Maximum Penalty for Breach of Contract Allowed by Agreement (Latest)

Duy Thinh

09:04, 11/07/2024

Depending on the type of contract concluded by the parties, the maximum penalty for breach of contract that may be agreed upon will vary. In cases where the agreed penalty exceeds the permissible limit, the excess portion will be deemed invalid. Therefore, the parties need to pay attention to the specific penalty amounts for each type of contract as follows.

1. Civil Contracts

Clause 2 Article 418 Civil Code 2015 stipulates that the penalty for breach of contract is agreed upon by the parties involved, except where otherwise provided by law.

In a civil contract, if there is an agreement on the penalty for breach of contract, the penalty will be agreed upon based on the will of the parties and there is no maximum limit.

2. Commercial Contracts

The penalty for breach of contract in a commercial contract is also freely agreed upon by the parties, but unlike civil contracts, the penalty for breach of a commercial contract must not exceed 8% of the value of the breached contractual obligation (except as stipulated in Article 266 of the Commercial Law 2005).

The above content is based on Article 301 Commercial Law 2005.

3. Construction Contracts

In the field of construction, Article 146 Construction Law 2014 stipulates that for construction works using State capital, the penalty must not exceed 12% of the value of the breached contract.

In addition, based on Clause 4 Article 16 Decree 37/2015/ND-CP to ensure the performance of the contract, the parties may agree on a performance guarantee ranging from 2% to 10% of the construction contract value; in cases of high-risk prevention, the value of the performance guarantee may be higher but must not exceed 30% of the contract value and must be approved by the person with investment decision authority.

4. Bidding Contracts

For bidding contracts with contractors, the value of the performance guarantee is specified in the bidding documents, as determined between 2% to 10% of the bidding price.

The value of the performance guarantee for investors is determined from 1% to 3% of the total project investment. In cases where the contractor or investor breaches the contract, the performance guarantee mentioned above will not be refunded.

The above content is based on Clause 3 Article 66 and Clause 2 Article 72 Bidding Law 2013.

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