Concurrent Application of Contractual Penalties and Late Payment Interest in Commercial Contracts under Vietnamese Law

Luật sư: Nguyễn Bá Tùng

Cập nhật: 20:43, Thứ Ba 22/09/2026

Does Vietnamese law permit the concurrent application of contractual penalties and late payment interest for overdue payments? Analysis of legal grounds, the 8% cap, judicial precedents, and contract drafting guidelines.

In commercial contractual relationships, breach of payment obligations constitutes one of the most common forms of default, directly impairing the cash flow of the obligee. To safeguard their legitimate rights and interests, contracting parties frequently agree that the defaulting party must bear both a contractual penalty and interest on the overdue amount. However, whether a single act of late payment may concurrently trigger both liabilities remains an issue warranting rigorous scrutiny, as commercial law contains no standalone statutory provision expressly governing the interrelationship between contractual penalties and late payment interest.

1. Identification of Commercial Contracts

Pursuant to Clause 1, Article 3 of the 2005 Commercial Law, "commercial activities" mean activities for profit-making purposes, encompassing the purchase and sale of goods, provision of services, investment, commercial promotion, and other profit-generating activities. Article 2 thereof defines the scope of application as including traders conducting commercial activities and other organizations or individuals engaged in commercial-related activities.

Accordingly, not all contracts executed between enterprises are automatically characterized as "commercial contracts"; rather, determination must be made on a case-by-case basis, taking into account the substantive nature of the transaction, the profit-making purpose, the legal status of the parties, and the specific applicable statutory provisions.

2. Statutory Provisions on Contractual Penalties in Commercial Contracts

2.1. Definition and Conditions of Application

Under Article 300 of the 2005 Commercial Law, a penalty for breach of contract (contractual penalty) is a remedy whereby the aggrieved party requests the breaching party to pay a fine for breach of contract where so agreed in the contract, except in the following events of exemption from liability:

Therefore, when considering the enforcement of a penalty clause, at least three issues must be ascertained: (i) whether the contract incorporates an express penalty clause; (ii) whether the actual act of default corresponds to the agreed breach triggering the penalty; and (iii) whether any event of liability exemption applies.

2.2. Statutory Cap on Penalty Amounts

Pursuant to Article 301 of the 2005 Commercial Law, the penalty rate for a breach of a contractual obligation, or the aggregate penalty rate for multiple breaches, shall be agreed upon by the parties but shall not exceed 8% of the value of the breached contractual obligation.

Note: The 8% ceiling is computed strictly on the value of the breached portion of the obligation, rather than by default on the entire contract value.

2.3. Handling Contractual Penalty Rates Exceeding the Statutory Cap

Prevailing law lacks explicit provisions governing the mechanism for handling agreed penalty clauses that exceed the 8% limit. However, judicial practice indicates that adjudicating bodies only uphold penalties within the ceiling of 8% of the value of the breached obligation. Specifically:

3. Statutory Provisions on Late Payment Interest in Commercial Contracts

3.1. Legal Grounds for Incurrence

Article 306 of the 2005 Commercial Law provides that where a contract-breaching party delays payment for goods, service remuneration, or other reasonable expenses, the aggrieved party is entitled to demand interest on such delayed payment corresponding to the period of delay.

3.2. Applicable Interest Rate

3.3. Determination of Interest Rate in the Absence of Contractual Agreement

Article 11 of Resolution No. 01/2019/NQ-HDTP dated January 11, 2019, issued by the Council of Justices of the Supreme People's Court, provides guidelines as follows: The Court shall refer to the average overdue interest rate prevailing in the market among at least three (03) commercial banks having headquarters, branches, or transaction offices within the province or centrally-governed city where the trial Court exercises jurisdiction, as determined at the time of payment (the date of the first-instance trial), to determine the late payment interest rate, unless the parties agree otherwise or the law provides otherwise.

4. Distinction Between Contractual Penalty and Late Payment Interest

Contractual penalties and late payment interest are founded upon distinct legal bases:

The fact that a contract stipulates a "penalty" calculated at a percentage rate per day or per month on the overdue amount does not automatically convert such payment into late payment interest; the true legal nature of the agreement must be properly characterized. If the clause clearly establishes that it is a penalty for breach of payment obligations, adjudicating bodies may look into the substantive intent to categorize it as a contractual penalty and apply the 8% cap under Article 301 of the 2005 Commercial Law. For instance:

5. Feasibility of Concurrently Applying Contractual Penalties and Late Payment Interest

5.1. In Cases of Breach of Payment Obligations

Current legal documents governing commercial contracts contain no prohibitive provision against the concurrent application of contractual penalties and late payment interest for a single act of late payment. Moreover, in terms of legal nature, these two remedies represent independent and mutually non-exclusive legal mechanisms.

Consequently, as a matter of principle, the aggrieved party is fully entitled to seek both contractual penalties and late payment interest for the counterparty's delay in meeting its payment deadlines under a commercial contract. Nonetheless, concurrent enforcement is not automatically granted across all circumstances, but remains contingent upon the precise terms of the contract, the legal characterization of the clause, and the standard of proof establishing the breach.

5.2. In Cases of Breach of Other Obligations

Where a party breaches other contractual obligations that do not involve payment obligations, the concurrent application of contractual penalties and late payment interest must be examined based on the nature of the breached obligation, the contractual agreements between the parties, and the relevant provisions of law.

Precedent No. 09/2016/AL provides an authoritative illustration where the Court endorsed the concurrent award of contractual penalties and interest with respect to a party's breach under a commercial contract when the respective statutory criteria were satisfied. Specifically, in Precedent No. 09/2016/AL, the Council of Justices of the Supreme People's Court ruled that: "Hung Yen Metal Company failed to perform its commitments under the contract (by short-delivering goods to Viet Y Steel Company); therefore, Viet Y Steel Company's lawsuit requesting the Court to compel Hung Yen Metal Company to refund the received purchase price (corresponding to the undelivered portion of goods), pay interest on late payment (for the advance payment made without receiving goods), and pay contractual penalties (for failing to deliver goods in full) is well-grounded and in accordance with Article 34, Clause 3 of Article 297, Articles 300, 301, 302, 306, and 307 of the 2005 Commercial Law."

In conclusion, contractual penalties and late payment interest may be concurrently applied in commercial contracts. Nevertheless, to successfully claim both remedies concurrently, contracting parties should take note of the following: (i) a penalty clause must be expressly agreed upon in advance in the contract, and the aggregate penalty must not exceed 8% of the value of the breached obligation; (ii) late payment interest may be claimed under Article 306 of the 2005 Commercial Law even in the absence of a contractual agreement, provided that the statutory conditions of this article are fulfilled; and (iii) when drafting commercial contracts, parties should establish distinct and separate provisions for these two remedies.

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