Essential Reading for Japanese Companies: Risk Management in Commercial Transactions in Vietnam

Attorney admitted in Vietnam, Patent Attorney

NEXORA Law Firm — Managing Attorney
Attorney admitted in Vietnam
Mediator, Bankruptcy Trustee, Outside Statutory Auditor

Table of Contents
01 - Confirming the Signatory's Authority When Concluding a Contract
02 - Points to Note Regarding the Contract Price Clause
03 - Points to Note Regarding the Payment Schedule Clause
04 - Points to Note in Setting Damages and Penalty-for-Breach Clauses

This article explains, in accessible terms, the risk-management points Japanese companies should bear in mind, given the contractual risks and the difficulty of debt collection in commercial transactions in Vietnam. It presents practical countermeasures — from due diligence on counterparties, to contract practice, to handling potential disputes. NEXORA Law Firm provides broad-ranging support to Japanese companies entering the Vietnamese market, from contract negotiation and drafting to transaction risk analysis and receivables management. By integrating legal, accounting, and operational perspectives, we provide strong backing for the safe operation of your business.

Commercial transactions (contracts) are a routine feature of everyday corporate operations. In practice, however, businesses — particularly those supplying goods or services — often focus so heavily on pre-contract negotiations that they neglect careful review and revision of the formal contract terms. Moreover, when Japanese companies operate in Vietnam, it is not uncommon, for various reasons, for them simply to accept the counterparty's contract template as-is and proceed without adequately assessing the potential risks. Predicting and managing every risk requires the advice of lawyers and other experts. That said, companies can identify certain major risks capable of causing serious trouble on their own. This article explains and analyzes such major risks.

01 - Confirming the Signatory's Authority When Concluding a Contract

Ordinarily, a company's legal representative signs as the party concluding the contract. In practice, however, persons other than the legal representative frequently sign contracts. Specifically, signatories may include a sales director, regional marketing manager, deputy general director, head of planning/procurement, or even a chief accountant or senior advisor to the company.

It is lawful and common practice for a legal representative to delegate authority to conclude contracts to another person. However, to avoid risk, a company must always confirm the following:

Confirming the power of attorney: obtain a formal power of attorney from the person signing the contract and confirm its content.
Confirming the scope of delegation matches the contract: confirm that the validity and scope of the power of attorney align with the content of the contract.

Common risks:

Cases where a contract is signed without a power of attorney, or where the power of attorney has expired.
Cases at large companies where authority to conclude contracts is subdivided by field or by contract value (for example, the legal representative signs commercial contracts while a different person signs internal operational contracts, or rules provide that the legal representative signs high-value contracts while a sales director or deputy general director signs lower-value ones).

If a contract is concluded outside the scope of these internal rules and a dispute later arises before a court, there is a risk that the contract will be held invalid.

Countermeasures and recommendations:
Confirming a power of attorney at the time of contracting is a simple and quick process. To avoid risk in Vietnam, Japanese companies should, before concluding a contract, be rigorous in:

Confirming the validity and scope of the power of attorney.
Confirming that signing authority has been properly allocated according to the contract amount and type.

02 - Points to Note Regarding the Contract Price Clause

Commercial contracts commonly state the total contract value in lump-sum form, e.g., "the total value of this Contract is YYY." This format is based on the parties' free agreement and does not conflict with Vietnamese law. That said, a more prudent approach is to record not only the total contract amount but also a detailed, itemized breakdown of the price.

Examples of specific itemization:

Supply of goods contracts: separating the value of each product or each lot.
Combined goods-and-services contracts: separating the value of the goods from the value of the services (installation, deployment, verification, etc.).
Service contracts: separately recording the value of each service (consulting, installation, maintenance, etc.).

Such detailed itemization is particularly advantageous for a company acting as supplier of goods or services. For example, if a problem arises with part of the goods or services, itemization allows the supplier to secure acceptance and payment for the portions that were duly completed, avoiding a situation where the entire contract is held up.

Special considerations for international contracts:
When a Japanese company does business in Vietnam, the goods or services supplied are often not limited to domestic transactions but form part of international dealings with Japan or other countries. In such cases, the following risks warrant attention:

Exchange rate fluctuations: incorporate a clause allowing flexible adjustment of the contract amount to account for foreign exchange risk.
Taxes and customs costs: clearly specify who bears the burden of any import/export duties and customs costs.
Estimating upfront costs: estimate the costs required before signing the contract and reflect them in the business plan and quotations to customers.

Recommendation:
By addressing these risk factors in the contract in advance, a company can mitigate the risk of unexpected cost increases or losses.
In addition, appropriately structured clauses can help avoid unnecessary disputes with counterparties.

03 - Points to Note Regarding the Payment Schedule Clause

Payment clauses in commercial contracts often specify a payment schedule. This schedule may be freely determined according to the parties' respective financial circumstances and plans, and is not subject to legal intervention. However, a review of contracting practice in Vietnam shows that payment amounts and schedules are often set on a lump-sum basis, without being broken down even where the items in question are in fact independent in nature. An overly long payment schedule likewise carries risk.

Specific examples of risk:
Particularly where the contract value is large and the supplier (of goods or services) is the party seeking to collect payment from the counterparty, the following risks may arise:

Difficulty obtaining acceptance: if a problem arises with a particular service item or lot of goods, acceptance and payment for the contract as a whole may stall.
Delayed collection: a problem with one part may delay collection of the funds due under the entire contract.

Recommended approach:
To mitigate these risks, particularly for high-value contracts or contracts that can be divided into multiple items, the following approaches are recommended:

Installments based on milestones: set the payment schedule according to key stages (milestones) in contract performance.
Payment based on deliverables: divide payments according to each deliverable.

Dividing the schedule in this way prevents a problem with a particular item or lot from affecting the progress of other deliveries or payments. This is especially effective in substantially reducing collection risk for a company acting as supplier of goods or services.

Recommendation for Japanese companies:
Japanese companies doing business in Vietnam should consider the following when structuring a divided payment schedule in their contracts:

Set a payment schedule appropriate to the delivery and acceptance at each stage.
Formulate an independent payment plan for each item to minimize risk in the event a problem arises.

04 - Points to Note in Setting Damages and Penalty-for-Breach Clauses

Damages and penalty-for-breach clauses are commonly found in commercial contracts, but errors relating to these clauses frequently occur. The two principal issues are as follows:

Confusing damages with the penalty for breach.
Setting an amount that exceeds the framework and principles established under current Vietnamese law.

The distinction between damages and the penalty for breach:
Both are forms of legal liability that apply upon a breach of contract, and both are intended to protect the legitimate rights and interests of the aggrieved party. However, they are independent regimes governed by different principles and methods of application.

Damages: compensation intended to restore the loss suffered, or the benefit that should have been enjoyed, by the aggrieved party. This applies even where not expressly stated in the contract.
Penalty for breach: a system requiring the breaching party to pay a fine upon breach of contract, applicable only where expressly agreed in advance in the contract.

Points to note regarding damages:
In international commercial contracts, particularly those involving Western contracting parties, a "liquidated damages" provision is sometimes included. For example, a clause might provide that if the quality of goods fails to meet the contractual standard, the seller must pay the buyer a fixed amount (e.g., ZZZ) or three times the value of the goods. However, under current Vietnamese law, the amount of damages is calculated based on actual direct loss. Accordingly, where a contract includes a liquidated damages clause, there is a high likelihood that it will not be upheld if contested in court, making its practical application difficult.

Points to note regarding the penalty for breach:
Under Vietnamese law, the cap on the penalty for breach is set at "8% of the value of the breached portion of the contract." However, it is common to confuse the value of the entire contract with the value of the breached portion. For example, in a contract providing for delivery of goods in multiple installments, if the final lot is delivered late, the penalty the buyer may claim is limited to 8% of the value of that delayed final lot — not 8% of the value of the entire contract. If a penalty exceeding this cap is stipulated, there is a high risk that, if contested in court, it will not be upheld and the statutory cap will instead be applied.

Practical recommendations:

Clearly understand the distinction between damages and the penalty for breach, and reflect it appropriately in the contract clauses.
Draft clauses that do not exceed the caps established under the Vietnamese legal framework.
For international contracts, carefully consider the practical enforceability of any liquidated damages provision.

Designing contract clauses and managing risk are indispensable elements of successful commercial contracting. By applying the approaches presented in this article, companies can minimize the risks involved in doing business in Vietnam and help prevent disputes from arising. In particular, Japanese companies can be expected to enhance the stability and competitiveness of their business by properly structuring and carefully reviewing their contracts.