IMPROVING THE LEGAL FRAMEWORK GOVERNING
BREACHES OF CONTRACT IN COMMERCIAL ACTIVITIES
IN VIETNAM TO MEET THE DEMANDS OF INTERNATIONAL INTEGRATION
NGUYEN MINH DUC
Faculty of Accounting and Finance, Van Hien University
ABSTRACT: Amid Vietnam’s ongoing
efforts to refine market economy institutions and deepen international economic
integration, the need for transparency, stability, and consistency in the law
governing breaches of contract has become increasingly urgent. This article
approaches the issue from theoretical and legal-policy perspectives, analyzing
the relationship between the 2015 Civil Code and the 2005 Commercial Law in
determining breaches and legal liability, thereby identifying shortcomings in
both regulation and application. On that basis, the article proposes directions
for improving the law on breaches of contract so as to enhance predictability,
rationalize risk-allocation mechanisms, and improve the effectiveness of legal
regulation in a market economy.
Keywords: breach of contract,
contractual liability, commercial remedies, penalty for breach, compensation
for damages, risk allocation, commercial law.
1. Introduction
In modern legal scholarship, a contract is
viewed not merely as an agreement between parties intended to establish rights
and obligations, but also as a legal institution reflecting the manner in which
the State organizes and safeguards transactional order in a market economy.
Through contracts, business entities clearly agree on the rights and
obligations of each party while also determining in advance how risks will be
shared and how situations will be handled if one party fails to perform its
commitments as agreed.
A breach of contract, therefore, is not an
exceptional phenomenon; it is an inherent possibility in every commercial
relationship. The key issue is to establish a mechanism for dealing with
breaches that both ensures contractual compliance and does not impede lawful
business activities. In this context, liability for breach of contract becomes
an important instrument through which the law guides and regulates the conduct
of parties to transactions.
In Vietnam, rules governing breaches of
contract in commercial activities are concurrently regulated by the 2015 Civil
Code (the “2015 Civil Code”) as the general law and the 2005 Commercial Law
(the “2005 Commercial Law”) as the specialized law. In theory, this dual
regulatory model makes it possible to combine the general principles of civil
law with enforcement mechanisms specific to commercial activities. In practice,
however, the interaction between these two laws has revealed a number of issues
concerning consistency, the boundaries of application, and the predictability
of the legal consequences of breaches.
Researching and improving the law on
breaches of contract in commercial activities is therefore not only of
practical significance but also raises important theoretical questions
regarding the role of contractual liability in Vietnam’s socialist-oriented
market economy.
2. Theoretical
foundations of breach of contract and contractual liability in commerce
From a theoretical perspective, a breach
of contract may be understood as a mismatch between the legal expectations that
the parties have “framed” in their contract and the actual conduct occurring
during performance of the obligations. In commercial activities, where
transactions are often of substantial value, directly affected by market
fluctuations, and dependent on many factors beyond the parties’ control—such as
supply capacity, logistics conditions, input-cost fluctuations, or supply-chain
disruptions—the risk of contractual breach becomes pronounced and recurrent.
Modern law therefore does not treat breach of contract merely as a moral
failing or individual fault, but regards it as a form of transactional risk
that must be reasonably allocated among the parties to the contractual
relationship.
Accordingly, liability for breach of
contract is not merely intended to punish non-compliance. More fundamentally,
it is a mechanism for determining which party is best placed to bear the risk
arising from non-performance, incomplete performance, or improper performance
of an obligation, thereby creating incentives for compliance and maintaining
contractual discipline in the market. Functionally, contractual liability in
commerce is commonly understood in three organically connected dimensions: a
compensatory dimension, aimed at restoring infringed interests through damages;
a deterrent dimension, aimed at influencing party conduct through remedies such
as contractual penalties; and a transaction-stabilizing dimension, achieved
through predictable mechanisms for dealing with breaches, reducing the risk of
collapse of the entire commercial relationship and lowering transaction costs
for business entities. In modern commerce, the stabilizing and predictable
functions of contractual liability are especially important because businesses
accept risk as an inevitable part of commercial activity but require a clear
legal framework to quantify risks, calculate compliance costs, and make
rational decisions on entering into, performing, or adjusting contractual
relationships.
From a legal-policy perspective, liability
for breach of contract should be viewed as an instrument for allocating risk
and optimizing transaction costs in a market economy, rather than merely as an
ex post response to wrongful conduct. The clarity, consistency, and
predictability of rules on contractual liability directly affect market
confidence, compliance behavior among business entities, and the overall
efficiency of the commercial order.
3. Current legal
framework governing breaches of contract in commercial activities
3.1. Approach of the
2015 Civil Code
The 2015 Civil Code approaches breach of
contract within the general framework of breaches of civil obligations.
Liability arises where there is a breach of an obligation, damage, and a causal
relationship, unless an exemption from liability applies. This approach
emphasizes compensation for damage and fairness between the parties. However,
when these principles are applied directly to commercial relationships, certain
limitations become apparent, particularly in dealing with technical breaches,
delays in performance, or breaches causing indirect damage that is difficult to
quantify.
3.2. Approach of the
2005 Commercial Law
Unlike the Civil Code, the 2005 Commercial
Law establishes a relatively flexible system of remedies, allowing the parties
to choose a response suited to their commercial objectives, ranging from
specific performance to cancellation of the contract. This approach reflects
the view that a commercial contract is an instrument of economic operation, in
which efficiency and speed in dealing with breaches are given priority.
However, because of insufficient coordination with the general principles of
the Civil Code, the remedial system under the Commercial Law is sometimes
applied in a fragmented manner and lacks standardized criteria for assessing
the conditions and legal consequences of each remedy.
4. Theoretical and
practical issues
4.1. Balancing
predictability and flexibility in dealing with breaches of commercial contracts
The law governing breaches of commercial
contracts faces a systemic balancing problem: the market requires
predictability so that businesses can quantify risks and optimize transaction
decisions, while commercial practice requires flexibility to adapt to price
fluctuations, supply conditions, and technical requirements. This tension
becomes more apparent where the legal system simultaneously operates under two
bodies of rules—the 2015 Civil Code and the 2005 Commercial Law. In principle,
this dual model can combine the foundational character of the general law with
the operational character of specialized law. In practice, however,
insufficient coordination means that “flexibility” can become inconsistency and
“predictability” may fall short of what is required for contract management.
Many disputes arise not because rules are absent, but because operational
criteria are lacking at decisive points such as the threshold of breach,
conditions for applying strong remedies, notice requirements, standards for proving
damage, and exemptions from liability. When these criteria are unstable,
businesses find it difficult to standardize contracts, select an optimal legal
response, and control transaction costs.
4.2. Threshold of
breach and conditions for applying strong remedies
In commerce, not all breaches carry the
same significance. The 2005 Commercial Law arranges remedies from less severe
to more severe, from requiring proper performance of the contract to measures
that interrupt or terminate the contractual relationship. For this remedial
system to function properly, the law should provide relatively clear guidance
on the threshold distinguishing a remediable breach, for which an opportunity
to cure should be prioritized, from a breach that defeats the purpose of the
contract and may justify suspension or cancellation. The nature of commercial
transactions means that the threshold cannot be based solely on the “form” of
the breach; it must reflect the contractual purpose, the essential nature of
the breached obligation, and the degree of impact on the business plan or
supply chain. Without such threshold criteria, practice may be pushed toward
two extremes: strong remedies may be “frozen” because of fear of
misapplication, or they may be used too readily, encouraging contract termination.
Both outcomes are detrimental to transactional stability.
4.3. Contractual
penalties and the risk of weakened deterrent effect
In theory, a penalty for breach serves
both a deterrent function and a function of reducing the cost of proving damage
through a predetermined mechanism. In commerce, contractual penalties are a
tool for internalizing the risk of breach into the contract and shaping
performance behavior. However, where the penalty is constrained by a rigid
“ceiling” applied uniformly to all transactions, its deterrent effect may be
reduced, particularly for high-value or high-risk contracts: the benefit
obtained by the breaching party may sometimes still exceed the penalty payable.
As a matter of policy, a penalty ceiling may be intended to prevent a stronger
party from abusing its position by imposing an excessive penalty. Yet modern
commerce is highly diverse, making it important to design a mechanism that
respects freedom of contract, provides sufficient deterrence, and still
controls the risk of abuse in each particular context.
4.4. Compensation for
damages, evidentiary standards, and the duty to mitigate loss
The mechanism of compensation for damages
is intended to make good the injured party’s losses, but in commerce, losses
are often diverse, may have cascading effects, and can be difficult to quantify
with absolute precision. The requirement to prove the amount of damage and the
causal link between the breach and the actual loss becomes a major obstacle,
especially where the damage is indirect or results from supply-chain
disruption. If the evidentiary burden is set too high, the compensation
mechanism becomes difficult to use in practice; if set too low, the risk of
excessive claims increases, undermining transactional stability and security. A
standard of proof that is “sufficiently reliable” and appropriate to the
characteristics of commerce is therefore needed. The duty to mitigate loss is
an important balancing mechanism, but it can be effective only when there are
clear operational criteria concerning reasonable measures, the time at which
they must be taken, and the treatment of mitigation costs.
4.5. Exemption from
liability and risk allocation
Exemption from liability, including force
majeure and other grounds for exemption provided by law or agreement, functions
as a “safety valve” for risks beyond control. From a policy perspective,
however, exemption from liability must not become an excuse for poor management
or delayed communication. It is therefore necessary to clarify criteria
distinguishing objective risk from management risk, and “impossibility of
performance” from circumstances in which performance is merely more difficult
or more costly, as well as the consequences of exemption for each remedy. At
the same time, exemptions in commerce should be closely linked to duties of
timely notice and mitigation in order to limit cascading losses and reduce
legal risk.
5. Directions for
improving the law on breaches of contract in commercial activities
5.1. Improving the
Civil Code and Commercial Law toward an operational specialized-law model
An important direction is to clarify the
dual regulatory model, under which the 2005 Commercial Law should serve as the
“operational mechanism” for commercial remedies, including the conditions for
application, procedures for implementation, and legal consequences of each
remedy, while the 2015 Civil Code supplies foundational principles on
obligations, liability, and supplementary rules where the Commercial Law is
silent. To implement this direction, legislative technique should standardize
shared concepts and criteria such as breach, exemption from liability, damage,
and causation in order to limit internal conflicts. At the same time,
priority-of-application rules should make clear that, for contractual
relationships that are commercial in nature, the Commercial Law takes
precedence with respect to remedies, while the Civil Code applies
supplementarily to safeguard the general foundational principles. Where
immediate statutory amendment is not yet possible, strengthening uniform
guidance on application is especially important to reduce inconsistency in
interpretation and enforcement.
The strength of this restructuring is that
it would make the system more predictable and provide businesses with a clearer
legal “anchor” when selecting and applying remedies. As a result, disputes
would focus less on “which statutory provision should be relied upon” and more
on the nature of the breach and the appropriate remedial response.
5.2. Clarifying breach
thresholds for commercial remedies
For the system of commercial remedies to
operate effectively, the law should clarify the thresholds for applying strong
remedies such as temporary suspension, suspension, or cancellation of the
contract. The direction of reform need not involve creating a rigid list;
rather, it should develop a set of foundational operational criteria that
dispute-resolution bodies and transaction parties can apply consistently. These
criteria should closely reflect the characteristics of commercial transactions.
Once codified or formally guided, the assessment framework would become more
consistent, reduce arbitrariness in application, and limit the risk that
businesses select the “wrong remedy” when responding to a breach.
5.3. Redesigning
contractual penalties to balance deterrence and protection against abuse
Reform of contractual penalties should
begin with their proper nature: they are a tool by which the parties
“predetermine” the consequences of breach, thereby shaping behavior and
reducing the burden of proving damage, rather than merely a punitive sanction.
As a matter of policy, the law must continue to prevent a stronger party from
exploiting its position, particularly where there is a clear imbalance in
bargaining power, while also allowing flexibility for different categories of
transactions. This approach should also recognize that, in high-value
contracts, penalties enable the parties to “price” risk and make decisions
quickly, while retaining a control mechanism where a penalty clause is imposed
or the penalty is unreasonably excessive in relation to its deterrent
objective. In addition, the relationship between contractual penalties and
compensation for damages should be clarified: simultaneous application may be
permitted in commerce, but criteria are needed to avoid double recovery for the
same injured interest.
5.4. Improving
compensation for damages through standards suited to the characteristics of
commerce
Reform of compensation for damages should
focus on the practical operability of the compensation mechanism in commerce,
where losses are often diverse and difficult to quantify with absolute
precision. First, the method of proving loss should be harmonized in a
reasonable direction: evidence need not achieve absolute precision but should
reach a level of reliability proportionate to the circumstances of the
transaction. The law should also accept methods commonly used in commerce to
determine loss, such as reference to market prices or substitute contracts,
documented costs and expenses, or market-price differentials during the
relevant period. Next, the scope of recoverable commercial loss should be
clarified to include direct loss and certain forms of indirect loss that could
reasonably have been foreseen at the time of the transaction. Finally, the duty
to mitigate loss should be expressly regulated or clearly guided, including
what constitutes an appropriate measure, when the injured party must take such measures,
and whether documented mitigation costs are recoverable as damages. This
approach would enhance the enforceability of the compensation mechanism,
preserve its compensatory function, and promote fairness in commercial
dealings.
5.5. Standardizing
exemptions from liability: early notice and mitigation of loss
Exemption from liability in commerce
should be viewed as a “risk-management process” rather than merely a legal
ground for excluding liability. Accordingly, the law should emphasize the duty
to provide timely and complete notice of the event giving rise to exemption,
while placing particular importance on the duty to take reasonable measures to
mitigate consequences and continue performance to the extent possible. It is
also necessary to clarify the consequences of exemption for specific remedies
such as damages, contractual penalties, or specific performance, depending on
the nature of the risk event and the degree to which it affects the ability to
perform the obligation. A process-oriented approach would reduce the risk of
exemptions being interpreted too broadly and ensure that the mechanism operates
as a genuine safety valve for objective risks rather than as a tool to
legitimize poor management or delayed communication.
6. Conclusion
Breaches of contract in commercial
activities are an inevitable phenomenon of a market economy. The law governing
contractual breaches does more than deal with violations; it also shapes
conduct, allocates risk, and safeguards the stability of transactional order.
As Vietnam continues to refine its institutions and deepen international
integration, improving the law on breaches of contract in commercial activities
should be grounded in a sound theoretical foundation and directed toward
enhancing the predictability, effectiveness, and rationality of contractual
liability mechanisms. The analyses and recommendations presented in this
article contribute to clarifying this approach and suggest directions for legal
reform consistent with the development requirements of Vietnam’s market economy
and international integration.
REFERENCES
National Assembly of Vietnam. (2005).
Commercial Law (Law No. 36/2005/QH11).
National Assembly of Vietnam. (2015).
Civil Code (Law No. 91/2015/QH13).
National Assembly of Vietnam. (2010). Law
on Commercial Arbitration (Law No. 54/2010/QH12).
Hanoi Law University. (2022). Textbook of
Vietnamese Civil Law: Volume 2 – Obligations and Contracts. People’s Public
Security Publishing House.
Ho Chi Minh City University of Law.
(2021). Textbook of Vietnamese Commercial Law: Volume 1. Hong Duc Publishing
House.
Nguyen Ngoc Dien. (2018). Contracts and
Contractual Liability under Vietnamese Law. Hong Duc Publishing House.
Do Van Dai. (2020). Vietnamese Contract
Law: Judgments and Case Commentaries. Hong Duc Publishing House.
United Nations. (1980). United Nations
Convention on Contracts for the International Sale of Goods (CISG). Vienna.
Article received: 01
November 2025
Reviewed, revised, and evaluated: 15 November 2025
Accepted for publication: 01 December 2025