Dispute Resolution and Liquidated Damages under Article 86 of Vietnam’s Construction Law 2025: Alignment with International Practice

Introduction

Cross-border financing face not only technical and operational risks but also heightened legal risks. Delays, breaches of contractual obligations, and consequential economic losses frequently give rise to disputes that are costly, time-consuming, and disruptive to project delivery.

Against this backdrop, construction legislation must strike a careful balance: it should deter contractual non-performance while providing effective, predictable, and internationally acceptable mechanisms for dispute resolution. Vietnam’s Construction Law No. 135/2025/QH15 (“Construction Law 2025“), which takes effect from 1 July 2026 (with certain provisions already in operation from 1 January 2026), represents a significant step in this direction.

Article 86 of the Construction Law 2025 (“Article 86“) is particularly noteworthy. It simultaneously recognises:

1. dispute resolution mechanisms aligned with international practice; and
2. the parties’ autonomy to agree on contractual penalties, rewards, and compensation for damages.

Together, these elements provide a legal framework within which liquidated damages (“LD“) type clauses may be contractually structured in construction contracts in Vietnam.

Article 86 – General Legal Framework

Article 86 regulates the following three core aspects of construction contracts:

1. contractual rewards and penalties;
2. compensation for damages; and
3. dispute resolution.

At its core, Article 86 affirms the principle of party autonomy. The law expressly allows parties to agree in their construction contracts on the following:

1. level of penalties and rewards;
2. method and amount of compensation for damages; and
3. means by which disputes are to be resolved.

In relation to dispute resolution, Article 86 expressly recognises negotiation, mediation, arbitration, court proceedings, and dispute resolution models based on international practice. This formulation appears to move away from a closed-list approach and opens the door to modern mechanisms commonly used in international construction projects.

It is worth noting that earlier drafting versions of Article 86 reportedly contemplated a sequential dispute resolution mechanism. However, during the legislative process, the National Assembly ultimately removed any mandatory ordering and retained only an enumeration of available dispute resolution methods. This approach underscores the legislature’s preference for preserving party autonomy in construction contracts and aligning Vietnamese law with international construction dispute resolution practice, where escalation mechanisms are typically a matter of contractual design rather than statutory mandate.

By recognising contractual freedom in both remedies and dispute resolution, Article 86 provides the legal “space” necessary for sophisticated contractual tools, including LD.

LD in International Practice

Concept and Legal Nature

LD refer to a sum agreed by the parties in advance, payable upon the occurrence of a specified breach, most commonly delay in completion. In international practice, LD clauses typically have the following characteristics:

1. They are agreed upon prior to contract execution;
2. They represent a reasonable pre-estimate of foreseeable loss; and
3. They apply without requiring the non-breaching party to prove actual damages.

In standard international construction contracts, including Fédération Internationale des Ingénieurs-Conseils (“FIDIC“) forms, LD are not treated as punitive sanctions. Instead, they function as a risk allocation mechanism, enhancing certainty and predictability for both parties.

Distinction between LD and Penalties

From a conceptual standpoint, LD must be distinguished from penalties.

1. LD aim to compensate for anticipated loss.
2. Penalties are primarily sanction-based and may bear no direct relationship to actual damage.

This distinction is fundamental in international dispute resolution, where LD clauses are widely upheld, while purely punitive clauses may be scrutinised or restricted. The ability to characterise LD as compensatory rather than punitive measures is therefore central to their enforceability.

Legal Basis for LD under Article 86

Although the Construction Law 2025 does not expressly use the term “Liquidated Damages”, Article 86 can be read as providing a workable legal framework to accommodate LD-type clauses in construction contracts.

Specifically, Article 86 allows parties to agree on compensation for damages, including compensation determined in advance in the contract. This wording supports the concept of pre-agreed damages tied to specific breaches and degrees of non-performance.

For public investment projects and public-private partnership (PPP) projects, Article 86 imposes a statutory cap on contractual penalties. However, the law continues to recognise compensation for damages as a distinct contractual remedy. Provided that pre-agreed damages are reasonable, transparent, and not contrary to mandatory provisions of Vietnamese law, LD clauses can be structured as an agreed form of damage compensation rather than as penalties.

Importantly, the express recognition of dispute resolution mechanisms “in accordance with international practice” supports the practical compatibility of LD-type clauses with international contracting and dispute adjudication in Vietnam.

Accordingly, LD may be viewed as a form of contractually agreed damage compensation, consistent with the spirit and structure of Article 86.

LD and International Dispute Resolution

The inclusion of LD clauses has significant practical implications for dispute resolution.

1. First, LD reduce disputes over damage quantification. By eliminating the need to prove actual loss, LD narrow the scope of disputes and shorten resolution timelines.

2. Second, in dispute resolution models commonly used in international practice, such as Dispute Boards and arbitration, LD enable adjudicators and tribunals to assess liability and compensation more efficiently, based on contractual parameters rather than complex evidentiary assessments.

3. Third, LD enhance contractual stability and predictability. They allow parties to understand and manage risk at the contracting stage, aligning with the Construction Law 2025’s broader objective of improving risk management and project governance.

The interaction between LD clauses and internationally recognised dispute resolution mechanisms therefore strengthens the enforceability and effectiveness of construction contracts under Vietnamese law.

Assessment and Recommendations

The indirect recognition of LD through Article 86 represents a positive and forward-looking development. It signals Vietnam’s intention to align its construction law framework with international standards.

To ensure effective implementation, several points merit attention.

1. Clear distinction between LD and penalties: Mischaracterisation of LD as penalties may undermine their enforceability and lead to unnecessary disputes.

2. Subordinate guidance: Implementing regulations would be valuable in clarifying criteria for determining whether pre-agreed damages are reasonable and compliant with Vietnamese law.

3. Contract drafting capacity: Employers and contractors should strengthen their ability to draft LD clauses in accordance with international standards, particularly in projects involving foreign parties or international financing.

Addressing these points will help ensure that Article 86’s progressive intent is realised in practice.

Concluding Words

Article 86 marks an important evolution in Vietnam’s construction contract regime. By recognising dispute resolution mechanisms aligned with international practice and affirming the parties’ autonomy to agree on compensation for damages, the law establishes a solid legal foundation for the use of LD in construction contracts.

This combined approach enhances legal certainty, supports effective risk allocation, and aligns Vietnam’s construction law with global contractual standards. If implemented consistently and supported by clear guidance, Article 86 has the potential to significantly improve dispute management and risk governance in construction projects across Vietnam.

This Update was authored by Dr. Chau Huy Quang, Mr. Cao Dang Duy, and Dr. Le Hong Phuc (also a lecturer at Phenikaa University).