment payments, contracts should link payment obligations to specific results. This minimizes the risk of losing money if the partner fails to complete the work.
In many cases, retaining a portion of the contract value or establishing clear disbursement conditions will create a balance between the parties.
Vietnamese law allows for agreements on penalties for breaches of contract and compensation for damages, but these clauses need to be practically applicable.
A good clause is not only legally sound but also enforceable should a dispute arise.
Businesses need to consider both court proceedings and commercial arbitration. Each option has its own advantages, but it's crucial to clearly define jurisdiction from the outset to avoid future disputes.
Each contract and dispute is unique, depending on the industry, partners, and practical implementation. Therefore, no single contract template is suitable for all cases. Applying experience from other markets or using a general contract template without adapting it to Vietnamese law can create significant risks. Contact DEDICA today for legal strategy advice tailored to your business operations.
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