Legal consultation on failure to pay contractual fines under commercial contracts

One of the most common sanctions in commercial contracts is the contractual fine for breach. In the article below, NPLaw analyzes the applicable legal regulations and provides effective legal consultation solutions in cases of failure to pay contractual fines under commercial contracts.

I. The impact of failure to pay contractual fines in the current context

In the context of an increasingly competitive market economy, commercial contracts have become essential legal instruments to ensure transparency, fairness, and stability in business relationships. However, in practice, there are many cases where the breaching party fails to fulfill its obligation to pay contractual fines as agreed, resulting in significant consequences:

For the non-breaching enterprise

• Causing financial losses, as contractual fines are intended to partially compensate for damages arising from the breach.
• Adversely affecting cash flow and business plans, particularly in high-value or long-term contracts.
• Undermining trust in commercial relationships, making enterprises hesitant to continue cooperation with unreliable partners.

For the business market 

• Failure to pay contractual fines may lead to an increase in contractual disputes, placing greater pressure on judicial bodies (courts and commercial arbitration).
• Negatively affecting contractual transparency and discipline in commercial activities, thereby creating instability in the business environment.
• Reducing investor confidence, especially in the context of Viet Nam’s deep integration into international trade agreements.

For the breaching party

• Failure to pay contractual fines may expose the breaching party to litigation risks and enforcement measures, resulting in legal costs and reputational damage.
• Adversely impacting corporate image and market competitiveness, as partners and customers may be reluctant to enter into future contracts.

II. What is failure to pay contractual fines?

1. Concept of failure to pay contractual fines 

Pursuant to Article 300 of the Law on Commerce 2005, a contractual fine is a sum of money payable by the breaching party to the non-breaching party as agreed in the contract in a case of a breach, except for cases of exemption from liability.

Accordingly, failure to pay contractual fines refers to an act whereby a party to a commercial contract (or a civil contract with business elements) fails to fulfill its obligation to pay the agreed fine amount, despite the occurrence of grounds for the application of the sanction.

It constitutes a breach of a financial obligation under the contract and directly affects the lawful rights and interests of the non-breaching party.

2. Does failure to pay contractual fines constitute a breach of contract?

Under Article 300 of the Law on Commerce 2005, the sanction of contractual fines is legally binding once agreed upon by the parties in the contract. Therefore, failure to pay contractual fines constitutes a breach of contractual obligations.

In essence, it represents a dual breach:

• A breach of the primary contractual obligation (resulting in fines); and
• A breach of the obligation to pay the agreed fines (failure to comply with the sanction).

III. Legal regulations related to failure to pay contractual fines 

1. Relevant regulations on payment of contractual fines 

Relevant legal provisions include:

• Article 300 of the Law on Commerce 2005: A contractual fine is the amount payable by the breaching party to the non-breaching party as agreed in the contract upon failure to execute or improper execution of contractual obligations.
• Article 301 of the Law on Commerce 2005: The fine level shall be agreed upon by the parties but shall not exceed 8% of the value of the breached contractual obligation.
• Articles 351 and 357 of the Civil Code 2015: Failure to properly execute payment obligations constitutes a breach; the late-paying party must pay interest on the late payment calculated based on the basic interest rate announced by the State Bank of Viet Nam corresponding to the delay period.

2. What is the dispute resolution process in cases of failure to pay contractual fines?

Depending on the contractual agreement, the parties may choose one of the following dispute resolution methods:

Negotiation and mediation

• The parties may directly negotiate to adjust payment obligations or agree on alternative offsetting solutions.
• Such a method helps save time and costs while preserving business relationships.

Commercial arbitration (if an arbitration agreement exists)

• Pursuant to Articles 6 and 30 of the Law on Commercial Arbitration 2010, the parties have the right to submit disputes to arbitration.
• Arbitral awards are final and not subject to appeal.

People’s Court

• In the absence of a valid arbitration agreement, the parties may initiate legal proceedings before the Court in accordance with the Civil Procedure Code 2015.
• The Court will examine the contract, the agreed fine amount, and the breach grounds, and issue a judgment compelling the breaching party to pay the fine along with late payment interest (if any).

3. What legal consequences arise from failure to pay contractual fines?

The breaching party may take the following legal consequences:

• Compulsory execution of payment obligations: The Court or Arbitral Tribunal may issue a decision compelling payment of the agreed fine.
• Late payment interest: Under Article 357 of the Civil Code 2015, interest accrues until full payment is made.
• Compensation for damages (if any): In addition to fines, if the failure to pay causes further damage, the breaching party must compensate for such damages (Article 302 of the Law on Commerce 2005).
• Reputational and business relationship damage: Failure to pay fines may undermine credibility and future cooperation opportunities.
• Risk of enforcement measures: If the breaching party deliberately fails to comply with court judgments or arbitral awards, its assets may be seized or subject to compulsory enforcement. 

IV. Questions regarding failure to pay contractual fines

1. What is the statute of limitations for initiating disputes related to failure to pay contractual fines?

Pursuant to Article 319 of the Law on Commerce 2005, the statute of limitations for initiating commercial disputes is two (02) years from the date on which lawful rights and interests are infringed. For ordinary civil contracts, under Article 429 of the Civil Code 2015, the statute of limitations is three (03) years from the date the entitled person knew or should have known of the infringement.

Accordingly, the applicable limitation period is two (02) years for commercial contracts and three (03) years for civil contracts.

2. If the contract does not clearly stipulate, which law applies to failure to pay contractual fines?

In such cases, the applicable law shall be determined as follows:

• For commercial contracts: The Law on Commerce 2005.
• For civil contracts (non-profit purposes or where one party is not a trader): The Civil Code 2015.
• For contracts involving labor, construction, investment, financial services, etc., specialized laws shall prevail first, followed by the Civil Code where applicable.

3. What evidence is required to initiate a claim for failure to pay contractual fines?

To substantiate claims before the Court or Arbitration, the claimant should prepare:

• The contract (original or notarized copy) containing the fine clause.
• Breach records, breach notices, emails, and correspondence between the parties.
• Financial documents include invoices, delivery notes, payment records, bank statements, etc.
• Written payment demands that were rejected or ignored by the other party.
• Documents evidencing actual damages incurred (if any).

4. In international disputes, which law applies to failure to pay contractual fines?

In international disputes, the applicable law is determined as follows:

• If the contract contains a governing law clause, the law chosen by the parties shall apply (Article 683 of the Civil Code 2015).
• In the absence of such agreement, the applicable law may be determined based on:
  + The law of the country where the contract is performed;
  + International law or treaties to which Viet Nam is a party (e.g., the 1980 Vienna Convention on Contracts for the International Sale of Goods – CISG).
• Where disputes are resolved by international arbitration (ICC, SIAC, VIAC, etc.), parties often choose international law or the commercial law of a neutral jurisdiction.

5. Does failure to pay contractual fines result in additional compensation obligations?

Under Article 302 of the Law on Commerce 2005, the breaching party, in addition to paying fines, must compensate the non-breaching party for the entire actual damage incurred, if any. Accordingly, failure to pay contractual fines may result not only in fine liability but also in additional compensation obligations if such failure causes further losses.

V. Are you looking for a reputable law firm to consult on failure to pay contractual fines?

Disputes related to failure to pay contractual fines are often complex because they:

• Involve both contractual agreements and specialized legal regulations;
• May lead to additional compensation obligations;
• Frequently entail arbitration, court proceedings, or enforcement procedures.

To safeguard your lawful rights and interests, you should seek assistance from a reputable law firm to:

• Receive legal strategy consultation from the outset;
• Obtain support in drafting documents, collecting evidence, and preparing litigation dossiers;
• Be represented in court or arbitration proceedings;
• Receive assistance with enforcement if the breaching party deliberately fails to execute its obligations.

Should you require consultation on failure to pay contractual fines, please contact NPLaw for direct legal advice and guidance from our professional team.