Signing Contracts in Vietnam: Risks Foreign Businesses Must Avoid

Signing a contract with a supplier in Vietnam is a critical step, but it also carries significant legal risks if foreign businesses do not fully understand the local legal system and enforcement practices. Is your contract strong enough? What happens if the supplier fails to deliver or delays performance? And if a dispute arises, can you realistically recover your money?

Why Foreign Businesses Face High Risks When Contracting in Vietnam

Many international companies approach contracts in Vietnam with the assumption that “a contract is just a formality” or rely on standard international templates without adapting them to Vietnamese law. This is often where disputes begin.

Lack of Understanding of Vietnamese Law – Risks Lie in Small Details

Vietnamese contract law is primarily governed by the Civil Code 2015 and the Commercial Law 2005. However, their practical application differs significantly from common law or European legal systems.

For example:

• Penalty clauses are typically capped at 8% of the value of the breached obligation
• Damage claims require proof of actual and direct loss
• A contract may be declared invalid if it fails to meet validity conditions (Article 117 of the Civil Code)

As a result, many international contracts become ineffective when applied in Vietnam due to non-compliance with local regulations.

Risks Come from the Counterparty – Not Just the Contract

A common mistake is focusing solely on contract terms while ignoring due diligence on the supplier.

In Vietnam, it is not unusual that:

• A company has ceased operations but has not been formally dissolved
• Financial information lacks transparency
• The contract signer does not have proper legal authority

This leads to a critical issue: a legally sound contract may still be unenforceable in practice.

Essential Steps Before Signing a Contract with a Supplier in Vietnam

Based on DEDICA’s experience advising foreign clients, most disputes can be prevented if proper pre-signing checks are conducted.

Conduct Legal and Operational Due Diligence

This is one of the most important – yet often overlooked – steps.

You should verify:

• Business registration certificate
• Scope of licensed business activities
• Operational status (active, suspended, or risky)
• Legal representative of the company
• Whether the contract signer has valid authorization

Additionally, it is advisable to review:

• Litigation history (if any)
• Commercial reputation
• Actual production or service capacity

DEDICA has handled multiple cases where clients paid deposits to entities that only “existed on paper” with no real operations.

Contract Review – Go Beyond Reading, Analyze Risks

Contract review is not just about understanding the wording—it is about anticipating worst-case scenarios.

Key clauses to review include:

Payment Terms

• Are payments structured in milestones?
• Are acceptance conditions clearly defined?
• Is there any retention mechanism?

Delivery / Performance Obligations

• Are timelines clearly defined or vague?
• Are there penalties for delays?
• Are reporting obligations included?

Penalties and Damages

• Do they comply with Vietnamese legal limits?
• Are they strong enough to deter breaches?

Dispute Resolution

• Court or arbitration?
• Jurisdiction (Vietnam or abroad)?
• Governing language?

A good contract is not necessarily a long one—it is one that works effectively when problems arise.

If a Dispute Happens – Can You Really Recover Your Money?

This is a question many businesses only ask when it is already too late.

Winning a Case Is Not the Same as Enforcing It

In Vietnam, winning a dispute does not guarantee actual recovery.

Key realities include:

• Litigation may take from 6 months to several years
• Enforcement procedures are required after obtaining a judgment
• If the debtor has no assets, recovery becomes extremely difficult

Many of DEDICA’s clients have experienced:

• Successfully obtaining a favorable judgment
• But failing to recover funds because the counterparty ceased operations

Litigation Costs vs Practical Outcomes

Businesses should carefully consider:

• Legal fees
• Time spent managing the case
• Impact on business operations

In some cases, total costs may approach or even exceed the disputed amount, especially when enforcement is uncertain.

This is why: Preventive legal structuring through contracts is far more cost-effective than dispute resolution.

DEDICA’s Practical Approach – Protecting Your Business Before Signing

With extensive experience advising foreign companies in Vietnam, DEDICA approaches contracts from a comprehensive risk management perspective.

Tailored Contract Review Based on Real Scenarios

Rather than using rigid checklists, DEDICA analyzes:

• The client’s business model
• The nature of the transaction (sale, service, manufacturing, etc.)
• The acceptable level of risk

Based on this, we:

• Adjust payment structures
• Design performance control mechanisms
• Strengthen protection in case of breach

Strategic Legal Advice Before Risks Materialize

Beyond contract drafting, DEDICA supports clients by:

• Structuring safer transaction models
• Advising on risk mitigation for payments
• Assessing enforceability in potential disputes

Most importantly, we help clients understand:

A contract is not just something you sign—it is a tool that protects your business when things go wrong.

Conclusion

Signing a contract with a supplier in Vietnam is not merely an administrative step—it is a strategic decision with direct financial and legal implications.

Without proper checks:

• You may contract with the wrong entity
• You may lose money without protection mechanisms
• You may win a case but recover nothing

With proper preparation:

• Risks are controlled
• Legal costs are optimized
• Business operations run more smoothly

Disclaimer: Each transaction has its own unique characteristics. There is no one-size-fits-all contract. Legal advice should always be tailored to the specific circumstances of each business and transaction.

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