The contract stipulates a 20% penalty for breach of contract, but I heard the law only allows 8%. Will I lose money unfairly?

“I signed a service contract with a company in Vietnam. The contract includes a clause stating that a breach of contract will result in a 20% penalty. Recently, a dispute arose, and the other party demanded that I pay that penalty. However, I heard that Vietnamese law only allows a maximum penalty of 8%. So, is the 20% clause still valid?”

In reality, many parties often don't pay close attention to penalty clauses when signing contracts. Only when disputes arise do they discover that the penalty stipulated in the contract is quite high, sometimes reaching 15%, 20%, or even higher than the value of the breached obligation. This causes many businesses to worry that they might have to pay a very large sum of money simply for signing the contract beforehand.

However, for commercial contracts, the penalty for breach of contract is generally not allowed to exceed 8% of the value of the breached obligation, except in certain specific cases where the law provides for it. It's important to note that many businesses often misunderstand that "8% of the contract value" and "8% of the value of the breached obligation" are the same. In reality, these are two completely different concepts.

For example, if the total contract value is 10 billion VND but the breached obligation only relates to a single item worth 1 billion VND, the penalty for breach will usually be considered based on that breached obligation, not the entire contract value.

Furthermore, it's important to distinguish between "penalties for breach of contract" and "compensation for damages." Many contracts contain both penalty clauses and clauses requiring compensation for actual damages incurred. These are two different legal provisions and, in many cases, can be applied simultaneously if they meet the conditions stipulated by law and the contract's content.

Another common issue is that many businesses use contract templates from foreign countries or online without adapting them to Vietnamese law. Therefore, penalty clauses are sometimes set at very high levels but may not fully comply with current regulations in Vietnam.

However, the fact that a clause states "20%" does not automatically mean that the entire clause is invalid or that the breaching party is not liable. When a dispute arises, the dispute resolution body will usually consider many factors such as the type of contract, the nature of the transaction, the breached obligation, and how the parties agreed in the contract.

In reality, many contract disputes do not arise from businesses intentionally violating the law, but rather from parties using clauses that are inconsistent with the law or misunderstanding the limits of legal liability in Vietnam.

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