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Termination of a construction contract is one of the most sensitive decisions in any project. In Vietnam, many disputes arise not because a party terminated the contract, but because the termination was handled incorrectly, leading to unexpected compensation claims.
Project owners and contractors often ask:
When does termination trigger compensation liability, and when does it not?
Understanding this distinction is critical, especially for foreign investors and EPC contractors operating in Vietnam’s regulated construction environment.
A common misconception is that any contract termination results in compensation. Under Vietnamese law, this is not always the case.
Compensation depends on:
The legal basis for termination
Whether the terminating party is at fault
Compliance with contractual and statutory procedures
Actual damage suffered by the other party
Termination itself is not illegal. Wrongful termination is.
Vietnamese law clearly distinguishes between lawful and unlawful termination.
Compensation is usually required when:
The contract is terminated without valid legal grounds
Termination procedures are not followed
Termination causes damage to the non-breaching party
By contrast, lawful termination based on contractual or statutory grounds may not trigger compensation, except for work already performed.
In construction projects in Vietnam, termination is often permitted when:
The contractor seriously delays completion beyond agreed deadlines
The contractor fails to remedy defects after notice
The project owner fails to make payments as required
One party fundamentally breaches core contractual obligations
Force majeure events make performance impossible (subject to conditions)
However, even when grounds exist, procedure matters as much as substance.
Many compensation disputes arise because parties terminate contracts too quickly or informally.
Typical mistakes include:
No written notice before termination
Insufficient cure or remedy period
Termination based on minor or non-material breaches
Ignoring contract-specific termination clauses
In such cases, courts or arbitral tribunals may rule that the termination was unlawful—triggering compensation liability.
If termination is deemed unlawful, the terminating party may be required to compensate for:
Direct financial losses
Costs incurred by the other party before termination
Lost profits (in certain circumstances)
Demobilization and site clearance costs
Contractual penalties, if applicable
The scope of compensation depends on evidence and contractual risk allocation.
Contractors may face compensation liability if they terminate when:
Payment delays are not serious or proven
Notice requirements are not met
Termination is used as leverage rather than legal remedy
Even if payment issues exist, improper termination may expose the contractor to counterclaims.
Project owners may be required to compensate if:
Termination is based on delays caused by the owner
Variations or scope changes are not properly documented
Termination occurs without giving the contractor an opportunity to remedy
Foreign investors often underestimate how quickly compensation exposure can arise if termination is mishandled.
Some construction contracts allow termination “for convenience.”
While lawful, this type of termination usually:
Requires advance notice
Requires compensation for completed work
May require compensation for certain losses
Failure to comply strictly with these clauses almost always leads to disputes.
Vietnamese courts and arbitral tribunals typically assess:
Whether termination grounds were valid
Whether notice and cure periods were respected
Whether damages were foreseeable and proven
Whether the claiming party contributed to the breach
Well-documented termination decisions significantly reduce compensation risk.
In practice, businesses often pay compensation because:
Legal risks are unclear
Evidence is incomplete
Termination was rushed
Contracts were poorly drafted
These issues are often the result of reactive legal involvement, rather than proactive risk management.
Many companies consult lawyers after termination has already occurred.
By then:
Notices cannot be corrected
Evidence gaps exist
Negotiation leverage is reduced
Termination decisions require legal input before action is taken, not after.
With ongoing legal consultancy, businesses can:
Draft termination clauses clearly from the start
Monitor performance issues early
Structure notices and cure periods correctly
Decide strategically whether termination is worth the risk
This approach often prevents compensation disputes entirely—or strengthens the company’s position if disputes arise.
Foreign investors face additional risks:
Unfamiliarity with Vietnamese termination rules
Language and documentation challenges
High financial exposure in large projects
A single wrongful termination can significantly impact project viability and investment returns.
DEDICA provides ongoing legal consultancy services for construction projects and FDI investments in Vietnam, including termination risk management.
DEDICA supports clients by:
Reviewing construction contracts and termination clauses
Advising on lawful grounds and procedures for termination
Drafting compliant termination notices
Managing negotiation and dispute resolution
Representing clients in arbitration and Vietnamese courts
DEDICA focuses on risk prevention, enforceability, and commercial outcomes, not reactive dispute handling.
📞 Hotline: (+84) 39 969 0012 (Available via WhatsApp, WeChat, Zalo)
🕒 Working Hours: Monday – Friday (8:30 – 18:00)
Contact us today for a free initial consultation with our experienced lawyers!
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