Contract Risks in Vietnam: What Foreign Businesses Must Know

When foreign companies start working with partners in Vietnam, contracts are often treated as a “formality.” However, in reality, most disputes arise from contracts that were signed without proper legal review.

Many businesses find themselves in situations where they have already paid a deposit, but the partner fails to deliver goods or perform as agreed. At that point, the common questions are: “Can we sue?” and more importantly, “Can we actually recover the money?”

The answer is not straightforward. In many cases, the issue is not whether you can take legal action, but whether the contract was structured to protect you from the beginning.

Risks Start from Basic Contract Terms

A contract can be “valid” but still fail to protect you

Under the 2015 Civil Code of Vietnam, a contract is legally valid if it meets basic requirements regarding legal capacity, intention, purpose, and form. However, “valid” does not mean “protective.”

Many foreign companies use international templates or contracts drafted by Vietnamese partners without proper review. As a result:

• Payment terms are unclear or lack conditions
• No mechanism for quality control of goods/services
• No clear definition of risk transfer

When disputes arise, these gaps become major disadvantages.

Penalty and compensation clauses may not be enforceable

Vietnamese Commercial Law sets specific limits on penalty clauses (generally capped at 8% of the breached obligation value). If the contract is drafted incorrectly:

• The penalty clause may not be enforceable
• The business cannot claim the expected level of compensation

This is a common mistake when foreign companies apply foreign law standards without adapting to Vietnamese regulations.

Risks When the Counterparty Fails to Perform

Non-delivery, delays, and quality issues

In practice, common disputes in Vietnam involve:

• Suppliers failing to deliver on time
• Goods not meeting agreed specifications
• Services not completed as required

If the contract does not clearly define:

• Acceptance criteria
• Inspection procedures
• Remedial obligations

then proving a breach becomes significantly more difficult.

Deposits paid without protection mechanisms

One of the biggest risks is paying deposits without:

• Clear refund terms
• Specific conditions for deposit retention
• Security mechanisms (bank guarantees, escrow, etc.)

When the counterparty breaches the contract, businesses often lack strong legal grounds to recover funds quickly.

When Disputes Arise: You Can Sue, But Recovery Is Not Guaranteed

Litigation costs in Vietnam are not low

Many businesses assume that filing a lawsuit will solve the problem. In reality:

• Proceedings may take from 6 months to several years
• Legal fees, court fees, and evidence collection costs can be significant
• Management time and operational resources are heavily consumed

If the dispute value is not substantial, litigation costs may outweigh the potential recovery.

Enforcement challenges – the overlooked reality

Even if you win the case, a critical question remains: “Can you actually collect the money?”

In practice:

• Vietnamese companies may cease operations, dissolve, or lack assets
• Asset tracing and enforcement can be time-consuming
• A court judgment does not guarantee recovery

This risk is especially high if the contract lacks financial safeguards from the outset.

Lack of In-House Legal Team Increases Risks

No local legal expertise

Foreign businesses often:

• Do not have a legal team in Vietnam
• Are unfamiliar with local laws and enforcement practices

As a result:

• They do not know what to check before signing a contract
• They fail to identify unfavorable clauses

Over-reliance on the Vietnamese partner

In many cases:

• Contracts are drafted entirely by the local partner
• Key terms are not negotiated

This creates an imbalance from the beginning, making disputes almost inevitable.

Solution: Contract Review Before Signing – Low Cost, High Impact

In practice, prevention is always more cost-effective than dispute resolution.

Legal due diligence on the counterparty

• Legal status (active or dissolved)
• Signing authority of representatives
• Litigation history (if any)

This basic step is often overlooked.

Review of key contractual terms

A well-structured contract in Vietnam should clearly address:

• Payment terms: conditions, schedule, method
• Delivery/service obligations: measurable standards
• Penalty and compensation clauses compliant with Vietnamese law
• Termination provisions
• Dispute resolution mechanism (court or arbitration)

Financial protection mechanisms

• Milestone-based payments
• Balanced deposit arrangements
• Bank guarantees for large transactions

The Role of Lawyers in Managing Contract Risks

Beyond “proofreading” – building a legal strategy

Lawyers do more than review wording. They:

• Identify real-world risks in transactions
• Propose appropriate contract structures
• Anticipate dispute scenarios

Cost optimization versus potential losses

The cost of contract review is typically minimal compared to:

• Contract value
• Litigation costs
• Losses from unrecoverable funds

Practical Insights from DEDICA

From advising foreign businesses in Vietnam, DEDICA has observed a consistent pattern:

Most disputes could have been avoided if the contract had been properly structured from the beginning.

Typical cases include:

• Paying 50% upfront but receiving no goods
• Lack of clear quality standards leading to disputes
• Ineffective penalty clauses that cannot be enforced

In such cases, even if legal action is possible, the actual outcome often falls short of expectations.

Important Disclaimer

Each case has its own specifics, depending on:

• Contract terms
• Conduct of the parties
• Legal and financial status of the counterparty

Therefore, there is no “one-size-fits-all” solution. Legal assessment must be based on the specific circumstances of each case.

The Problem Is Not the Dispute – It’s the Contract From the Start

When foreign businesses sign contracts in Vietnam without proper legal review, the real risk is not just whether a dispute will occur, but:

• Whether you have sufficient legal protection when it does
• And more importantly, whether you can actually recover your money

In most cases, the outcome is determined at the moment the contract is signed.

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