Main considerations regarding payment clauses in business contracts

In any business contract, the payment clause is always one of the most critical provisions, as it directly regulates the financial rights and obligations of the parties. Clearly and precisely stipulating the payment method, duration, currency, and conditions for deferred or advance payment not only helps minimize dispute risks but also ensures transparency and fairness throughout contract execution. Therefore, when drafting and executing a business contract, the parties must pay special attention to the core elements of the payment clause in order to safeguard their lawful interests. The following article by NPLaw will provide readers with legal regulations on the payment clause in business contracts. 

I. Importance of the payment clause in business contracts

In commercial activities, business contracts establish the legal binding between the parties. Among their provisions, the payment clause plays a particularly vital role as it directly determines financial benefits and the feasibility of contract execution. 

• First, it ensures the financial rights and obligations of the parties. The payment clause clearly specifies the amount, method, duration, and conditions of payment, thereby enabling the parties to accurately determine their entitlements and obligations.
• Second, it limits dispute risks. Many contractual disputes arise from vague or insufficient payment provisions. When drafted clearly and comprehensively, the payment clause serves as a solid legal ground for resolving disputes in a case of a breach.
• Third, it enhances transparency and trust in the cooperative relationship. The contract with a clear payment clause demonstrates professionalism and good faith, thereby strengthening mutual trust and promoting long-term business cooperation.
• Fourth, it protects lawful interests when risks occur. In cases where the paying party breaches its obligations, provisions on sanctions for breach, late payment interest, or security for payment obligations constitute the legal grounds for the affected party to claim damages or initiate legal proceedings.

Accordingly, the payment clause is not merely a procedural provision but a core element determining the effectiveness, safety, and fairness of a business contract.

II. Legal regulations governing payment clauses in business contracts

1. What is a payment clause in a business contract?

A payment clause is a contractual provision specifying the method, duration, currency, and conditions for execution of payment obligations between the parties. It serves as the legal ground for determining financial rights and obligations as well as handling contractual breaches.

2. What must be included in the payment clause to ensure legal validity?

The Commercial Law 2005 provides for payment obligations as follows:

Payment obligation (Article 50)

• The buyer is obliged to pay the purchase price and receive the goods as agreed.
• The buyer must comply with agreed payment methods and procedures and with applicable laws.
• The buyer remains obligated to pay even if goods are lost or damaged after the risk has passed from the seller to the buyer, except where such loss or damage is caused by the seller’s fault.

Suspension of payment (Article 51): Unless otherwise agreed, payment may be suspended in the following cases:

• The buyer has evidence that the seller has committed fraud;
• The buyer has evidence that the goods are subject to a dispute, in which case payment may be suspended until the dispute is resolved;
• The buyer has evidence that the seller delivered non-conforming goods, in which case payment may be suspended until such non-conformity is remedied.
• If payment is suspended under the above grounds based on unsubstantiated evidence causing damage to the seller, the buyer must compensate for such damage and take other sanctions as prescribed by law.

Place of payment (Article 54): In the absence of a specific agreement, payment shall be made at:

• The seller’s place of business at the time of contract formation, or the seller’s residence if no business location exists; or
• The place of delivery of goods or documents, where payment is made concurrently with delivery.

Term of payment (Article 55): Unless otherwise agreed:

• The buyer must pay upon delivery of goods or related documents;
• The buyer is not obliged to pay until completion of goods inspection where inspection is agreed according to Article 44 of the Law.

To ensure legal validity, the payment clause typically includes:

• Contract value or unit price of goods/services;
• Payment method (bank transfer, cash, L/C, etc.);
• Payment currency and applicable exchange rate (if foreign currency is involved);
• Payment schedule and deadlines;
• Conditions for advance or deferred payment;
• Payment security measures (if necessary);
• Provisions on sanctions for breach and late payment interest.

3. Main considerations when drafting payment clauses in international business contracts

When drafting payment clauses in international business contracts, in addition to Vietnamese law, the parties must comply with international practices and regulations, including:

• Determination of payment currency and exchange rate fluctuation clauses;
• Selection of secure international payment methods (e.g., L/C, T/T);
• Clear allocation of bank charges;
• Compliance with Vietnamese foreign exchange and cross-border remittance regulations;
• Agreement on dispute resolution mechanisms (international arbitration, international commercial courts, etc.).

III. Questions regarding payment clauses in business contracts

1. If the payment clause is unclear, which party takes responsibility for dispute resolution?

Clause 1 Article 404 of the Civil Code 2015 provides that where contractual provisions are unclear, interpretation must be based not only on the wording but also on the parties’ intent as reflected throughout the pre-contractual stage, contract formation and execution.

Accordingly, unclear payment clauses must be interpreted based on the common intent of the parties. If consensus cannot be reached, the competent court or commercial arbitration body will resolve the dispute. In such cases, both parties take responsibility for failing to stipulate clear terms.

2. How should payment clauses address exchange rate fluctuations to minimize risk?

The parties may agree on an “exchange rate adjustment” clause or select a stable payment currency such as USD or EUR. They may also specify that the exchange rate applicable at the time of payment shall be based on the announcement of a designated bank, thereby minimizing disputes arising from significant fluctuations.

3. May payment clauses be amended after contract execution?

The parties may amend or supplement the contract by mutual agreement according to Clause 2 Article 401 of the Civil Code 2015, or execute a contract appendix to specify certain terms in detail according to Clause 1 Article 403 of the Civil Code 2015. A contract appendix has the same legal effect as the contract, provided that its contents do not contradict the contract.

4. If the Parties cannot agree on the payment method, may the clause state “to be agreed later”?

Payment clauses should not state “to be agreed later”. Such wording may render the contract partially invalid or impracticable. All provisions concerning financial rights and obligations must be clearly defined at the time of execution.

5. May the payment clause bind a third party to provide payment guarantee?

The parties may agree that a third party (such as a bank or parent company) provides a payment guarantee. Such guarantee must be made in writing and comply with the provisions of the Civil Code 2015 on security for execution of obligations (Subsection 6, Section 3, Chapter XV).

IV. Legal consulting services related to payment clauses in business contracts

To minimize risks and protect their interests, enterprises may seek professional legal consulting services, including:

• Drafting and reviewing payment clauses in compliance with law;
• Advising on appropriate payment methods for domestic and international transactions;
• Supporting negotiation of payment terms to balance parties’ interests;
• Representing clients in resolving disputes related to payment obligations;
• Advising on guarantees, escrow arrangements, or other secure payment mechanisms.

Should you require further consultation regarding payment clauses in business contracts, please contact NPLaw for direct advice and comprehensive guidance from our legal team.