Penalty clauses and compensation for damages are two common contractual remedies under Vietnamese contract law. However, the concurrent application of these remedies remains subject to differences between civil law and commercial law. This article analyzes the legal basis and legal nature of each remedy, clarifies the possibility of their concurrent application under current law, and proposes several recommendations for improving the legal framework.

1. Introduction

In the context of increasingly diverse contractual relationships, ensuring the performance of contractual obligations has become an essential requirement. Current Vietnamese law provides various remedies for breaches of contractual obligations, among which contractual penalties and compensation for damages are the most commonly applied.

However, a controversial legal issue remains: whether these two remedies may be applied simultaneously. This question is not only theoretically significant but also of substantial practical importance in the process of contract formation and performance.

2. Legal Basis for Contractual Penalties and Compensation for Damages

2.1. Provisions of the Civil Code 2015

Clause 3, Article 418 of the Civil Code 2015 provides:

“The parties may agree that the breaching party shall only be subject to a contractual penalty or shall be subject to both a contractual penalty and compensation for damages.”

This provision is generally interpreted as follows:

• where the agreement only contains a penalty clause → only contractual penalties may be applied;
• if the parties intend to apply both contractual penalties and compensation for damages concurrently → such concurrent application must be expressly agreed upon.

Accordingly, civil law emphasizes the principle of contractual freedom and party autonomy.

2.2. Provisions of the Commercial Law 2005

Article 307 of the Commercial Law 2005 provides:

“Where there is an agreement on contractual penalties, the aggrieved party shall have the right to apply both contractual penalties and compensation for damages.”

In addition:

• compensation for damages arises only where sufficient legal grounds exist (breach, actual damages, and causal relationship);
• contractual penalties arise only when agreed upon by the parties.

Unlike the Civil Code, the Commercial Law permits the concurrent application of both remedies without requiring a separate agreement specifically authorizing simultaneous application.

3. Legal Nature of the Two Remedies

3.1. Contractual Penalties

A contractual penalty is a monetary amount agreed upon in advance by the parties, payable by the breaching party in the event of non-performance or improper performance of contractual obligations.

Its characteristics include:

• contractual and consensual nature;
• independence from actual damages;
• deterrent and preventive functions against contractual breaches.

3.2. Compensation for Damages

Compensation for damages is a legal liability mechanism intended to remedy losses caused by contractual breaches.

Conditions for liability include:

• existence of a contractual breach;
• occurrence of actual damages;
• causal relationship between the breach and the damages suffered.

This remedy is compensatory in nature and aims to restore actual losses.

3.3. Differences in Legal Nature

The two remedies differ substantially in legal nature:

Criteria	Contractual Penalty	Compensation for Damages
Legal basis	Agreement of the parties	Statutory provisions
Conditions for application	Existence of agreement	Existence of actual damages
Legal nature	Punitive	Compensatory

These distinctions constitute the basis for considering whether the two remedies may be concurrently applied.

4. Possibility of Concurrent Application of the Two Remedies

4.1. In Civil Relationships

Under the Civil Code 2015:

• contractual penalties and compensation for damages may be applied concurrently;
• however, a mandatory condition is the existence of an explicit agreement permitting simultaneous application.

Without such agreement, the aggrieved party is not entitled to request both remedies concurrently.

4.2. In Commercial Relationships

Under the Commercial Law 2005:

• concurrent application of both remedies is permitted;
• no separate agreement authorizing simultaneous application is required.

It is sufficient that:

• the contract contains a penalty clause; and
• the legal conditions for compensation for damages are satisfied.

4.3. Observations on the Differences

The divergence between these legal instruments reflects two different legislative approaches:

• the Civil Code prioritizes respect for party autonomy and contractual freedom;
• the Commercial Law provides stronger protection for the aggrieved party.

This inconsistency creates practical difficulties when determining which legal regime governs a particular contractual relationship.

5. Evaluation and Recommendations for Legal Improvement

5.1. Evaluation

Current regulations possess several advantages:

• clear distinction between the two remedies;
• flexibility in contractual negotiations;
• consistency with the principle of freedom of contract.

However, certain limitations remain:

• lack of consistency among legal instruments;
• potential disadvantages for aggrieved parties in civil relationships;
• increased risk of disputes in judicial practice.

5.2. Recommendations

In order to improve the legal framework, it is necessary to:

• harmonize regulations toward permitting concurrent application of both remedies;
• avoid making concurrent application entirely dependent on party agreement;
• ensure the following principles:
  • contractual penalties → based on party agreement;
  • compensation for damages → based on actual losses suffered.

Such reforms would enhance the effectiveness of protecting the lawful rights and interests of contracting parties.

6. Conclusion

Contractual penalties and compensation for damages are two remedies with distinct legal characteristics, yet they may complement one another in addressing contractual breaches. Current Vietnamese law permits the concurrent application of these remedies; however, differences remain between civil and commercial law regimes.

Therefore, when entering into contracts, parties should pay particular attention to drafting clear contractual provisions in order to avoid legal risks. At the same time, there is a continuing need to improve and unify the legal system toward greater consistency and transparency.

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Khuong Ngoc Lan