Global Vietnam Lawyers would like to introduce to our valued readers an article by Ms. Le Thi Ngan titled “Liquidated damages under the 2025 Law on Construction: A legal turning point and implementation challenges” published on the website of Vietnam Lawyer Journal on 2nd March 2026.
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Construction projects are typically characterized by large investments, complex technical structures, and extended implementation timelines. Any delay in achieving a project milestone may trigger cascading economic losses for project owners, which in some cases can be severe. To mitigate such risks and avoid prolonged disputes over the burden of proving actual damages, the concept of “Liquidated Damages” has emerged as an essential tool of contract risk management.
In Vietnam, although this concept has long been widely incorporated into construction contracts based on FIDIC standard forms, the practical application in relation to liquidated damages has faced many obstacles due to its incompatibility with the fundamental principles governing compensation for damages under Vietnamese law. However, the introduction of new provisions under the 2025 Law on Construction marks a significant legal turning point, laying a clearer statutory foundation for the application of this compensation mechanism.
LIQUIDATED DAMAGES AS PROVIDED FOR IN FIDIC CONTRACT FORMS
FIDIC contracts—particularly the Red Book, Yellow Book, and Silver Book—have long established a benchmark for the application of liquidated damages in cases where contractors breach their obligations regarding construction progress, specifically the Time for Completion (referred to in the Vietnamese versions of FIDIC contracts as the “Thời hạn hoàn thành”). Under these standard forms, delay damages are stipulated as a fixed monetary amount stated in the Contract Data, payable by the contractor to the employer for every day which shall elapse between the relevant Time for Completion and the Date of Completion..[1] The employer is not required to prove actual damages arising from the delay.
Another important legal aspect of “delay damages” under FIDIC standard forms is that it is the only damages with respect to the delay. This means that the employer is generally precluded from claiming any additional damages for actual losses beyond the pre-agreed amount, except in certain specific circumstances, such as where the contract is terminated prior to completion of the works.[2]
LEGAL GAPS AND JUDICIAL PRACTICE PRIOR TO THE EFFECTIVENESS OF THE 2025 LAW ON CONSTRUCTION
Prior to the official entry into force of the 2025 Law on Construction, Vietnamese law offered no clear or specific provisions directly governing liquidated damages, resulting in legal gaps and inconsistent interpretations among contracting parties.
Under Articles 13 and 360 of the 2015 Civil Code, Vietnamese law establishes two core criteria for determining compensation for damages: (i) full compensation for losses, and (ii) compensation equivalent to the actual damage suffered. To ensure the proper application of these criteria, the law further requires that: (i) the damage must have actually occurred, be provable and quantitative; and (ii) the damage must be direct in nature. Article 360 of the 2015 Civil Code additionally provides that, with respect to full compensation, compensation for damages may be agreed between the parties (i.e. the party causing the damage and the suffered party), or as otherwise prescribed by law. Accordingly, depending on the parties’ agreement or statutory provisions, the amount of compensation may be higher or lower than the actual loss. However, if the law merely permits voluntary agreement between the parties without offering more concrete guidance—for example , by specifying the types of transactions in which such agreements are permissible or whether agreed compensation amounts are subject to any limitations—it remains questionable whether fairness in damage compensation can be adequately ensured.
In the absence of clearly defined alternative formulas to the principle of “full compensation”, an increasing number of civil contracts have in practice opted for incorporating liquidated damages clauses. This mechanism, widely adopted in common law systems, is often regarded as advantageous due to its reliance on the parties’ voluntary agreement, its simplification of burden of proof, and its ability to reduce uncertainty for both parties when determining the amount of compensation. This situation has given rise to the co-existence of four distinct approaches in both court adjudication and commercial arbitration, exposing disputing parties to considerable risks. The first approach is to deny, at the outset, the enforceability of liquidated damages clauses in contracts. The second approach tends to characterize liquidated damages as a form of contractual penalty, thereby subjecting such clauses to the statutory cap of 8% of the value of the breached obligation, effectively stripping them of their compensatory function. The third approach treats liquidated damages as a form of damages while nevertheless requiring the non-breaching party to prove actual loss. This requirement inadvertently negates the principal advantage of liquidated damages—namely, their efficiency and simplified burden of proof. Finally, there is a fourth approach that regards liquidated damages as a distinct remedial arrangement grounded in the principle of freedom of contract. However, this interpretation has yet to attract broad consensus among dispute resolution bodies, scholars and legal practitioners.
This lack of consistency has been clearly reflected in judicial decisions rendered by Vietnamese courts over the years. A notable example is Cassation Review Decision No. 15/2016/KDTM-GDT dated 7 September 2016 of the Supreme People’s Court in a dispute concerning a construction contract, in which the Court equated a liquidated damages clause with a contractual penalty, thereby holding that the amount payable could not exceed the statutory cap prescribed under the Commercial Law.[3] Similarly, in a 2020 decision, the Supreme People’s Court held that an agreement providing for the payment of a fixed sum, intended as compensation—specifically VND 10 billion—constituted, in substance, a form of contractual penalty. According to the Supreme People’s Court in its cassation review decision, where a first-instance court seeks to characterize such liability as compensation for damages, it must fully establish all elements giving rise to such liability, including: the breach, the occurrence of actual damage, the direct causal link, and the burden of proving both the loss suffered and the profits directly lost.[4] In other words, this effectively reverts to the traditional approach to damages, thereby rejecting liquidated damages as a distinct remedial mechanism with its own operational logic.
These divergent and at times conflicting approaches have, to a certain extent, placed project owners and contractors under considerable difficulty in anticipating and allocating risks when entering into large-scale construction contracts.
Nevertheless, recent judicial practice has evidenced positive developments moving closer to international standards. In Judgment No. 660/2022/KDTM-PT (“Judgment 660”), the Ho Chi Minh City People’s Court adopted a notably progressive stance by recognizing the legality of liquidated damages agreements on the basis of the principle of contractual freedom enshrined in the Civil Code.[5] Although the Court retained the authority to review such agreements where the compensatory amount is far higher than the actual loss, its recognition of the validity of liquidated damages agreements—even in cases where actual loss may exceed the liquidated damages—signals a more flexible and pragmatic judicial mindset. This development constitutes an important stepping stone, reflecting the urgent need for a formal legal framework—one that the 2025 Law on Construction has sought to address, albeit not comprehensively—to safeguard party autonomy and enhance transparency in modern construction contracts.
THE 2025 LAW ON CONSTRUCTION AND THE LEGAL RECOGNITION OF LIQUIDATED DAMAGES
The enactment of the 2025 Law on Construction marks a significant shift in Vietnamese law toward closer alignment with modern project governance standards, departing from traditional approaches to project management practices. Against the backdrop of increasingly complex disputes concerning liquidated damages—particularly in large-scale projects or projects using FIDIC contract forms—the absence of a clear legal framework had long been a major obstacle for both project owners and contractors. Article 86 of the 2025 Law on Construction directly addresses this long-standing impasse by providing that: damages may be determined based on actual losses or on liquidated (pre-determined) damage amounts corresponding to the contractual obligations breached and the degree of such breach.
By expressly allowing the parties to pre-agree on liquidated amounts corresponding to specific breaches, the Law effectively formalizes and legitimizes the legal concept of liquidated damages. Under this new statutory framework, the parties’ freedom to contract is substantively respected, thereby providing a sound legal basis for the enforcement of liquidated damages for delay clauses in construction contracts without the risk of such clauses being invalidated or treated as contractual penalties.
IMPLEMENTATION BARRIERS AND THE NEED FOR FURTHER GUIDANCE UNDER THE 2025 LAW ON CONSTRUCTION
Although the 2025 Law on Construction opens a new chapter for the application of liquidated damages, the transition from the traditional practices to the new legal framework presents substantial challenges in contract management that stakeholders must carefully consider.
First, challenges arising from inconsistencies between contractual terminology and its legal nature
Due to the prolonged absence of explicit statutory provisions governing liquidated damages in Vietnamese law, contracting parties have traditionally tended to identify delay-related payments as “contractual penalties” in order to ensure enforceability under the prevailing legal framework. For instance, Section 3 of Appendix No. DS-Duol-2016-001-A02, as cited in Judgment 660, provides that: “If Party B delays completion of the construction works, … it shall be subject to a penalty of VND 300,000,000 for each day of delay.” The historical use of such punitive terminology was primarily intended to take advantage of the existing remedies under the Commercial Law and the former Law on Construction. However, this practice has inadvertently blurred the compensatory nature of liquidated damages.
The intersection between habit-driven terminology and the new provisions of the 2025 Law on Construction—which expressly characterizes liquidated damages as a method of determining damages—may give rise to serious disputes over contractual interpretation in the coming period. In practice, once liquidated damages are construed as a penalty for breach, the parties are confronted with the question of which law should govern—namely, the Civil Code or the Commercial Law—given that the Law on Construction, as a specialized law, does not yet provide specific guidance on this issue. While the 2015 Civil Code recognizes the parties’ freedom to agree on penalty amounts unless otherwise provided by relevant laws, the Commercial Law imposes a statutory cap of no more than 8% of the value of the breached contractual obligation for contracts of a commercial nature. Consequently, in the event of a dispute, one party may argue that the relevant clause constitutes liquidated damages in order to safeguard its interests where the agreed amount exceeds the 8% cap under the Civil Code, whereas the other party may request the dispute resolution authority to apply the penalty cap under the Commercial Law to reduce its payment obligation, relying precisely on the use of the term “penalty” as reflected in the contractual wording. The issue of whether the Civil Code or the Commercial Law should apply to resolve disputes in cases where the Law on Construction remains silent continues to be a subject of lively debate among legal practitioners. Although there have been proposals for the development of case law suggesting that construction contracts should be classified as civil contracts to apply the Civil Code, such proposals have not yet been formally adopted. Accordingly, as the 2025 Law on Construction is scheduled to take effect in July, it is considered an optimal solution for project owners and contractors to proactively review and standardize these contractual provisions to ensure compliance with applicable laws and to accurately reflect the parties’ true intentions. Clarifying the legal nature of liquidated damages at the contract drafting stage will be a critical step in enabling the parties to protect themselves against undesirable legal interpretations in future disputes.
Second, the challenge of determining the relationship between liquidated damages and actual damages
Another critical legal issue that project participants may encounter is whether the application of liquidated damages precludes the right to claim compensation for actual damages.
Under the standards of FIDIC model contracts, delay damages are typically established as a sole remedy. This means that the employer may not claim additional compensation for other actual losses arising from the same act of delay, unless the contract is terminated prior to completion of the works. This approach enables the parties—particularly contractors—to anticipate their maximum financial exposure and helps to limit prolonged disputes over the assessment of additional damages.
However, the 2025 Law on Construction has yet to provide specific guidance on whether these two compensation mechanisms may be applied concurrently in respect of the same breach. This legal gap may give rise to scenarios in which the parties dispute whether both liquidated damages and actual damages may be claimed in parallel for the same breach.
Third, the challenges in assessing proportionality and defining the court’s authority
Another significant challenge concerns how to determine whether a stipulated amount of liquidated damages is “proportionate” to the breached obligation and the degree of breach, as required under Article 86 of the 2025 Law on Construction. The absence of specific quantitative criteria to distinguish between a reasonable, compensatory level of liquidated damages and a punitive amount continues to pose difficulties in dispute resolution. In practice, questions arise as to how situations should be handled where the liquidated damages are significantly higher or lower than the actual losses incurred, and on what basis the dispute resolution authority should assess the proportionality of the agreed amounts.
When disputes arise, one party will often seek judicial review of the agreed liquidated damages on the grounds that the amount is excessive and adversely affects its legitimate interests. In other words, although the parties are free to agree on the amount of liquidated damages, where such amount is deemed to be grossly disproportionate to the reasonably foreseeable loss, the dispute resolution authority may be requested—or may even, in certain circumstances, take the initiative—to review its reasonableness. Nevertheless, the power of intervention exercised by dispute resolution authorities must be applied with caution so as not to undermine the core value of the liquidated damages regime. The inherent objective of liquidated damages is to enable the parties to promptly ascertain losses without having to undergo the complex and costly process of proving actual damages. If courts too readily accept requests by the breaching party to recalculate damages, dispute resolution proceedings may be prolonged, resulting in unnecessary costs and delays for all parties involved, while simultaneously depriving liquidated damages clauses of their intended purposes when they are drafted—namely, simplicity and transparency.
In addition, recent judicial practice indicates that dispute resolution authorities frequently affirm their power to reduce liquidated damages where the agreed amount is considered excessive in comparison with the actual loss, with a view to protecting the interests of the breaching party. However, a fundamental question remains unresolved: whether courts possess a corresponding authority to review and increase liquidated damages where the contractually stipulated amount is deemed “too low” relative to the actual loss suffered by the non-breaching party.
In light of the practical challenges encountered by adjudicatory bodies in the resolution of issues related to liquidated damages, Article 86 of the 2025 Law on Construction, in its current form, falls short of providing clear guidance. Once the door has been opened to the application of liquidated damages, the Law on Construction should provide more specific and closely tailored provisions to ensure liquidated damages approximate actual loss as closely as possible. It should also be noted that under FIDIC standard contract forms, when drafting the liquidated damages clauses for delay in construction progress, parties are commonly advised to stipulate liquidated damages as a percentage of the project’s final account value[6]; however, this approach has not proven particularly effective. It is hoped that the guidance documents of the 2025 Law on Construction will introduce more detailed provisions to ensure that liquidated damages are applied in a coherent, consistent, and effective manner—particularly in high-value construction disputes where the assessment of actual loss is inherently complex.
[1] Article 8.7 (FIDIC Red Book 1999), Article 8.8 (FIDIC Red Book 2017), Article 8.7 (FIDIC Yellow Book 1999), Article 8.8 (FIDIC Yellow Book 2017), Article 8.7 (FIDIC Silver Book 1999), and Article 8.8 (FIDIC Silver Book 2017)
[2] Article 8.7 (FIDIC Red Book 1999), Article 8.8 (FIDIC Red Book 2017), Article 8.7 (FIDIC Yellow Book 1999), Article 8.8 (FIDIC Yellow Book 2017), Article 8.7 (FIDIC Silver Book 1999), and Article 8.8 (FIDIC Silver Book 2017)
[3] Cassation Review Decision No. 15/2016/KDTM-GDT dated 9/7/2016 of the Supreme People’s Court in a dispute concerning a construction contract, https://congbobanan.toaan.gov.vn/2ta1057t1cvn/chi-tiet-ban-an last visited on 1/30/2026
[4] Paragraph 4 of the “Court’s Findings” section in Cassation Review Decision No. 10/2020/KDTM-GDT dated 8/14/2020 of the Supreme People’s Court, https://www.toaan.gov.vn/webcenter/ShowProperty?nodeId=/UCMServer/TAND198581 last visited on 1/30/2026
[5] Judgment No. 660/2022/KDTM-PT dated 11/10/2022 of the Ho Chi Minh City People’s Court on a dispute over “Construction Works Execution Contract”, https://congbobanan.toaan.gov.vn/2ta1256837t1cvn/chi-tiet-ban-an last visited on 30/01/2026
[6] See Brian Barr and Leo Grutters, FIDIC User’s Guide, Third Edition, 2010, pg. 176
