Preventing Breach of Contract: 9 Practical Points for International Sale and Purchase Contracts Between Vietnamese and Japanese Companies

This article systematically explains the practical issues involved in international sale of goods contracts between Japan and Vietnam. It covers typical disputes and preventive measures, due diligence on counterparties' creditworthiness, an overview of the CISG and governing law, practical aspects of contract form and electronic signatures, quality clauses (inspection, AQL, third-party inspection, latent defects), payment and foreign exchange controls (exchange rates, letters of credit, deferred payment), customs, certificates of origin, and Foreign Contractor Tax compliance, trade remedy measures and change-of-law clauses, and dispute resolution (arbitration). NEXORA Law Firm, with offices in Hanoi, Da Nang, and Ho Chi Minh City, has supported numerous international sale of goods contracts between Japanese and Vietnamese companies — from drafting and reviewing contracts, through negotiation, to arbitration and litigation. Drawing on knowledge accumulated through hands-on practice, we offer concrete, practical solutions: contract designs with strong evidentiary value, risk allocation that accounts for quality, customs, certificates of origin, and Foreign Contractor Tax, optimized payment terms that comply with foreign exchange regulations, and swift dispute resolution through arbitration clauses.

In today's era of ever-expanding international trade, international sale of goods contracts — transactions between merchants located in different countries — have become more active than ever. Nevertheless, a fair number of sellers and buyers fail to fully appreciate the importance of the contract, either relying solely on a relationship of trust or prioritizing cost savings in the drafting and execution of contract documents. As a result, when a breach of contract occurs, many find themselves facing serious risk and loss in dealing with the aftermath and resolving the resulting dispute.

Our firm, NEXORA Law Firm (a Vietnamese law firm with offices in Hanoi, Da Nang, and Ho Chi Minh City), has supported the drafting and review of several hundred international sale of goods contracts covering a wide range of products traded between Japan and Vietnam. We have also represented and supported clients in numerous negotiations, arbitrations, and court proceedings arising from disputes connected with these contracts.

Drawing on our extensive practical experience, this article explains the key practical points to bear in mind when concluding an international sale of goods contract between a Japanese company and a Vietnamese company. We hope that this practical perspective will help, even in a small way, to reduce the risks involved in your dealings with Vietnamese companies.

01 - Typical Dispute Scenarios in International Sale of Goods Contracts

Type of dispute

Content

Breach of the seller's delivery obligations

Cases in which the seller delivers goods that do not conform to the contract terms, delivers a short quantity, delays delivery, or fails to attach the required documentation — in each case breaching its contractual delivery obligations.

Breach of the seller's warranty obligations

Cases in which the seller fails to perform its warranty obligations with respect to the goods after delivery.

Quality defects and latent defects in the goods

Cases in which a defect not discovered during the inspection period upon receipt manifests during use, and the seller refuses to honor the warranty, provide a replacement, or pay damages.

Breach of the buyer's payment obligations

Cases in which the buyer fails to pay the price, pays a short amount, or delays payment

Disagreement over the scope of damages

Cases in which, even where a breach is acknowledged, the parties cannot agree on the scope or amount of damages or penalty because the contract contains no clear provision on the matter.

Disputes over the timing of transfer of title

Cases in which goods are lost or damaged in transit and, because the contract does not specify when title transfers, it cannot be determined which party should bear the risk.

02 - The Importance of Conducting Due Diligence on Counterparties' Creditworthiness

Whether acting as seller or buyer, conducting due diligence on a counterparty's creditworthiness is extremely important. To minimize contractual risk, our firm recommends scoring (evaluating) counterparties from the following perspectives:

Confirming legal status: verifying that the counterparty has legal personality and is a legally valid business entity.
Understanding its financial condition: reviewing financial statements and audit reports, among other materials, to assess capital strength, profitability, and debt levels.
Checking its history of breach: investigating, through past business partners and industry contacts, whether the counterparty has a history of breach of contract or default.
Assessing operational capability and experience: confirming the counterparty's ability to fulfill orders, its production capacity, and its track record in the industry, in order to assess its likely ability to perform the contract.

Conducting this kind of due diligence in advance can substantially reduce the likelihood of trouble arising during contract performance and improve the overall safety of the transaction.

03 - Confirming the Legal Framework Applicable to International Sale of Goods Contracts

Because both Vietnam and Japan are contracting states to the United Nations Convention on Contracts for the International Sale of Goods (CISG), the CISG applies, in principle, to sale of goods contracts between Japanese and Vietnamese parties.
That said, the parties may exclude the application of the CISG, in whole or in part, through a contractual provision. It is therefore important to reach a clear agreement on the scope of application of the CISG at the time of contracting.

In addition to the CISG, the domestic law at the place of performance also has a bearing on the contract. Accordingly, it is necessary to confirm in advance that the contract terms do not conflict with the mandatory rules or fundamental principles of the counterparty's home jurisdiction. In particular, verifying that the contract clauses do not violate the counterparty country's commercial law, civil law, or consumer protection law, among others, is directly linked to avoiding future disputes.

04 - Contract Form and the Use of Electronic Signatures

An international sale of goods contract need not necessarily be in writing; it may also be formed through an oral agreement.
However, if a dispute arises, oral promises and agreements are easily denied by the other party and are difficult to prove as evidence. Our firm therefore strongly recommends always concluding contracts in writing.
In addition, Vietnamese law recognizes electronic signatures as a valid method of signing. This makes it possible to conclude a contract remotely, using an electronic contracting system, without a physical signature or seal. For a detailed discussion of the legal effect of electronic signatures and points to note in their operational use, please refer to the article below.

The 2023 Amended Law on Electronic Transactions of Vietnam: A Practical Guide to the Legal Effect of PDF Contracts and Electronic Signatures

Making appropriate use of electronic contracts and electronic signatures allows a company to simultaneously speed up contract execution, reduce costs, and secure strong evidentiary value. This is particularly beneficial in international transactions, where it minimizes the impact of physical distance and time-zone differences and streamlines contract practice.

05 - Clarifying Quality-Related Provisions

In international sale of goods contracts, quality-related disputes arise extremely frequently. It is therefore important to set out the following matters in detail in the contract, or to reference clear specifications and standards:

Clear identification of the goods: describing the subject goods, model, quantity, specifications, and grade specifically, to eliminate ambiguity.
Pre-delivery calibration and quality inspection: where calibration or quality testing is required prior to delivery, specifying the method, the party responsible, and the allocation of costs in the contract.
Confirming Vietnam's import regulations in advance: for certain categories of goods, technical conformity certification (the CR mark) or a conformity assessment is required before the goods may be distributed within Vietnam. These procedures should be confirmed and completed in advance to avoid disrupting the import plan.
Obtaining quality certificates: requiring the seller to provide all certificates and inspection reports relating to the quality of the goods.
Clarifying inspection methods and standards: specifying in the contract the pre-shipment inspection, inspection at the Vietnamese port, AQL standards, and the applicable reference standards (ASTM/ISO/EN, etc.), and identifying supporting evidence such as a Certificate of Conformity (COC) or a third-party inspection report (SGS/BV/Intertek, etc.).
Addressing latent defects: providing separately for defects that cannot be discovered through visual inspection, and setting a claim period for such defects distinct from the general warranty period. The contract should also specify the sampling method, the appraisal procedure, and the allocation of costs for re-appraisal where the results differ from the initial inspection.

Clarifying quality-related provisions at the contract stage in this way is the most effective means of preventing disputes. In particular, when a Japanese company transacts with a Vietnamese company, it is desirable to take into account both international standards and Vietnamese domestic standards, and to build a practical inspection regime accordingly.

06 - Payment Terms and Compliance with Foreign Exchange Controls

In import/export transactions with Vietnamese companies, strict compliance with foreign exchange control regulations is required. The following matters should be clarified at the time of contracting:

Obligation to remit through a bank: under Vietnamese law, all payments relating to import/export transactions must be made by remittance through a bank licensed in Vietnam (subject to very limited exceptions). Cash settlement, or settlement outside the banking system, risks violating foreign exchange regulations.
Payment currency and exchange rate: while the contract may specify payment in a foreign currency (USD, JPY, etc.), actual execution in Vietnam must comply with foreign exchange control regulations. We recommend specifying in the contract the exchange rate conversion method, the applicable date, and the allocation of bank fees.
Trade finance, letters of credit, and deferred payment: as of July 2024, the regulations governing foreign borrowing in connection with import contracts and letter of credit (L/C) settlement have changed. For payment of import proceeds through overseas borrowing, or for the opening and use of an L/C, it is necessary to confirm the latest foreign exchange control rules and to reliably complete any required filings and approvals.

Securing the legality of international remittances and compliance with foreign exchange controls from the contracting stage in this way is directly linked to preventing payment disputes and legal violations. When a Japanese company transacts with a Vietnamese company, clarifying the banking route and prioritizing compliance with foreign currency regulations should be treated as a top priority.

07 - Managing Tax, Customs, and Import Documentation

In import transactions into Vietnam, accurately handling customs procedures, tax obligations, and document management is essential to avoiding import tax risk and preventing customs clearance delays. We recommend clarifying the following matters from the contracting stage:

Customs declaration and declared invoice value
Under Vietnamese customs law, import-related documents — the sales contract, invoice, packing list, bill of lading (B/L), and certificate of origin (C/O) — must consistently state the same item description, specifications, and quantity. Inconsistencies among these documents may result in adjustments to the assessed duty, customs clearance delays, or the risk of penalties.
Compliance with C/O and rules of origin
Obtaining and submitting a certificate of origin (C/O) is essential to receiving preferential tariff treatment under a free trade agreement (FTA). Because the conditions for issuing a C/O and the applicable rules of origin are strictly applied under each FTA and Vietnamese domestic law, it is important to confirm the conditions in advance and to obtain and manage the C/O properly.
Handling Foreign Contractor Tax (FCT)
Where a foreign company performs a contract in Vietnam, it may be subject to Foreign Contractor Tax (FCT). Before concluding the contract, the parties should consult a tax advisor or attorney to clarify whether FCT applies, the applicable rate, which party bears the tax liability (seller or buyer), and the procedures for declaration and payment.

By clearly stating these tax, customs, and import documentation arrangements in the contract and rigorously implementing them in practice, companies can expect to reduce tax risk, optimize import costs, and streamline customs clearance.

08 - Responding to Trade Remedy Measures and Policy Risk

In international transaction contracts, changes in the policy of the exporting or importing country, or the application of trade remedy measures, can significantly affect contract performance. It is therefore important to build clear policy-risk and trade-remedy clauses into the contract to prepare for future uncertainty.

The contract clause should ideally permit the following measures:

Adjustment of the contract price
Extension of the delivery date
Modification of the transaction terms
Termination of the contract without penalty or damages

This ensures a mechanism that allows the contracting parties to respond flexibly even where a change in law or policy affects the terms of the transaction.

Sample contract clause

Article X (Changes in Law and Trade Remedy Measures)
If, after the date of this Contract, a change in law, regulation, policy, tax, or fee in Vietnam or the exporting country, or a trade remedy measure (including but not limited to anti-dumping duties, countervailing duties, or safeguard measures) is applied, and as a result the cost of performing this Contract increases by [X]% or more, or the delivery date is delayed by [Y] days or more, the parties shall promptly consult and adjust the price, terms, and delivery deadline.
If the parties fail to reach agreement within [Z] days of commencing such consultation, either party may terminate this Contract by written notice without penalty or damages, provided that obligations arising prior to the date of termination shall not be discharged.

Including a clause of this kind makes it possible to minimize contractual risk arising from policy changes such as the imposition of anti-dumping measures, the triggering of safeguards, or revisions to import/export tariff rates.

09 - Governing Law and Dispute Resolution Clauses

The governing law and the dispute resolution body for an international sale of goods contract may be freely agreed between the parties. The governing law may be that of the seller's country, the buyer's country, or a third country.

As for the dispute resolution body, the parties may choose either a court or an arbitral institution. However, enforcing a foreign court's judgment within Vietnam requires an applicable international treaty or a principle of mutual recognition. Accordingly, where the place of enforcement of the judgment will be Vietnam, it is generally advisable to avoid designating a foreign court as the dispute resolution body.

Furthermore, given the relative expertise and practical experience of courts in handling international transactions, arbitration is generally recommended as the dispute resolution mechanism. Arbitration offers advantages such as procedural flexibility, adjudication by highly specialized arbitrators, and ease of recognition and enforcement of international arbitral awards (under instruments such as the New York Convention).