Disputes in Export Garment Processing Contracts in Vietnam

Sep 22

1. Overview and Common Disputes in Export Garment Processing Contracts

1.1. Legal Framework & Role of Processing Contracts in the Export Garment Industry

In Vietnam’s export garment industry, a processing contract is an agreement between the ordering party (usually a foreign trader or a Vietnamese enterprise contracting with a foreign partner) and the processing party (local garment workshop or factory). The processing party uses raw materials (supplied by the ordering party or sourced independently) to manufacture textile products based on specifications, quantity, deadline, type, quality, and design. Upon completion, the goods are delivered, and processing fees are paid.

According to current Vietnamese laws:

The 2015 Civil Code treats processing contracts as a type of civil contract.
The Commercial Law regulates commercial contracts, including agreements on outsourcing and processing of goods, particularly where either party is an international trader.
The Law on Foreign Trade Management governs processing/export operations, including regulations on the export of raw materials, trademarks, origin, and licensing requirements.

1.2. Common Disputes and Causes

Recent legal cases have revealed common disputes arising from export garment processing contracts, including:

Product quality fails to meet technical standards
Examples: wrong designs, materials, sizes, colors, or stitching errors. These issues often arise when technical specifications or sample approvals are unclear or missing.

Delivery deadlines for products and raw materials
Delays in the delivery of materials by the buyer or finished goods by the processor often lead to disputes, especially if the timeline affects international shipping, FOB/CIF orders, or export commitments.

Payment delays or refusal
Disputes frequently involve refusal to pay processing fees, delayed payments, or partial payments—leading to lawsuits for debt collection and late payment interest.

Excess/remaining materials
When the contract ends early or finishes with surplus materials, disputes arise over who bears responsibility for unused raw materials or imported goods that are not accepted by the buyer.

Origin, trademark, and IP rights issues
For export goods, if the contract does not clearly define who is responsible for brand registration, labeling, or determining origin, disputes can occur during import inspection or in third-party IP infringement claims.

Force majeure, legal changes, and global market volatility
Unforeseen issues such as export regulation changes, tariffs, anti-fraud measures, environmental/labor standards, or supply chain disruptions can trigger disputes if not addressed in the contract.

Statute of limitations for lawsuits
Under the 2015 Civil Code, the statute of limitations to file a contract dispute claim is three years from the date the claimant knows or should have known of the rights infringement. Missing this deadline forfeits legal rights.

Fraud and dishonesty in contract execution
Examples include misreporting raw materials, quantities, or origins, or using unauthorized inputs. Authorities in Vietnam are increasing inspections to combat fraud in garment processing for export.

2. How to Prevent and Resolve Disputes in Export Garment Processing Contracts

2.1. Prevention – Best Practices for Contract Drafting and Execution

To reduce the risk of disputes, businesses should prepare thoroughly from the contract negotiation stage:

Draft clear and detailed contracts

Clearly define product specifications: sample, material, technical standards, color, size, permissible deviation, sample testing, and acceptance processes.
Specify the source of raw materials: who provides, origin verification, and tax/shipping responsibilities for imported materials.
Set clear deadlines for material supply and product delivery, including penalties for delays and schedule adjustments.

Define trademark and origin responsibilities
Clarify who registers the brand, who pays the costs, and who is liable in disputes. Origin rules must also be addressed to avoid import rejections or penalties.

Include force majeure and legal change clauses
Contracts should cover natural disasters, pandemics, regulatory changes, taxes, or environmental standards—and define how such events affect deadlines, costs, or obligations.

Establish inspection, acceptance, and payment terms
Outline the process for quality checks, corrections, and feedback. Specify payment structure (advance, post-delivery), and interest on delayed payments.

Clarify treatment of leftover materials
Contracts should detail how surplus or unused materials are handled—whether returned, destroyed, or compensated. This avoids storage issues or unexpected costs.

Select a dispute resolution mechanism
Include a clause specifying arbitration or court jurisdiction. For international contracts, identify applicable law (Vietnamese or foreign), and choose an equitable forum for both parties.

2.2. Dispute Resolution – Practical Steps When a Dispute Occurs

If a dispute arises, companies should follow these steps:

Analyze the dispute and review documentation
Check the signed contract, samples, delivery notes, acceptance reports, invoices, correspondence, and emails exchanged between the parties.

Attempt negotiation or mediation first
Many disputes can be resolved through dialogue, error correction, or contract amendments—saving time and legal costs.

Choose arbitration, mediation, or court proceedings

If the contract has an arbitration clause: submit the dispute to a domestic or international arbitration center.
If not, file a lawsuit at the competent People’s Court in Vietnam—determine jurisdiction based on dispute type (civil, commercial) and locality.
In a 2023 case titled “Commercial Dispute Over Garment Processing Contract No. 10/2023/KDTM‑ST” in Hai Duong, the People's Court ruled on a contract dispute under commercial law.

Claim damages and late payment interest
If the buyer delays payment, the seller can claim the principal amount and interest under commercial law or the applicable legal framework.

Collect evidence and prove contractual breach
To win a case, the plaintiff must prove the defendant’s breach—such as incorrect delivery, substandard quality, late payments, or refusal to accept goods. Key evidence includes acceptance reports, samples, emails, and inspection reports.

File within the legal statute of limitations
As mentioned, the legal deadline is three years from the date of discovering the violation. Failing to act within this period results in loss of legal recourse.

3. Conclusion

Disputes in export garment processing contracts can arise at any time if businesses fail to prepare and negotiate clearly. A well-drafted contract, clearly defined rights and obligations, and a predetermined dispute resolution mechanism are essential to minimize risks and ensure smooth cooperation in international trade.