Contract Review in Vietnam: Legal Risks for Foreign Companies

From the very beginning of preparing for contract drafting and contract review in Vietnam, many foreign businesses are already exposed to a wide range of legal risks that, if not properly understood, can lead to significant financial losses. Are you confident that the contract you are signing is strong enough to protect your interests if the counterparty fails to deliver goods, delays payment, or breaches its obligations? And if a dispute arises in Vietnam, can you actually recover the money you have lost?

Why International Businesses Are Easily Exposed to Risks When Signing Contracts with Vietnamese Partners

The Legal Gap and Differences in Contractual Thinking

One of the biggest challenges when foreign companies enter into contracts in Vietnam is the difference in legal systems and in the understanding of contractual obligations.

In Vietnam, contracts are primarily governed by the 2015 Civil Code and the 2005 Commercial Law. However, in practice, many foreign businesses apply a common law mindset (UK/US practice), while Vietnamese counterparties are often more familiar with a flexible, “practical agreement-based” approach.

This creates a common risk: the same contractual clause may be interpreted differently by each party. When disputes arise, interpreting the contract is no longer straightforward.

Common Risks in Real Business Transactions in Vietnam

During contract drafting and contract review in Vietnam, DEDICA Law frequently observes the following risk patterns:

• Non-delivery or delivery of substandard goods, while the contract lacks strong penalty mechanisms
• Late payment or delayed financial obligations
• Deposit payments made without clear refund protection mechanisms
• Lack of clear dispute resolution clauses (court or arbitration not specified)
• Failure to define governing law and language priority in case of disputes

Under the 2005 Commercial Law, contractual penalties are generally capped (typically not exceeding 8% of the value of the breached obligation). This often surprises foreign businesses who expect stronger penalty enforcement.

What Happens When a Contract Is Not Properly Drafted?

Disputes Are Not Only Legal Issues but Also Enforcement Issues

Many international businesses assume that “having a contract is enough.” However, in Vietnam, the issue does not end at signing—it lies in actual enforceability.

Even if you win a lawsuit, enforcement under Vietnam’s Law on Enforcement of Civil Judgments may still be prolonged if:

• The counterparty has no remaining assets
• The company has ceased operations without proper dissolution
• Assets have been transferred or registered under third parties

This leads to a harsh reality: winning the case does not always mean recovering the money.

Litigation Costs vs Practical Effectiveness

One of the most common mistakes foreign businesses make is underestimating the time and cost of dispute resolution in Vietnam.

A commercial dispute may take 6 months to 2 years, not including enforcement procedures. Meanwhile, legal fees, opportunity costs, and business disruption may far exceed the contract value itself.

Therefore, a key principle in legal practice is: prevention is always cheaper than dispute resolution.

Key Contract Clauses That Must Be Reviewed Before Signing

Payment, Deposit, and Performance Security Clauses

In practice of contract drafting and review in Vietnam, payment terms are one of the most high-risk areas.

Businesses should pay special attention to:

• Whether deposits are refundable or not
• Conditions for forfeiture or retention of deposits
• Payment milestones linked to actual performance progress
• Security mechanisms such as bank guarantees, if applicable

Without clear provisions, foreign businesses may end up in a situation where payment has been made but goods or services are not delivered as agreed.

Penalty and Compensation Clauses

Under the 2015 Civil Code and the 2005 Commercial Law, parties may agree on:

• Contractual penalties (subject to statutory limitations under commercial law)
• Actual damages compensation

However, in practice, many contracts fail to clearly distinguish between “penalties” and “compensation,” making it difficult to prove damages in disputes.

A well-drafted contract must clearly define:

• When penalties apply
• When compensation can be claimed
• How damages and evidence are determined

Risk Mitigation Strategies When Signing Contracts in Vietnam

Choosing the Appropriate Dispute Resolution Mechanism

International businesses often hesitate between Vietnamese courts and commercial arbitration.

• Vietnamese courts: lower cost but potentially longer timelines and stricter procedures
• Commercial arbitration (e.g., VIAC): more flexible and confidential but higher cost

Choosing the wrong mechanism can significantly complicate dispute resolution beyond initial expectations.

Verifying the Legal and Operational Capacity of Vietnamese Partners

Before signing a contract, foreign businesses should at minimum:

• Verify legal status (business registration, licensed activities)
• Assess financial capacity and transaction history
• Evaluate actual operational capability (factories, personnel, production capacity)

Many risks are not embedded in the contract terms but in the counterpart’s actual ability to perform.

The Role of Lawyers in Contract Drafting and Review in Vietnam

In practice, many international companies only consult lawyers after disputes arise. However, the most critical stage is before signing the contract.

An experienced Vietnam-based lawyer can help:

• Identify hidden legal risks in contracts
• Adjust clauses to comply with Vietnamese law
• Balance commercial interests with enforceability
• Design effective dispute resolution mechanisms from the outset

This is the core value of contract drafting and review services in Vietnam that DEDICA Law regularly provides to international clients.

Practical Perspective: Why Prevention Matters More Than Litigation

In many real cases in Vietnam, the cost of pursuing contract disputes can far exceed the original contract value. Moreover, if the counterparty has no remaining assets or has ceased operations, enforcement becomes significantly limited.

Therefore, instead of relying on “winning litigation,” international businesses should focus on:

• Strong contract drafting from the beginning
• Risk control before transactions
• Building mechanisms to protect cash flow and obligations

This is the practical mindset adopted by companies that have long-term operations in Vietnam.

Conclusion

Contract drafting and contract review in Vietnam is not just a legal formality, but a strategic tool for asset protection and business risk management. Given the differences in legal systems, business culture, and enforcement mechanisms, international businesses must approach contract matters carefully and strategically from the outset.

Every contract carries unique risks and cannot be treated as a standard template. Engaging legal counsel early helps businesses avoid unnecessary risks and significantly improves the enforceability of contracts in Vietnam.

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